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I got an email today from an exec at a company who I was with at a recent board meeting. I thought it was a powerful summary of part of our discussion, specifically around the sales pipeline for Q4 and overall sales execution. I’ve been in something like 91,293 pipeline reviews in my life and it continues to baffle me that experienced sales execs manage to snow the CEO and the board with “probability weighted sales pipeline.” I hung in there in this case and continued to make my point about playing offense on sales forecasting.
Rather than trying to summarize it, I got permission to just reprint the email. It follows.
One of the larger take aways for me was your insight on our attitude towards how we were predicting revenue. Prior to our meeting, we thought we were doing a good job of predicting revenue. We are working on 10 deals and we explained to you that we thought that 75% of these deals would close within the next 60 days or so.
You asked specifically, “which of those deals would close?”
Our answer, was “we feel confident that each of these deals has a 75% chance of closing”.
You pushed us and asked “which of these 10 deals has a 100% chance of closing?”
Our exec team looked at each other in silence.
We were hard pressed to answer that specific question. We couldn’t answer that question.
The takeaway for me was that we need to take the offense when it comes to predicting revenue. We need to change our mentality from Defense to Offense.
Defense was: Us allowing FATE to play a large factor in whether or not a deal closed. We accepted the fact that 75% of these deals will close, but couldn’t point to WHICH 75%. We were in “wait and see” mode and allowing fate to decide our monthly revenue.
Offense is: We feel good about these 5 specific companies signing and we are going to commit to them closing as a sales team and a company. We are going to keep on top of them, be proactive, and make sure they close. Fate will have VERY LITTLE to do with whether these deals close or not.
It is a subtle adjustment, almost semantic, but one that will make a very large difference in how we act, how we talk, how we think, and ultimately how much revenue we book.
One of the companies I’m an investor in has a gong in the office. They bang it every time they sign up a new customer. They also have a virtual gong – an email that goes out to the entire company and board that starts with GONG: (Client Name). The salesperson who closed the deal gets to send the email out and write whatever he or she wants. Everyone in the company then piles on with Reply-All commentary.
It’s just awesome. I know many companies that ring bells or make some kind of other noise in the office when they close a sale. But it’s not very noisy if you have multiple offices, people on the road, or board members who don’t work out of your office.
Now, if you have a self-serve, high velocity model you may not want an email going out with every signup. So how about a daily gong at the end of the day that the system automatically emails out. I’ve written about email robots in the past – many of the companies I’m an investor in have an email robot that sends out the sales summary for the day at 12:01am the following day. The formats vary, but they are all short and consumable by all. No fancy graphs. No complicated analysis. Just raw data every day that informs everyone in the company how many new customers we got yesterday.
So ring that gong loudly. Take a page from my friends’ playbook and get that email out every time a new deal closes.
In December, I wrote a post titled Give Your Sales People All The Knives. While I let you draw whatever conclusions you wanted from the post, I thought I’d follow through and give you a little more detail about what I meant by the statement.
I framed the problem with the struggle many software companies have been going through over the past few years (or decades – depending on who’s version of history you believe) around selling perpetual licenses vs. subscriptions. I inadvertently included the construct of the deployment model (desktop, server, or SaaS / hosted) which, while a key part of the evolution of the software business, was not the part of the problem I was referring to when I suggested you should give your sales people all the knives.
A few people wrote me concerned that I was suggesting that the sales organization should determine the deployment model and that I was suggesting a company shouldn’t differentiate between desktop, server, or SaaS. Don’t be concerned about this – it isn’t my argument or suggestion.
Instead, I’m focused entirely on the licensing and pricing model (which I’ll simply refer to as the “licensing” model – which includes price.) I’ve been in more conversations that I care to count about how to price software, regardless of the deployment model. The licensing model and the deployment model inevitably get tangled up when they shouldn’t.
In 2009 (and going forward) customers will buy software using both perpetual licensing and subscription licensing, regardless of how the software is deployed. In addition, customers will buy perpetual licenses but pay periodically (monthly, quarterly, annually) and customers will buy subscription licenses but pay in single payments up front. If you can parse all of that, this is the exact opposite of the theory of how the software licensing and deployment were intended to line up. Of course, this is nothing new as software leasing has been around since the beginning of the software business, as have prepaid services.
While I know all of this gives the auditors great pleasure because it means they get to spend more time lecturing companies about revenue recognition and enforcing accounting policies that distort the true financial picture of the company under the guise of complying with GAAP, it’s irrelevant. Your goal as a company is to create great products that your customers will pay you for. The goal of your sales organization is to sell these products; they shouldn’t care how the customer wants to license the products.
That’s the essence of what I mean by Give Your Sales People All The Knives. While it makes good business sense to have a religious point of view about the deployment model (there are fundamental differences between a SaaS deployment model and a software license / behind the firewall / on premise / whatever you want to call it deployment model), customers buy each deployment model a variety of different ways and your licensing model should accommodate.
I regularly hear the argument that the economics aren’t the same. Baloney – they are approximately the same. A typical perpetual model is $x in year 1 with 0.2x in year 2 and year 3. A typical subscription model is 0.4x in year 1, year 2, and year 3. Tweak this however you’d like; you get a roughly equal cumulative payment stream over four years. I understand the cost of capital argument – you’d rather get the money up front, but remember that some customers want to pay for the subscription model up front (three year pre-pay for the subscription – or a single check of 1.2x) while others want to pay for the perpetual model in equal payments over three years (0.467x / year).
Cash flow follows this logic. The customer wants to pay in different ways to manage their cash flow. Some want to pay monthly; some quarterly; some annually. The deployment model doesn’t matter; the license model doesn’t matter – how the customer wants to pay is what drives this.
Fundamentally, the customer is managing two things. First is cash flow. If the customer has a use it or lose it budget, they want to pay now. If they have no (or minimal) budget but really need the software, they want to pay monthly and try to bury the expense in a cumulative budget, or get a budget exception for a small monthly payment. Second – and more subtle – is how the customer accounts for the purchase. Many companies (whether they should be or shouldn’t be) want to capitalize the software purchase and put it on the balance sheet to manage short term earnings, especially in down markets. Others are perfectly happy to have the purchase be an income statement item. The two issues drive customer purchase behavior much more than your licensing model does. As a result, I’m suggesting you should set up your licensing model to be flexible to accommodate your customer’s needs, rather than the other way around.
Bottom line – if you make software for a living, regardless of your deployment model, you should be able to provide either a subscription or perpetual licensing model, with any type of payment approach.
Many companies have only been giving their sales guys the brown handled knives (e.g. they are limited to using one type of licensing model.) Selling software into a downturn is always harder. Now is the time to give your sales people all the knives. If they don’t carve up enough business, they’ll at least have enough knives to put themselves out of their misery.
As Q408 stumbles to a close, I’m seeing a distinct trifurcation of sales performance among the companies I’m working with. I’m pleasantly surprised by the companies that are solidly outperforming their Q4 plan, especially since Q4 is the hardest quarter to outperform (since the plan is now typically great than 9 months old.) Some are fighting to get to their Q4 plan and some are going to fall short regardless of what they do between now and the end of the month.
This is in direct conflict with what you might think if all you do is read the newspaper and watch television. If this is your information base, you’d conclude that no one could possibly have a successful Q408. Not true!
That said, in all of the companies I’m involved in, people are being very cautious about Q109, even in the ones that are outperforming Q408. Anyone who has ever played the MIT Beer Game understands how multi-stage supply chains can mess with your mind (if you don’t have any idea what I’m talking about, grab three friends and play the online beer distribution game.) Every startup is now living in an extreme version of this with a severe bullwhip effect.
Sales organizations – and decision making around them, especially in the forecasting part of the cycle – are especially susceptible to this phenomenon. Since most companies are now working on their 2009 plans, paying special attention to this on the top line is especially important this year. While talking through this at one of the SaaS companies I’m involved with, I made the comment "give your sales people all the knives."
In the software business, we’ve been struggling for the past few years with the transition from traditional perpetual software licensing to subscription based licensing. Layered on top of this is the split between desktop software, server-based on-premise software, and SaaS-based software. All are valid deployment, sales, and pricing approaches although on some days of the week you’ll notice that religion takes over, especially when VCs tell you "we only are funding SaaS-based software companies" or "enterprise software sales is dead." Ok – whatever.
My solution is to give your sales people all the knives. I’ll be more specific in another post, especially since it won’t really matter this quarter. In the mean time, go play the beer game before you finalize your operating plan.
A CEO friend (who also is an excellent salesman) sent me a fun post titled Sales 101 with the comment "here’s one that will make you laugh in a sad but true kind of way." Yup – this pretty much sums up the dark underbelly of high tech sales. If you are a VP of Sales in a high tech companies, read slowly and see what you can do to improve the situation.