New article from First Round Review trying to debunk the idea of “growth at all costs,” and this paragraph stands out:
It’s a tale as old as time. Founders push sales orgs for growth to hit the numbers needed for the next round of fundraising. The ask stems from a need to show product/market fit in the form of revenue. With headlines of massive rounds being raised, founders feel that if they let up on the growth pedal, their competitors won’t. The first few sales folks are hired, and instead of that releasing the pressure it increases it. All of a sudden, plans are made to double or even triple the sales team as a sort of rush-order on revenue.
A tale as old as time indeed. And you know what? It usually fails. Here’s why…
The inherent problem
When you think of sales like the above paragraph, you create two major problems:
- Shitty unit economics
Basically, you’re hiring out in front of need — so when the demand for product goes down (which can happen for any number of reasons), suddenly you’re carrying all these people who have no real role anymore, because no one seems to want to buy on the market. It destroys your economics. It’s actually really, really bad and stressful to boot.
One better approach
We’ve heard the expression (including in this article) that you need to “check the engine is working before pouring in the gas.” So true. When you don’t do that, the car blows up. No one wants that.
Karen Rohrer, who heads up the sales process at Atrium, told First Round Review how to take a more measured approach:
“It’s only now that we’ve figured out the sales motion that we’re going to hire one person outside of the founder to focus on sales. And it’s just that one hire, because we want to make sure that the sales motion is real and replicable before we hire a fleet of account executives (AEs),” she says. “You need to understand the fundamentals before pouring gas on the fire because you want to make sure it’s going into a working engine, not onto a conflagration that will burn through your VC money.”
This is more broad than just VC situations, though. Hiring excessive sales help before you (a) know you need it and (b) have a process in place for it will burn through revenue too — i.e. your money, not just someone else’s (VC) money.
You can outsource. Here’s what happens when you outsource, typically:
- You get area and industry expertise
- You pay a subscription model monthly
- They help you get your shit together sales-wise for lack of a better term
- If you like what they’re doing, ride or die with them
- If you think you’ve got a handle internally after a year or two, cut them loose
It’s a very workable relationship for much less cost than hiring 3-5 new salespeople. Plus, outsourced sales orgs typically do it all in terms of lead generation, pipeline-building, nurturing, helping sales principals close more, etc. To get that internally, you often need to make 5-10 hires. That’s easily north of $400,000 U.S. all-in just on staffing. Many scaling companies cannot afford that.
Outsourcing is rooted in the principle of “I do this well” — i.e. make a product, solve a problem — but “I don’t do this well” — i.e. sell what I do — so I focus on my value and let someone else help me with their value. That’s how the relationship works ideally. It helps you at a cost level too.
What metrics can you look at to see what you need to do?
- Look at the total amount of money that’s spent on sales and marketing and divide that by the number of new customers acquired in the last quarter.
- Look at each of the customer segments you support and proportionally allocate spending. If you are selling to really unique verticals, then the cost to acquire those types of customers will be different.
- Take your average deal size, multiply it by your net dollar retention rate to get your year two expected value, and then keep doing that for the number of years you expect your customer to stay a customer to find the lifetime revenue. Then multiply that by your gross margin to back out the costs of supporting, retaining and upselling that customer.
- Look at the direct expenses for supporting your customers, such as AWS servers, and your fully loaded account management and customer success headcount and technology expenses. Then add these up to find your quarterly cost of goods sold (COGS), divide that by your current amount of active customers and multiply that by the number of quarters in your average customer life. You can then subtract this lifetime total cost of supporting a customer from your total bookings value per customer.
- Do this math:
- Aim for a CLV that’s at least three times CAC and pay back CAC in less than 18 months.
If you work these metrics and consistently look at them, you’ll know how your sales side is truly performing — marketing too! — and running the numbers on outsourced subscription-based models will show you whether that’s a valid play in your current situation.
But it’s about having good control of (a) process and (b) financials/costs. If you’ve got that and you’re willing to explore different options, your sales machine will do just fine and your engine will not catch on fire.