Many establish organizations that are transitioning their go-to-market strategy from products to solutions face several challenges when it comes to revenue allocation for solution sales. If the product groups have not agreed on a revenue allocation scheme for the now discounted offerings, a tug-of-war ensues.
We talk to many organizations that are transitioning their go-to-market strategy products to solutions. They often recount several challenges, such as creating the high-level messaging required for a successful solution strategy. For established organizations centered on products and business units, the evolution can be especially difficult, especially when it comes to revenue allocation for solution sales.
Here’s what happens: First, the organization adopts a solution-focused strategy. Solution teams develop bundles, integrated solutions or a marketecture approach for the vertical or horizontal market of choice. Sales are reorganized around industry targets, and reps are well trained in the offering and domain. The entire plan is best-in-class, and the sales start to roll in.
But then, if the product groups have not agreed on a revenue allocation scheme for the now discounted offerings, a tug-of-war ensues. Understandably, each product group has a revenue goal and is driven to own its share of the solution revenue pie.
Instead of having one or two components of the solution take a revenue or margin hit, some organizations use a revenue allocation model based on list price. Assuming that the components’ list pricing is based on a realistic proximity to actual selling price, allocating the total revenue to each component based on the proportion of its list price to the total list price of all components seems like a fair approach.
However, this approach does not take into account the importance of each offering in the bundle. Should the component that is the most critical to the sale earn the most revenue? Second, this approach can incent product managers to create very high list prices for their offerings so that they inflate their share of revenue. Additionally, if the list price does not change based on supply and demand,(a common occurrence in B2B environments), the revenue percentage will not take into account higher or lower actual selling prices based on demand.
With a fair distribution model, organizations are more likely to embrace the solution sell in the field. We would like to hear from our readers regarding models for revenue distribution when solutions are sold. Please comment below to let us know your thoughts and ideas on this topic.