Per my posts below on forecasting sales, Mark Leslie wrote an interesting article on the subject and the importance of quickly moving down the sales learning curve for start-ups.
The Sales Learning Curve - Optimizing the Path to Postive Cash Flow
By Mark Leslie
There's an old saying about rolling out a successful new product: "It always takes longer and costs more." Many company executives are resigned to this state of affairs, determined to ride out the tough phase of the new product cycle on the path to positive cash flow.
But it doesn't have to be that way. By learning from the mistakes of the past, start-ups can build cost-effective, successful sales teams that burn through a minimal amount of cash on the road to breakeven.
This method of establishing a sales force is called the Sales Learning Curve (SLC). It's a concept adapted from the Manufacturing Learning Curve (MLC), which is widely accepted in the manufacturing sector. The MLC states that the cost to produce the early units of a new product normally is high, but over time, as the production team learns how to optimize manufacturing and wring out costs, volume increases and per-unit product costs decline sharply.
When we apply the MLC to sales, we come to the following conclusion: The time it takes to achieve cash flow breakeven is reasonably independent of sales force staffing. It is, instead, entirely dependent on how well and how quickly the entire organization learns what it takes to sell the product or service while incorporating customer feedback into the product itself. Because the entire organization has to come up to speed, hiring a large initial sales staff does not speed up the time to breakeven, it simply consumes cash more quickly.
Let's look at a case study of what happens when the SLC is not applied. Our model company experiences positive early product revenues from beta customers. Top management, eager to establish an early leadership position in the market, adopts an aggressive approach to sales. The company hires a VP of sales, as well as regional sales managers, systems engineers, inside sales reps and field sales reps. The clear expectation is that this team - often upward of 30 people - will deploy rapidly and efficiently, reaching breakeven within three or four quarters.
Then reality sets in. It takes longer than expected to convince initial customers to buy. The positioning of the product is not quite right, the price needs to be adjusted and product features need to be tweaked. Meanwhile, typical start-up issues, such as opening regional sales offices and establishing lines of command, distract the sales force. The result: This oversized team burns through tons of cash and does not come close to reaching breakeven within the target timeframe.
What happened? Management incorrectly assumed that by simply ramping up the sales force, revenues would automatically increase at the same pace.
If the company had applied the SLC, it would have staffed sales at a much lower and cheaper level, in anticipation of a slower initial sales ramp. This would allow the company to fine-tune the product or service (feature set, ease of use, integration needs, etc.), to hone its sales and marketing processes and to learn from customers about positioning, promotion and pricing, all before deploying a large and expensive sales force.
Rather than starting with a large sales force, a company using the SLC is better served by hiring a small team of sales execs with the analytical skills and patience to lead the company through an iterative learning process that includes the continuous discovery and solution of small but crucial problems.
Let's revisit our model company. Let's say it adheres to the SLC. When should it start expanding the sales force? Keeping in mind that the slope of the SLC varies depending on the product being sold, a good starting place would be to wait until the initial sales team is generating a marginal contribution of two times the cost of a field sales rep. While data points in sales tend to be scarcer than in manufacturing, this is a reliable indicator that you've started to climb the Sales Learning Curve.
By adhering to the Sales Learning Curve model of sales force staffing, you can safely toss out that old adage we started with. It doesn't have to take longer and cost more than you planned.
Mark Leslie is an El Dorado Ventures Technology Partner. He is a managing director of Leslie Ventures and teaches at Stanford University's Graduate School of Business and Graduate Engineering School. From 1990 to 2000, Mark served as Chairman and CEO of Veritas Software and oversaw the growth of the company from start-up mode to $1.2 billion in annual revenues. He is on the boards of Avaya Corp. (NYSE: AV), Metric Stream, Model N, Outerbay, Panta, PostX and Scalix.