The Sales Learning Curve For Start-Up Companies
The sales learning curve is an important concept introduced by Stanford professors Mark Leslie and Charles Holloway roughly 12 years ago. It is a concept that we have borrowed from a lot here at Bowery Capital and believe it remains one of the more underrated academic concepts in the new world of business software. Before a company can sell a product efficiently, the entire organization needs to learn how customers will acquire and use it, a process they termed called the sales learning curve. An easy example of how this works can be borrowed from the manufacturing industry. In manufacturing, employees transfer knowledge and experience back and forth between a production line and the purchasing, manufacturing, engineering, planning, and operations departments. Over time, the entire process becomes more effective and efficiency usually equals cost savings. Their article lays out a ton of detail on how to think specifically about the concepts and details and is worth a read for anyone. The sales learning curve involves three distinct phases.
1. The Initiation Phase. This phase begins when the company is ready to sell a product. It lasts (surprisingly) until the break-even point which can be defined as when sales yield reaches a point where revenue per sales rep equals the fully loaded cost per sales rep. There is a difficulty in getting people to sign up. Things are hardest at this phase. Sales reps and teams should be focused here on learning from the customer, building bridges between internal organizations, insights and information sharing, and perfecting product and go to market. Think small teams, few sales people, and low burn.
2. The Transition Phase. Toward the end of the initiation phase, companies generally have acquired a critical mass of customers, and sales are beginning to accelerate. At this point companies move into the transition phase. Once the sales yield equals the fully loaded expense per sales rep, you should assume you’ve moved to the transition phase. You have real traction in the market. Your organization has probably grown. You understand what it takes to build a profitable business. Mark and Charles use a sales yield of twice the fully loaded cost per sales rep as the end of the transition phase to constitute “traction.” By this point, the company should have a pretty good idea of what to expect in terms of steady state sales yield for the product. It is here where you focus on building your repeatable sales model, your sales capacity, your training, and other revenue related items. Think bigger teams, many individual contributors and a few managers, and moderate burn.
3. The Execution Phase. We don’t love the name, but it does make sense. You’ve figured out initiation and transition. The execution phase is basically once sales management is confident that the product has achieved traction and is entering the execution phase. It is here that sales reps can be hired as rapidly as the company’s management and financial constraints will allow. In this phase, when the formula for success has been developed and all of the support requirements for sales reps are in place, the company needs more traditional salespeople—what’s known in the industry as “coin-operated reps”—who require nothing more than a territory, a sales plan, a price book, and marketing materials to bring in orders. Think big teams, many individual contributors and a many managers, and burn that meets the requirements of the business.
Mark and Charles wrote their post on the sales learning curve in 2006. It would be interesting to revisit it in the context of companies today. Greg Sands had a good riff on it a few years back but not many people have revisited it. On one hand the staging of financing (Series Seed, Series A, Series B) has certainly gotten more specific with revenue, customer, and profit thresholds. On the other hand, we still see companies establish revenue plans without taking into account the realities of the sales learning curve. We still see companies move to the transition phase too quickly. In addition, investors continue to invest in these same companies not understanding the same exact risks and issues.
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