Sales Always Get Incrementally Harder

How many revenue organizations have you come across that operate on the premise that each additional seller that gets added to the team will generate X amount of revenue based on current seller metrics? The answer is “almost all of them”.

This is a form of focusing on revenue per head, but it is a short sighted, and ultimately self defeating version of it. The assumption that scalability will remain constant is the biggest issue with the premise, and the result of building a revenue organization on this premise is almost always missed goals, overspending, and the eventual need to execute layoffs and other cuts.

I took a job at a technology company a number of years ago. They, and every other company, were coming out of a rough patch in the broader economy and believed that they were in a good position to scale the business. When they started to set goals and hire with their renewed growth mindset they had 270 employees. I was hired in November, and their goal over the course of the following calendar year was to hire about 130 people including 70 sales people which would put their total headcount at about 400 and would bring the number of salespeople up to 120. In other words, they wanted to increase headcount by almost 50%. For some context, I was hired to run a very specific business unit which was meant to include a product person, about 6–7 sales people and another 5–8 support people.

The thinking was simple. They had a specific trajectory in mind based on their current sales team and figured that each additional seller could sell about the same amount as a current seller so they built their cost structure and hiring plan based off of revenue projections that matched those of the current sales team. By mid summer it was evident that things were not going according to plan. The revenue projections were falling short, and not by a small amount. By late fall the missed projections had to be reckoned with. Although hiring had not kept up with goals and the overall employee count only reached about 360 with the sales team growing too close to 100, it was still necessary to enact significant layoffs across the company, and mostly in sales.

When the dust settled, employee count returned to about 280, just above the numbers it had started at, and the sales organization returned to its prior size. In one way you could look at this and say, “well, they tried, and when it was all said and done, they ended up where they started so it could have been worse”. But this outlook is far from descriptive of the situation. In all of the turmoil, they lost good sellers they would have wanted to keep, who left because they had a bad taste in their mouth and because people they liked to work with were laid off. They had hired quickly and ended up with some employees that were not vetted using the same standards as in the past in order to meet hiring goals; these were employees that they would not have ordinarily kept but were needed in order to keep teams at a certain size to operate the business. They hired people out of good jobs and then left them unemployed. They spent a lot of money ramping up operations only to ramp those operations back down almost immediately. All in all, the business lost significant time, money, and reputability, not to mention the effects on the laid off employees.

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All of what I described above seems intuitive and understandable, but yet, we see so many companies go down this and similar paths. So, what causes this type of strategy to be employed, and what is the alternative?

What causes this type of strategy to be employed is a reliance on historical data as a predictor of future results. Many of us have seen the disclaimers on financial products like ETFs that say something like “historical performance is not a predictor of future results”. We understand this intuitively, but we crave data to support our decisions, and in the absence of a true understanding of how a revenue team scales, we rely on that data without factoring in other pieces of information.

Specifically, it is important to understand that salespeople are humans, and humans will always do their best to optimize their situation under their current incentive structure. This means that sellers will spend their time working with the easiest clients to sell to. By definition, this means that every single incremental sale is harder than the one before it. Of course, in the real world, it doesn’t always work out exactly like that, but the guidance generally falls in line. If one client is easier to sell to than another and I make a deal with that client, I am then left with the client who was harder to sell to.

If your team has 400 accounts and 10 sales people, each sales person will have 40 accounts and they will work on the 20 easiest to close. If you increase to 20 salespeople, each salesperson will now have 20 accounts, and on average, they will each only have 10 accounts that are considered ‘easy to close’. Of course, more people will lead to more sales than before but not anywhere close to 2 times the sales. But guess what does get multiplied by 2? The cost of hiring all those people.

The other fatal flaw has to do with the business cycle and reversion to the mean. Most of the time when executives make the decision to hire a lot, it is when things have started to go well. They look at the trajectory, the growth in ARR, or pipeline, and think to themselves, if I have 10 sellers doing this, imagine if I had 20. When the cycle is down and things aren’t going well, the same desire is not there. But all businesses go through cycles and after a period of growth that is unexpected, the next phase is statistically likely to be a reversion to the mean. This does not mean that things will go poorly, or sales will drop to zero, but it does mean that unexpected growth is usually not sustained at the high levels that causes the optimism, which means that the business won’t be able to support an influx of new sellers when the current cycle ends.

The other really important piece to understand, especially for earlier stage companies is that founder led sales tend to run into scale issues. Founders know a lot of people and can marshal the resources of the company. Plus, when they sell early in the lifecycle of a company, they tend to be selling to those who are bought in; the early adopters. They can have CEO to CEO conversations with people who get the concept of what they are doing and are interested. In other words, they tend to sell to lower hanging fruit. When founders try to build scalable sales teams, the sellers don’t have the cache that goes along with being the CEO, they can’t marshal the same resources, and they aren’t talking to early adopters who are halfway bought in.

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So, all of the above is what causes increased difficulty for each incremental sale, and the lack of understanding of these principals cause business leaders to lean too heavily on historical data and over-index on optimism. So, what is the alternative to this type of approach?

Certainly we could just be extremely conservative with our projections and give our new reps time to build up their book of business, and there is some merit to that approach. But there is something much more powerful that can be leveraged as we start to scale a business. That approach revolves around understanding the lowest cost of the next incremental dollar and matching up the right resources to drive that next dollar.

We have already established that each incremental sale gets harder, which is another way of saying that it costs more to close. We have also stated that revenue per head is the most important metric. So, how do we marry the two? Well, we have sellers who have built a book of business and have repeating revenue that they are managing. In many cases, the easiest incremental dollar comes from our existing clients because they have already demonstrated that they understand the value proposition. The problem is that we are paying our sellers for managing the business and not for growing it. We need to understand the relative difficulty of growing business compared to driving new business and set up incentive structures such that our sellers self-select into the most ideal function for driving growth.

Oftentimes book management becomes lucrative enough that long time sellers can sit on a patch of accounts and be assured of making money by simply managing their existing business which means that any potential new business in their patch does not get worked. They are essentially crowding out new sellers and exacerbating the problems around increased difficulty of each incremental sale. I am not advocating for setting new business goals, because that assumes that we can accurately predict exactly where our sellers should be spending time, going into the year. I am, however, advocating for setting overall revenue goals for sellers such that they are incentivized to push for growth, either with their existing book, or with new business. Once your sellers tell you where they want to go, you are now able to either have client success play a bigger role in managing existing business, while your sellers focus on new business, or you are able to distribute new business to hungry sellers while your more tenured sellers focus on growing existing accounts.

The basic idea is that if your tenured sellers can get paid 80% of their goal through book management and order taking, you end up not incentivizing growth. But much worse, you allow those sellers to keep accounts that they won’t put effort into. This will mean that your new sellers are left with accounts that are not likely to buy and are therefore not set up for success.

I don’t mean to imply that setting up these incentive structures is easy. However, the key point in all of this is that new sellers have a harder job than tenured sellers, and we need to expect that productivity will decrease as we scale, simply because every incremental sale gets harder and more costly. We can combat the issue by taking into account this reality and working to build high value territories for new sellers with realistic targets, all while incentivizing more tenured sellers to focus on the clients where growth potential is greatest.

The Sales Cycle Can Be Unforgiving