Editor's note: yesterday, in part one of this two-part series, Dave Chase of the Altus Alliance explained the Sales Learning Curve, a new theory developed by Stanford University professors Mark Leslie and Charles Holloway, and why it is of interest to anyone working in hi-tech, including marketers. Today, Dave explores how senior management can apply some of the principles inherent to this new theory.
My firm's principals have served as executives, investors, board members, and consultants to nearly 50 early stage companies in the technology sector -- some successful (like Microsoft) -- and some not. Consistently, we have found that the go-to-market stage (more so than product development or market expansion stages) is where there is the highest degree of uncertainty and the greatest potential to burn through finite cash resources, typically through a misallocation of sales and marketing resources. Needless to say, once we were exposed to the SLC, we immediately began working to develop the tools and constructs needed to apply the theory behind the SLC to the day-to-day operating reality of rapidly-growing companies.
The last thing most CEOs and venture investors want to hear is "go slow" when they have a product that is out of beta testing. Having become intimately involved with the SLC and Leslie and Holloway's thinking, we at the Altus Alliance are firmly convinced that this is precisely what companies must do, whether they are a start up launching a brand new product or an established company starting a new line of business.
When companies are pushing a product out of beta, it is not unusual for a startup to have a relatively poor handle on important questions like these:
- What is the true customer ROI?
- Does the company have a clear segmentation and customer-focus strategy?
- Has the sales model been clearly defined?
Most management teams feel like they have a strong grip on these topics based on a few "high touch" initial sales, and these teams feel that it is time to put the pedal to the metal. Typically, when "v1" is shipped, it is a time of rising excitement, enthusiasm and confidence within the organization. There is also an expectation from investors that -- with rising expenses -- management is going to push to get to break-even in the shortest time possible. Since revenue is only generated from sales activity that is directly related to the number of sales people in the field, there is a tremendous amount of pressure to hire and deploy reps immediately.
Unfortunately, these sales reps are frequently deployed before the product is grounded in market reality and before an effective sales and marketing process has been developed. Consequently, these sales reps are unproductive, "sales activity" never turns into revenue, and precious cash is wasted at an alarming rate.
Recently, I conducted an interview with interactive marketing industry veteran Dave Smith, he shared lessons learned from when rich media was introduced that are applicable elsewhere.
Another example from the interactive marketing arena is how long it took for search engines to realize two key drivers for their business. First, the "long tail" (i.e., low frequency search terms) mattered. Second, pay-per-click was the way marketers wanted to pay for this kind of service.
So what is the alternative? Our experience, which is echoed by the SLC, has shown that taking a much different approach to sales when introducing a new product into the market can result in far more favorable outcomes.
At this early stage, management should focus on capturing market and customer feedback rather than strictly on generating near-term revenue. The rate at which this customer feedback is acquired and assimilated into the product is critical to a company's ability to move up the SLC.
Defining sales success in terms of the "amount of feedback collected from customers" influences the type of sales people hired at this stage as well as how they are compensated.
How does a company know the shape of its SLC and how to gauge its progress along it?
A number of primary drivers of the SLC exist: readiness of the product, sales and marketing, product type, market structure and macro-economic conditions.
In tandem with the Venture Dynamics Group, we have developed a dynamic simulation model that estimates the SLC under different scenarios. The model helps entrepreneurs and investors model the shape of the SLC given a certain set of assumptions and then see the resulting impact on cash flow.
There are several actions an early stage business should take to apply the SLC framework that my firm, as well as Leslie and Holloway, are espousing. The following are some highlights:
- Identify and prioritize product, sales and marketing factors impacting the SLC.
- Shore up gaps as well as exploit your strengths based on findings from broad customer contact and market experience.
- Engage in a regular process of analyzing how learning can be accelerated.
- Mobilize entire organization to engage with customers (engineering, product marketing, sales and finance).
- Staff and operate at the appropriate levels based on where you are on SLC.
The management team can then mobilize their entire organization towards learning and accelerate their path up the SLC. While some of the management team may believe that this process will slow the rate of revenue growth, it is important to remind them that this process is intended to accelerate the process by which companies reach the ultimate corporate goal, cash flow positive.
Though it can seem counterintuitive to slow down the go-go energy upon initial product delivery, a well-grounded approach that keeps the SLC principles in mind will end up being the fastest path to rapid market penetration and sales growth. This will ensure you avoid the old saying, "haste makes waste," while giving your team and investors the kind of financial return you desire.
You can see a complete SLC presentation given by Mark Leslie at a recent event.
Dave Chase is a partner with Altus Alliance, which specializes in driving revenue traction for emerging businesses. He publishes a blog entitled Chase Market Velocity that focuses on how emerging businesses can gain market traction via the Enterprise Sales Learning Curve principles espoused by Mark Leslie. Before joining Altus Alliance, Chase spent nearly 20 years in the industry with over a dozen years at Microsoft in various senior marketing and general management roles, including his role as MSN's managing director for industry marketing and relations. In that capacity, he was responsible for MSN taking a leadership role within the Interactive Marketing industry to grow Online's share of the overall ad market in concert with AOL, CNET, Yahoo!, Google and other market leaders.
Chase played leadership roles in launching several new businesses within Microsoft including Microsoft's entry into the enterprise software and server business which is now an $8B business. This included co-leading Microsoft's first vertical marketing efforts where he grew the Healthcare vertical market from virtually no presence to a market leading position. The healthcare business now represents nearly $500M in revenue for Microsoft.
From there, he was integral in Microsoft's entry into consumer Internet businesses that achieved both critical and financial success. These included Sidewalk, Encarta and HomeAdvisor, which were among the first profitable consumer Internet businesses for Microsoft. He has contributed to iMedia via articles and Summit presentations.