Early Stage Marketing and Sales – The “Why” vs. the “What”

I was at a Rally Software board meeting where we spent a chunk of time finalizing and approving the 2005 operating plan. A big part of the discussion – not surprisingly – was on the sales ramp and the corresponding expense base (and timing of opex growth throughout the year based on a prediction of sales growth and performance.)

Rally started shipping their product in mid-2004. So – 2005 is their first full year of product ship. They have a nice, active customer base that is growing as expected. The growth curve is ambitious (but achievable) for 2005 – f they make plan, they’ll have a great year. However, their operating expense ramp (pre-board meeting discussion) assumed they made the sales plan. The guys running Rally are responsible and know how to sandbag a plan, so we’re confident that they won’t pull the trigger on hiring if they don’t see the sales ramp happening. The going in proposal (and plan) assumed they hit their numbers relied on management backing off hiring if they missed their numbers.

I’ve been involved in over 100 companies. None of them ever have made their operating plan on their first year of product ship. Occassionally they outperform, but they almost always underperform for some reason. The reasons are often logical and non-fatal, but the dynamic that gets created is one where the business is always “behind plan.” This sucks.

I made the strong point that I actually care LESS about “making our 2005 revenue plan” then I do about learning why people are interested in what we do, why they turn into real prospects, why they become customers, and why they buy more stuff from us. I know – with certainty – that our 2005 revenue forecast is wrong – we just don’t have enough data to have any precision on it. So – I want to learn the “why” in 2005 – not that “what.”

We do have a sales force to comp, a team to motivate, and a plan to achieve. So – the “what” is important. However, in my experience, the way to calibrate things is to set up the operating plan so you are in a position to increase opex as you are successful vs. having to back off spending (or hiring) if you fall short of plan. I’d rather go to a board meeting mid-year where the management team says “we’ve hit our revenue ramp so far this year so we want to pull some head count adds forward” vs. the meeting that says “we missed our revenue ramp so we’re holding off hiring folks in the plan.” The nuance is subtle but the dynamic is important – as you succeed, you get to apply more resources; if you don’t reach your goal, you haven’t assumed more resources (e.g. we can’t hit the goal because we need the resources.)

It also reinforces the focus on the “why.” If we fall short of plan, we’ll focus on “why.” If we exceed plan, we’ll rejoice, talk about “why”, and add more resources. However, we won’t spend a lot of time agonizing over “what we should do because we missed plan.”

The first full year of product ship for a software company is a very defining year. I’ve seen way too many of my VC cohorts believe that the operating plan and forecast is gospel and spend all their time in year one of product ship (and usually year two of the business) focusing on the quantitative financial metrics rather than understanding how things actually work in the business. Financial planning is imprecise early in a business – a smart executive team understands this and sets the right expectations and parameters around it.

  • http://furrier.typepad.com John Furrier

    Brad: On the money with this post!

  • Jason

    If I may make a comment, how on earth do you find prices, try to sign up as a customer, or even contact sales for Rally through the website? It appears interesting but the lack of any way to actually buy it was quite frustrating for me.

  • http://www.feld.com/blog Brad Feld

    So – this unquestionably goes is the “doh” (in the voice of Homer Simpson) category. Jason – you are unarguably correct – there’s no simple way to do it. Salesforce.com has mastered this, so there’s no excuse for making this difficult and mysterious, especially for a hosted product like Rally’s. Look for this to improve soon (although – unfortunately – with many of these things – you lose the prospect if you start off by making it hard on them.)

    FYI – if you are serious about getting started – sign up to Test Drive the Rally Sample Project – that’ll at least get you started.

  • http://furrier.typepad.com/john_furrier/2004/12/early_stage_ven.html John Furrier

    Early Stage Venture Marketing

    Marketing and Sales are just as important for an early stage venture as having a great product team.

  • Jason

    Thanks for the reply Brad. I will give it a try and watch for the improvements.

  • http://sshu-s4.tripod.com/blog Steve Shu

    Brad,

    Great post. After sidewinding from finance and operations into trench-level sales rotation a number of years ago for an early-stage venture, I couldn’t agree more. What I have always found challenging is being able to cut through all of the silverlining that one finds when working as a salesperson and as part of the sales team. Due to salesforce incentive structures, typical MOs, etc. unless one is keeping a close eye on management including qualitative monitoring of the sales process, it can be tempting to get carried with listening to too much “confirming evidence”, i.e., things that tell you to stay the course. Confirming evidence tends to prevent people from learning. People also need to look for “disconfirming evidence” things that tell them that things are going wrong.

    -Steve Shu

  • Sandy Kumar

    Brad:

    Excellent article. Your article raises an interesting “paradigm” of operations management and related sales forecast. I have wondered , if this whole paradigm emanates from trying to please the investors upfront.

    Having been in the trenches selling for start-up software services companies of India, I have found similar compulsive pressure coming down from the management, to make quarterly quota , apparently under pressure from the VCs !!! However, very little effort ever got spent on “why” a customer buys or does not buy from us. It lead to 3 years of flat revenues, disgruntled sales force and sales force turnover.

    The company is history now, acquired by a larger entity. The last I heard , they are still struggling to “make quota”.

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