My friend Townsend Wardlaw’s current post (http://salesbot.blogspot.com) about commission plans makes the point that it’s crazy to build commission plans that reward over-quota performance to motivate sales forces where only 30% of the sales force is even making their number - particularly if he’s correct that the 30% number is actuality in a majority of companies. Townsend concludes by saying:

“One might even say that sales organizations are striving to succeed based on the myth that you can build a plan that motivates sales people to do better than expected when the vast majority fail to even meet baseline expectations.”

The Problem: top-down quota setting

As I thought about Townsend’s post, I realized that in my experience, the problem rests more with how quotas are set than with the compensation plan. In early stage high-tech companies, quotas are often set “top-down” - the business plan overall sales goal is divided by the number of people in the sales force, and if the number doesn’t seem too far out of line based on “industry standards”, it becomes the individual quota. The likelihood that this quota even slightly represents the actual ability of a salesperson to close business is very small. When quotas are set this way, Townsend’s conclusion is correct - commission plans that are based on over-quota performance actually are de-motivators to most of the sales force.

A Solution

Fortunately, there’s a better way. The top-down number must be tested and modified using a “bottom-up” analysis. Here’s how to approach this analysis:

1. Determine what your average deal size is.

2. Look at your sales cycle and figure out how many sales calls it takes from initial contact to final contract.

3. Figure out how much time each sales call takes. Include the following:

- The time a salesperson spends in the sales call
- The time spent planning the sales call and documenting after the call
- The time spent coordinating the call with others in the company
- Travel time
- Any other call-specific tasks necessary to conduct the sales call, such as presentation or demo preparation

4. Determine how many additional activities the salesperson must engage in and how much time is spent on these:

- Prospecting (figure this time by determining how many prospects it takes to find one real opportunity)
- Internal meetings, training, etc
- Other required non-sales activities

5. Do the Math: total time available minus non-sales call related activities equals time available for sales calls.

Now you know how many hours per week are available for sales calls and how many calls a sales person must make to close a deal, so you can calculate how many deals a salesperson can do per month, quarter or year - multiplied by the average deal size, this gives you a rational quota.

You may find that a business plan that works based on the top-down method no longer works so well using the bottom-up method - but better now than at the end of the quarter.

Commission Plans based on realistic quotas

Now you can rationally answer the question that Townsend asks in his post; “Do you want to motivate your salespeople to over-perform, or protect yourself against under-performance?” I think that you can build compensation plans that reward over-performance if your quotas are realistic, and motivate a reasonable percentage of your salespeople to work toward that financial reward.

Sales cycles that depend on getting in front of the prospect and pitching and/or demonstrating the product as the way to convince the prospect to buy only work part of the time.

Think about the three kinds of competitive situations you might be in as you sell to a prospect:

Direct Competition: The prospect has decided to solve a problem, has decided on what kind of solution will work, and is evaluating vendors to decide who to buy from. In this competitive situation, presenting and demonstrating is the way to convince the prospect your solution is the best one. This is the only one of the three situations where presenting and demonstrating is the appropriate sales tactic.

Indirect Competition: The prospect doesn’t think there is a problem that can’t be solved internally, either by building their own solution or by stretching an existing solution they already own to fit the new problem. Presenting or demonstrating your solution to this prospect is a waste of time - they don’t believe they need any solution. Unless you can work with them to demonstrate that the current problem can’t be solved internally, there is no potential sale here.

Financial Competition: There are always many problems and projects competing for the available dollars. Until your prospect believes that solving the problem your solution addresses offers a better return than solving some other problem (or not spending the money at all), he won’t listen to any product-oriented pitch you can make. You must work with the prospect to gain agreement that the cost of not solving the problem is significant and that a solution to this problem offers a substantial return before you can begin talking about your specific solution.

The best approach in all cases is to initially focus on the prospect’s problem and gain three levels of agreement:

Agreement that a problem exists.
Agreement that not solving the problem is expensive.
Agreement that a solution that removes the cost of the problem might exist.

Once these agreements are in place, you can begin talking about your solution - and you will have an eager listener.

One of the complaints I hear from start-up salespeople is that their prospects “just don’t get it”.

The prospect throws up all kinds of objections that the salesperson doesn’t think are relevant, and refuses to believe that the product or service will deliver the wonderful benefits the salesperson is pitching.

If you recognize yourself, or your company, in this picture, here’s an idea for you….

Put yourself in the place of your prospect - a person who’s heard a thousand stories from a thousand salespeople, and is at least skeptical, and often cynical, about the story he or she is hearing from you. Then go through your pitch or presentation - out loud - so you can hear exactly what you have been saying to this prospect. At the end of every sentence, or at least every time you have to catch your breath, stop. Be your prospect, and say “So What?” in as skeptical a tone as you can manage. Answer the “So What?”, and when you’re done answering, be your prospect again, and say (you guessed it) “So What.” Continue this conversation until you can come up with an answer that addresses a real problem that the prospect is really concerned about. Then, go to the next statement in your presentation, and start the process again. Continue until you’ve gone through your whole pitch.

You should now have some understanding of what kinds of problems your prospect might - I emphasize “might” - have. Now, you can think about what kinds of questions you can ask that will start conversations about those problems, which might lead to conversations about how you might help solve them.

Now, throw away your presentation, and on your next sales call, ask those questions instead. I predict that your prospect will “get it”. The key is that it’s your responsibility to uncover the problems and demonstrate your ability to help, not your prospect’s responsibility to figure out how your product or service fits.

I encounter many early stage companies where one or more of the founders have been handling the sales effort, have achieved some success, and are ready to start hiring a sales force. I’ve also seen many of these sales expansion efforts fail, and have some ideas about how to successfully manage this transition. Don’t just run out and start beating the bushes for salespeople; I believe the steps below need to be taken before you even begin to recruit.

- The first step is to recognize that your founder-based sales effort is likely to be a “craft” selling model, based on your individual enthusiasm about the product, targeted at prospects you have some relationship with (someone knows someone and makes an introduction), often priced differently and sold with different contract terms for each customer, and generally not systematized at all.
- If you haven’t already defined the common important problem you are solving for your customers, now is the time to do that. A salesperson will not be able to consistently prospect and sell without a clear understanding of the value you are bringing to the prospect. As part of this definition, you need to build an “ideal prospect” profile that will lead your new salespeople to the right prospects.
- You need to analyze the common steps you have gone through in selling to your current customers, and build at least a skeleton of a sales process to guide your new salespeople through the path from finding a prospect to closing a sale.
- You need to think carefully about what kind of person will have the best chance of success as your salesperson, and write a job description and hiring criteria as a basis for your search. Too many early stage companies hire people they know, or who are recommended to them, without going through this thought process - this will almost guarantee low sales and high turnover.
- You need to develop a sales compensation plan that rewards the sales behavior you want to see. This plan needs to include definitions of commissionable sales, how and when commissions are paid, how territories are defined, and any other compensation issues you are concerned about.
- I’d highly recommend that you implement a CRM system that incorporates the sales process that you have defined and provides you with the ability of tracking sales activity and opportunities. It doesn’t have to be fancy - a basic Salesforce.com implementation will work fine - but it is absolutely necessary if you expect to have any visibility about or control over multiple sales people and sales opportunities.
- Finally, you need to develop a sales training curriculum that encompasses product training, sales process training, prospect definition, compensation and company values, use of the CRM system, and any other important subjects you want your sales force to master.

Now you are ready to begin your recruiting, with a much improved probability of success. An important extra benefit of all the work you’ve done is that you look much more professional and competent to your prospective sales hires, and will be able to attract and hire better people, further increasing your chances of a successful expansion.

I’ve just completed a consulting engagement for a company that has a recurring revenue model that’s dependant on lots of small deals - $5K in annual recurring revenue - instead of a few large, complex deals. This was a new environment for me, and I learned a lot as I designed, implemented, and then managed a new sales process for them.

It turned out that the sales process elements weren’t all that different. We still had to figure out what important problem we were solving for our prospects, and who owned that problem. We still had to implement an action-based sales process and incorporate it into a CRM tool. We still had to train salespeople in the new process and aggressively manage the process.

Selling in this environment seemed easy in the respect that the prospect was easy to identify, the problem we were solving was easy to describe and the benefits were evident, and the sales cycle and process were short and pretty easy to manage. It was still a very tough selling environment, though, because the pressure to close deals was unrelenting.

This meant that the sales process had to be very well defined and simple, and that the CRM measurement and management tools had to focus on overall daily, weekly, and monthly activity rather than focusing on progress through a complex sales cycle on a specific opportunity.

The big lesson for me was that it was still essential that the sales process be well defined, repeatable, and measurable by both salespeople and management. Just because the sale looks simple doesn’t mean that a company doesn’t need a solid set of sales processes - in fact, I now believe that it’s more important to systematize the sales effort, because there’s very little slack. You can’t easily recover from a bad month in a recurring revenue model.

If a startup is going to achieve sales traction, they have to be solving critical problems for their prospects, which means they must become customer-centered in their selling processes. When salespeople and executives in startups begin the process of moving from product-centered to customer-centered selling, and have to stop doing presentations and demos and start finding out what’s going on in their prospect’s business, one question always comes up. They want to know “What should I ask?” when talking to an executive.

It’s a natural question driven by two concerns - first, they don’t want to look stupid by asking the wrong questions, and second, they don’t want to upset the prospect by asking inappropriate questions.

Here’s some help if you are struggling with this transition. “What the CEO Wants You to Know” by Ram Charan is an excellent book about the fundamental issues that drive businesses. He is mostly concerned with how a person can become aligned with the critical issues in the company he works for (something every salesperson should do as well), but I think the book is a wonderful primer for understanding what is driving your prospect’s business decisions. A must read for anyone who is selling enterprise-level products or services.

“Spin Selling” and its companion “The Spin Selling Fieldbook”, both by Neil Rackham, is a very practical set of techniques for building sequences of questions that help salespeople with both of the concerns mentioned above. I highly recommend these books as a starting place for understanding how questions, properly used, can uncover, develop, and establish the cost of the prospect’s problem - and establish the value of your product or service.

These are just two of the books I’ll review as I continue to write about sales issues for high-tech startups.

A friend of mine, Steve Sterba, CEO of AuctionPay in Portland, OR, talks about selling heart medicine versus selling aspirin. His point is that in high technology enterprise sales, you can’t be selling a commodity if you want to grow a company. Selling aspirin means that you have to go for high volume with low margins; if you’re selling heart medicine, you can value price with higher margins because you are solving a critical problem for your prospect.

There is, of course, a caveat here. You can’t sell heart medicine to someone who has, or thinks they have, a headache. And there’s an additional complication that some folks who think they have headaches actually have heart disease - and vice versa.

So, the sales job is first to determine whether the prospect actually has heart disease - the critical problem you can solve for your customer. This is a critical step - it keeps the salesperson from chasing deals that will never happen, allowing high productivity in dealing with the prospects that really need the product or service.

The only way to accomplish this is to abandon the traditional high tech approach of qualification/presentation/demonstration/handle objections/close. The salesperson must begin with an investigation of the prospect’s current condition - and that means asking questions about the prospect’s business and really listening to the answers and then diagnosing the problem. Until the problem is understood, and there is agreement from the prospect about its seriousness, it is a waste of time to talk about solutions. Remember, you can’t sell heart medicine to someone who thinks they have a headache.

In future posts, I’ll talk more about what this means from a tactical perspective - what the salesperson actually has to do - and how companies can get their salesforces to adopt this sales approach.

High-tech sales is different from most selling:

- The “whiz-bang” technologies tend to result in a product-centered selling style
- Prospects get excited about the technology even if they don’t see a real reason to buy
- The sales cycles tend to be complicated and long, so if you lose, you can waste a lot of time
- The sales process has to change as the company grows

What I will be talking about going forward is specific sales and selling issues that impact the success and growth of these small companies. I hope the blog will generate a lot of discussion and new insights into how the success / failure ratio of these companies can improve with better understanding of the sales processes differences.