A Shockingly Common Way that Sales Misses Plan

It’s just after the end of a quarter, and for VC’s that means many board meetings to review how portfolio companies have performed. Over the years of doing this, I’ve been shocked and surprised how many times I’ve seen good companies with great product/market fit miss their sales targets for an incredibly avoidable reason: they missed their sales hiring targets. As a result, they didn’t have enough quota carrying sales reps to make their number.

In many cases this wasn’t disastrous, and could be corrected in subsequent quarters. But in several cases, it caused significant problems with an upcoming financing, and damaged the company’s cash flow.

It was also frustrating seeing the founders realize that they could have easily avoided the problem, had they just been warned about it in advance. That’s the reason that I am writing this post.

The problem occurs because recruiting A-players is hard (see my last blog post “Recruiting – the 3rd critical startup skill”), and is frequently given a lower priority than is needed.

There’s another likely explanation why this happens and it has to do with the mental shift that is required of founders when it’s time to scale. As you’ll see in the diagram below, I believe there are three phases in a startup’s lifecycle.

Slide9

In the first two phases, founders should be minimizing spend to buy themselves as much time as possible to figure out product/market fit, and a repeatable/scalable sales process. However once they have these figured out, they enter an entirely different phase, where they need to scale the company aggressively. This requires a huge mental shift, away from saving money and staying lean and mean, to hitting the accelerator pedal, and investing and hiring aggressively to scale the proven sales process. I think many founders don’t recognize the moment when that mental shift is required, and how their thinking and behavior has to change.  Founders are used the feeling that it’s OK to be a little late with hiring as you’ll save some cash. But in the third phase, hiring misses turn out to be an execution failure that have direct and significant consequences.

The science behind sales

Sales is both an art form and also a science. The science part of sales can best be captured in a few formulae that drive sales results. While these are instinctively known to most executives, they are still worth re-examining, as they provide some valuable lessons for B2B founders who have found product/market fit, and are now starting to scale their business.

The primary formula that drives sales results

Slide6

This formula tells us that there are two variables that we have to pay attention to carefully to increase bookings:

  • How many productive reps we have
  • How much a typical rep will be able to sell in a month/quarter/year

Blindingly obvious, right? But surprising how frequently companies don’t pay enough attention to making sure they hit their hiring and productivity targets for sales reps, and miss plan as a result.

Anyone who has ever developed a financial forecast for a B2B company will know this formula well, as this is typically the key formula used to figure out what the bookings number will be as the company grows. (One of my earlier blog posts: SaaS Economics, provides many graphs and a sample spreadsheet model that clearly illustrates how sales rep hiring drives bookings.)

Hiring sales reps isn’t enough on its own

Although the primary driver of sales is making sure you have enough productive sales reps, simply hiring those reps is not enough. This will only work if you take care of a few other critical needs:

  • Ensure there are enough leads to feed those sales people
  • Do proper on-boarding to ramp those new sales hires
  • Allow for a certain number of failed sales hires
  • Ensure that there are enough resources to on-board and support the new customers

I’ll look at each of these in more detail below.

Ensure there are enough leads to feed the salesforce

In the old days, it was common to expect sales reps to do their own lead generation by cold calling. But in today’s Sales 2.0 world, we’re smart enough to know that this isn’t the best strategy. Today’s SaaS companies will typically employ a combination of Inbound Marketing, paid marketing, and outbound calling using Sales Development Reps, or SDR’s (sometimes also referred to as Business Development Reps, or BDR’s. For more information on SDR’s, read this earlier blog post: Using outbound prospecting to drive targeted leads.)

Recruiting & OnBoarding

 

So if we’re going to add sales people, we’re also going to need to add marketing resources and/or SDR’s to produce the leads required to feed our expensive sales reps.

On-boarding to ramp those new sales hires

In the early days of a startup, on-boarding is typically done in an informal way, often by sitting new hires next to a founder, and spending time as it’s needed passing on knowledge. However, as soon as a startup reaches the point where it has product/market fit, and a repeatable, scalable sale process, it will enter an expansion phase where many recruits will join the company. At this stage, consistent on-boarding becomes incredibly important.

Many founders will find it hard to invest enough time in this, as they are so used to being the ones doing all the key work. But as the company scales, they have to stop being the do-ers, and become great managers. And for them to be able to trust others to do the work, and create a consistent, scalable sales process, they are going to have to invest significant time and energy in teaching those new recruits what they know. Nowhere is this more important than with sales hires, as the impact of a great on-boarding program will be immediately felt in hard measurable bookings numbers.

This topic is so important, and there is such great opportunity for most startups to improve what they are doing, that I am going to dedicate my entire next blog post to it. I will post an interview with Andrew Quinn, the head of on-boarding at HubSpot, to look in detail at how he has built up their on-boarding program. It’s one of their secret weapons, and well worth understanding.

Allow for a certain number of failed sales hires

Another common reason that causes sales to miss their targets is that the plan assumes that every sales hire will be productive and hit quota. We all know from past experiences that this is unrealistic. So a good plan will incorporate room for a certain number of failed sales hires. The number I have heard is somewhere between 25-33% of new sales hires will not work out.

The trick with poor sales hires is to identify them as fast as possible. A good on-boarding program will have testing built-in, and this can be a good way to detect salespeople that don’t possess the skills needed for success.

Ensure enough resources to on-board and support the new customers

If you hit your sales hiring targets, you are likely to ramp bookings, and that will immediately place pressure on the Customer Success teams that are responsible for on-boarding and supporting the new customers. So good hiring execution in sales will also drive a need for good hiring execution in Customer Success.

Slide5

Best practice: hire ahead of your sales hiring budget

The best sales executives have seen this movie before, and they know that the one way to really ensure they are going to hit their numbers is to hire ahead of the sales hiring budget. They are always looking for great talent, and like to fill their open requisitions slightly ahead of the planned date.

If you’re wondering if there is some risk in this, there is a small amount. But the worst downside you’ll see is that your business doesn’t develop quite as fast as you’d hoped, and you slow hiring, and are out of pocket one or two months of a sales rep’s salary. That is a far smaller risk than the risk of missing your bookings plan due to not hitting your hiring plan.

Track sales capacity to avoid the problem

Another good way to avoid hitting this problem is to track your sales capacity versus plan. Sales Capacity is simply the number of productive reps multiplied by your average productivity per rep.

Slide7

It’s a good idea to look at both Sales Capacity, and the two components that contribute to it:

  • Rep hiring versus plan.
    • I typically see this done by measuring fully ramped equivalents versus the planned number. So if you have hired a new rep who is only ramped to be at 50% capacity, they would only count for 0.5 fully ramped equivalents.
  • PPR – Productivity per Rep.
    • Hopefully as you get better at hiring, training, selling, and as your product improves, you should see this improve over time.

Tracking these metrics on at least a monthly basis, hiring ahead of plan and equipping your sales reps with the training and resources they need to be successful will help you hit your sales targets at the point you’re ready to scale.

Important note: this blog post does not apply to startups who don’t have product/market fit, or a repeatable/scalable sales process.

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David Skok

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  • http://www.linkedin.com/in/england Justin England

    As always – spot on. Also so happy you addressed capacity and marketing. Too often I see people simply equate a sales hire to more revenue without adequately factoring in the marketing lead flow required. As you said, simply hiring more reps without the leads, planning, support and training does not move the needle.

  • http://www.saasmetrics.co Leo Faria

    Another great article David! I do have two questions for you: 1) If a company is just starting to build a sales team, what would be a good reference for a sales rep quota? 2) What does limit the number of sales reps hires? Cash? Thanks.

  • http://www.salesprocessengineering.net/ Justin Roff-Marsh

    David, I feel like too little consideration is given to the capability of the founders to manage the sales ‘machines’ they build.

    My preference is to design the sales function around (in part) the capabilities of the founder. In many cases, recruiting a high-powered sales director is not a solution if execs simply can’t relate to these individuals.

    Certainly, in manufacturing environments, one of the benefits of the processes we build (strict division of responsibilities, no commissions, etc) is that engineers and prodn people are comfortable managing them.

    I wonder if you see evidence of this problem in tech companies?

  • http://www.forentrepreneurs.com David Skok

    Thanks for the confirmation Justin.

  • Mark Organ

    The big question is what to do when you are in what I’ve called “the pickle” (from baseball, when a runner is trapped between two fielders, one of whom has the ball).

    The more common pickle is when leads are behind where they need to be. Do you keep hiring reps as aggressively? If you do, and the lead gen situation does not improve *exponentially* (because the plan increases exponentially!) you run the risk that the best reps leave because there is not enough dealflow to work on, relative to their alternatives, and the company can go into a vicious spiral in a hurry. If you don’t, then you will miss plan eventually because you don’t have the sales capacity.

    Pickle B is when the churn starts to tick up, at least in part driven by all of those new reps who are still learning the right customers and use cases. Do you slow down rep hiring or power through it? Choose incorrectly and the company can be in a lot of trouble, just as in pickle A.

    There is often not enough data to make a truly data-driven decision, so it does come down to instinct.

    At my last SaaS company, I often would slow down hiring. I’m more likely to power through it now at Influitive, and apply a ton of resources to wherever the bottleneck is to relieve it.

  • http://www.forentrepreneurs.com David Skok

    Hi Mark, great questions! I do agree that in situations like this there are no hard rules, and using your judgment is very important. In Pickle A, I would be inclined to fix the lead issue before adding more reps, and go back to hiring as soon as I had confidence that this was working. If your leads can be generated by adding outound Sales Development reps, I’d do my hiring there.
    For Pickle B, your cash situation would likely have an impact on how your instinct would lead you to go. With lots of cash, powering through is less risky. But with less cash, slowing down to fix churn first would be the lower risk approach. If the churn were bad, I personally would stop hiring, as I consider churn to be a strong indicator that you don’t have good product/market fit. I’d want that fixed before investing too heavily.
    This is a good discussion topic. Thanks for adding!

  • http://www.yairriemer.com Yair Riemer

    “The number I have heard is somewhere between 25-33% of new sales hires will not work out.” Do you have a rough estimate of the average time a new sales hire is given to improve their PPR metric before they are terminated? My belief would be that it would correlate with the average sales cycle of the product + previous data within the organization re: how long it took the current (productive) sales reps to have success. Perhaps it is less than 3 months for some, and 3-6 months for others, but would you see a scenario where it would ever be longer than 2 or 3 quarters?

  • Mark Organ

    That makes sense. I think one reason why i am powering through pickles now is that expectations for growth are much higher than a decade ago when I was running Eloqua – then capital efficiency was much more important than today. We simply cannot miss growth targets and we have money to throw at the problem now.

    Im not sure that churn heading higher is necessarily a sign of lack of product market fit. I think when you start to scale up, it’s expected that churn should head higher for a while. All those new reps don’t necessarily know what they are doing, executive coverage on accounts is diluted, new market segments are being attempted etc. But I would say that if churn doesn’t head back to baseline within 2 or 3 quarters there may be a product issue and piling on more new reps, segments etc can lead to disaster.

  • http://www.forentrepreneurs.com David Skok

    What I have seen is a fairly wide range of times. A lot depends on the sales cycles of the particular company. For example if a company has a four month ramp time for a new rep, and sales cycle of less than 90 days, it should be possible to detect poor performers within 4-6 months using just their sales results. However good sales execs will be looking for signs earlier, such as poor performance in the on-boarding tests, and weak early results. They will then go on calls with them to see what the rep is doing, and give coaching if needed. Then they’ll watch to see if the rep has the ability to improve. If not they can terminate earlier. Obviously the earlier the better. But no sales manager wants to give up too early as they have made a significant investment in that rep, and hope to justify that plus their hiring decision.

  • http://www.forentrepreneurs.com David Skok

    Hi Justin, I am not sure that 100% understand the question you are asking, but what I think it is about is whether the founders have the capability to manage the sales machine. It is very common for us to see startups that are founded by technical founders who don’t have any experience managing sales, or sales machines. In those situations we very strongly recommend that they hire in an experienced VP of Sales, or at least a director level sales manager. Sales management is one of those areas that can’t be learned from a text book. There is simply no substitute for experience. (I think I read in your comment that you agree with this. But I hope I answered the right question!)

  • http://www.forentrepreneurs.com David Skok

    Hi Leo, if you are building an inside sales function, a great starting point for you is here:
    http://www.forentrepreneurs.com/bridge-group-2015/

    Otherwise a good rule of thumb is that a salesperson should be able to produce 5-6x what they are costing you in total on-target compensation. Best, David

  • http://www.forentrepreneurs.com David Skok

    For your second question: two things typically limit the number of sales hires:

    1) Cash
    2) The ability to generate enough leads

  • Tom Murdock

    An important thing to also remember is how critical constant recruiting is, even when you have a fully staffed sales team. Finding and hiring A players is incredibly difficult and time consuming (since most A players are making a lot of money in their current company and would take a big risk leaving). If you aren’t constantly recruiting and nurturing A players for when the time is right, you’ll find yourself settling for mediocre reps with the thought, “An under performing rep is better than no rep at all” which is a recipe for a bookings and morale disaster. Have a full bench of A players ready to go and you’ll set yourself up for long term success.

  • http://www.forentrepreneurs.com David Skok

    Strongly agree.

  • http://www.salesprocessengineering.net/ Justin Roff-Marsh

    Sorry, David

    That was a little obtuse!

    My speculation is that there’s a period between start-up and when the organization is mature enough to add a VP of Sales, where the sales function needs to be designed around the capabilities of the founders.

    Certainly, we see this with manufacturers — which is where we do a lot of our work.

    For example, with these smaller organizations we try and design the sales function so that founders can perform critical selling conversations — without having to operate as salespeople, in a traditional sense.

    Justin

  • http://www.forentrepreneurs.com David Skok

    That makes tons of sense! A great idea, as anytime you can makes sales interactions feel more natural and less “salesy”, the better.

  • http://www.saasmetrics.co Leo Faria

    Awesome, thanks.

  • http://www.saasmetrics.co Leo Faria

    Yes, that makes a lot of sense. Thanks a lot.