How do you calculate the ACV for deals where revenue ramps over time?

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JASON LEMKIN

In the end, you have two basic options:

  • Pay a small commission when the deal closes, and then pay ongoing commissions on that customer for up to 12 months thereafter. If the customer starts at say $99 / month but scales to $100k a year by Month 11, they you keep paying commission checks through a date certain after the initial contract. Those checks obviously start off tiny but if the usage grows, the commission eventually becomes material.

OR

  • You model the expected value, pay all or a good chunk of the commission up front — and claw it back if it comes up short. Eventually, you can do this if you want. Once you have 100+ customers under contract, you’ll be able to model their aggregate behavior fairly effectively.

These models are becoming more and more common. Most B2D/API-centric companies work this way with utility-like pricing, and more traditional SaaS companies are also adding at least partial “pay as you go” options.

So why would you do the second approach? The simple reason is ultimately it makes it easier to recruit an experienced sales team in a competitive market. It’s more similar to how traditional SaaS companies pay out. Close a deal, get a commission, move on.

So you’ll probably migrate at least partially to option 2 over time. But starting with option 1 is certainly less stressful. Match cash out the door to cash in the door in the early days. Later, when cash is less important, do what’s easiest for everyone. Which is usually what’s most traditional.

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Published on October 10, 2017
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