In last week’s decision, the management at SpiderNet decided to pursue a freemium model, where the company would give away a free product and then upsell a $99 added value feature set. As part of this go-to-market model, SpiderNet must now decide on how to allocate and budget for sales resources.
In order to promote and sell the added-value features, the company decides to use an inside sales model for generating revenue. This approach has worked well for other companies delivering a freemium product and avoids the costs of a direct/outside sales approach. The inside sales team at SpiderNet will be responsible for following up on leads, generating demand for the for-fee upsell, and ultimately closing business.
As CEO of SpiderNet, you must now decide on the operational plans for growing this inside sales capability. Right now the company has no salespeople, but with the product coming out this next quarter, you feel it is the right time to start bringing on sales talent to generate revenue.
While everyone agrees that hiring sales is important, the internal debate centers on how many and when. Most people in the company, including engineering, wants to hire as many sales people as can realistically be hired, such that the company can quickly capitalize on the opportunity and grow quickly right out of the gate. This group also wants to make sure that the sales force can cover all opportunities and be well trained ahead of the demand. A few people suggest waiting until the freemium model is proven and suggest hiring just a few sales people initially.
You expect the demand for your freemium product to be huge, that the upsell will be in high demand, and that you’ll need capacity from the sales organization to field in-bound requests. Hiring too few sales people might cause SpiderNet to miss out on a golden opportunity. Given this, do you rapidly ramp up sales capacity or hire less aggressively?
Every company that is about to release a new product is always optimistic about the future of the product. The expectation is that the product will offer great value and, in turn, create an amazing following of users and revenue. However, it often takes time and iteration to get the formula correct and the tendency for most companies is to over-hire sales capacity before the product-to-sales fit has been fully worked out. The consequence of over-hiring in sales without knowing whether the company can repeatedly sell the product can be severe. Therefore, a prudent balance must be established between capitalizing on the opportunity and hiring the appropriate number and type of sales people at the outset of a product’s market entry.
The Sales Learning Curve
The Sales Learning Curve is a concept that my good friend, mentor, and co-lecturer at Stanford, Mark Leslie, developed as a methodology for adding sales capacity following the launch of a new product. The premise is that, in the same way a company must take the time to develop a product, a company must also take the time to develop sales knowledge and capability. All too often, what a company thinks will work in terms of customer segmentation, sales model, and salesperson type does not end up being the optimal outcome. Companies must learn how to sell and bring products to market in order to avoid expensive and costly mistakes based on assumption rather than quantitative evidence.
The Sales Learning Curve has three phases:
1. Initiation. The initiation phase begins when the product hits the market. In this phase, few customers will typically be willing to purchase the product, so having a large sales organization with large quotas is dysfunctional. Instead, put in place a small sales team that is focused on understanding how a customer intends to use the product. When the small sales team generates 1x the loaded cost of an individual sales person (base+commission+expenses), the company is ready to move to the next phase.
2. Transition. In the transition phase, the sales organization should be focused on developing a repeatable sales model, refining market positioning, and adding sales capacity, provided that each new sales person can safely generate at least 1x their loaded cost. It is in this phase that the company moves from “renaissance” salespeople to a “coin-operated” sales organization. A company will move out of the transition phase when each sales person is generating 2x their loaded cost.
3. Execution. In this phase the product has proven traction and management can predictably hire salespeople as quickly as financial constraints allow. Specifically, there is a well-understood sales training program, the company understands exactly how much revenue each new sales person can generate and when, and the sales growth becomes a systematic process of territory allocation and expansion. From a modeling standpoint, the sales productivity and expense should move to “industry standard” allocations, typically measured as a percentage of gross revenue.
In the SpiderNet example, choosing to hire a large number of salespeople up front would assume that the company is in the execution phase of the Sales Learning Curve methodology. However, in reality, the company has never sold a dime’s worth of product and has little quantitative evidence that their inside sales approach will even work. SpiderNet is really in the initiation phase and should hire a few renaissance sales reps who can help the company learn the proper sales cadence. This way, SpiderNet can iterate its sales approach and avoid potentially costly mistakes as the model evolves.
The complete SLC paper can be found here.