The Sales Learning Curve Part II: Sales Planning
Tactical implications for hiring
In Part 1: I introduced the concept of the sales learning curve, taken from the eponymous Harvard Business Review article.1 That learning curve is the steep mountain a startup must climb before its sales staff can be productive. It is organizational, not individual, and this learning involves product, engineering, marketing and sales working together to integrate their understanding and efforts.
This sequential, iterative process takes time; founders cannot parallelize their way around it. It comes in three phases: initiation, transition and execution. The initiation phase encompass pretty much everything up until Series B. Here’s the problem: the vast majority of sales in the vast majority of companies take place in the execution phase. Execution is characterized by very different conditions than initiation. Unfortunately, almost all the aphoristic wisdom salespeople lean on comes from the wrong phase. This makes a lot of it irrelevant to founders.
In Part I, after quoting Leslie and Holloway’s description of the initiation phase at length, I drew a series of conclusions that I promised to flesh out in follow-on pieces. Today’s topic is hiring.
Don’t assume that hiring more sales staff will make your company grow faster
Usually people hire sales reps in the hope of getting more sales. But you cannot assume that approach will work here. You probably haven’t even nailed your pitch or customer persona or product offering yet. Having more people say the wrong thing to the wrong people won’t help you sell much more.
Sure, hiring sales staff might help you land a few more sales. But there is a rapidly diminishing return on this when a company is early in its sales sales learning curve. The organization’s limited knowledge and the nature of adoption curves puts a kind of ceiling on how much revenue you can buy. It’s not until you are approaching your B round that you will start to get much clarity around how much output you can get from a salesperson anyway.
Learning is the paramount contribution from your sales function at this stage
This is the lesson that I find most founders resist. When I say this, CEOs often look at me like I’m some sort of moron. They rightly worry that if they don’t bring in revenue, the runway will disappear and the VCs will flee and they will fail.
Let’s be clear. Of course you need to make money. If you want funding, you have to hit milestones, and most stages involve milestones that require revenue increases.
But unless your deal size is tiny and your transactions are very frequent, you will be touching most or all of these sales until well after you close your seed round. Startups terrify most customers. Your buyers need the reassurance of the CEO in order to feel comfortable closing a contract. She can help them feel like the vendor is real and dependable. She needs to make the client comfortable that that the startup won’t lose her customers’ data or spontaneously combust at the drop of a hat.
So yes, your salespeople need to help you hit your milestone minimums. But since those depend on you as much as the sales reps, and reps can only make a marginal difference in revenue outcomes without more organizational learning, you need them to prioritize helping you focus on climbing the curve.
Do not take your eye off this ball. This is what will get you the most revenue. The step-change increases in revenue that are going to make a substantive difference in your survival, or in your valuation, come from scaling the learning ladder.
That means that you have to figure out how to maximize your learning from every interaction you and your salespeople have with potential customers. Salespeople can feed you warm leads to speed up deal flow, and they can talk to lots of people and process market feedback and refine the pitch and product vision alongside you and the executive team. This is much more likely to push you toward the step change you need, and the revenue you thirst for, than any amount of obsessing over incremental revenue itself.
Plan to lose money on reps
Leslie and Holloway suggest you use revenue as a proxy for your organizational learning phase. In their formulation, you are probably in the initiation phase if your average revenue per rep is equal to their average fully-loaded cost.2 Note, that means that even at the end of the initiation phase, you’ll still lose money on each rep. That’s because your gross margin would have to equal your fully loaded cost to start making each incremental rep profitable.
This “equal to fully loaded costs” approach is a nice rule of thumb, but don’t take it too literally. If you have a 20% margin on that revenue or an 80% margin on that revenue, it may mean very different things in terms of what tactics should follow. Your business model may also impact this. The cash from SAAS famously takes forever to catch up to actual costs, although you might technically book the revenue up front. What counts as “profitable” for this learning curve analysis is in the eye of the beholder, especially in a subscription world when lifetime values are unknown and it is unclear how much revenue you can reliably book up front.
So you can’t algorithmically map revenue onto your learning journey. Instead, pair the 100% rule of thumb with your delta—your rate of change in revenue per rep—to get a sense of if you have moved into a rapid acceleration phase. Does that mean you are officially “in transition?” The semantics aren’t the point. If the outputs from your efforts start to change rapidly, you usually will need some tactical updates to take advantage of the learning that is happening. Be on the lookout for change!
And please do not forget - even if you are on a very successful journey, and doing everything right and hiring amazing people, you should count on losing money on your salespeople if you are in this initiation phase or just beyond it. If you are stingy, only hiring when funds from the reps covers their costs, you are unlikely to get anywhere. Think of this as an up-front capital cost, just like that early product work you are doing. This early unprofitable sales work is a painful and necessary step to get through the key learning work that positions you much better for success later.
Next up, Part III: Compensation For Early Stage Startups
The Sales Learning Curve, Mark Leslie and Charles Holloway, Harvard Business Review, Jul.-Aug., 2006.
That includes base, taxes, benefits, expenses and commissions