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continuing q&a for

a question of scale: growing (into) your customer base 

 

On July 24, 2002, Netpreneur’s Coffee & DoughNets event was about A Question of Scale: Growing (Into) Your Customer Base.” Panelists included Patrick Arnone, President of Arnone & Associates; Deepak Hathiramani, President and CEO of Vistronix; Cory Marsan, Executive Vice President of Sales & Marketing at ServiceBench; Rob Masri, Vice President of Corporate Development at Multicity; and moderator Eric Becker, Managing Partner of Sterling Venture Partners.

 

Following the event, panelists answered additional questions in The Loop, an email list where subscribers can continue the conversations from Netpreneur events. That online conversation is reproduced here. Some posts have been edited for length, clarity, flow, and topicality. The complete, original posts can be found in The Loop archives, which is accessible to all subscribers.

 

Gene Gartner: There was much talk today about how the entrepreneur should constantly evaluate the quality and capabilities of the management team. This definitely should be done. However, are there any suggestions for the members of the management team regarding evaluating the ongoing management capabilities of the entrepreneur or other founders?

 

Patrick Arnone: Let me offer you these thoughts and suggestions:

 

1. If the entrepreneur/founder is the current CEO, then evaluation of the ongoing management capabilities must come from the Chairman and the Board Members. My view is that the Chairman/Board Members must evaluate, assess, and determine if the CEO is 1) focusing on and performing the proper roles and responsibilities assigned, and, more importantly, 2) the CEO is achieving or over achieving the key business and financial metrics necessary to ensure the profitable growth of the company. If the answer to #2 is no, a quick determination needs to be made as to why not and, potentially, a change should be made. Clearly, it is highly desirable for the Chairman or a key board member to coach, mentor, and guide the CEO, especially if they are a first time CEO and/or unproven as a successful CEO in other business environments.

 

2. If the entrepreneur and/or other founders are not in the CEO role, but, rather, in other functional positions within the company (i.e. Sales, Marketing, Development, etc.) as the senior executive for these functional areas, then the evaluation of their ongoing management capabilities would be made by the CEO, President, or COO to whom they report. With the same points applying in #1 and #2 above relative to their role, responsibilities, and, most importantly, their tangible/measurable results and accomplishments.

 

3. When a hiring executive or CEO conducts a search for a new key person or executive for their company, they must spend sufficient time thinking through and documenting the salient descriptions of this person’s roles and responsibilities; their required experience, abilities, background, and attributes; and the tangible results and accomplishments they must produce. Generally, when a retained search is done, a competent search consultant spends hours with the hiring executive and/or CEO to define these key elements. There generally are 12-15 for each category. Once recruited into the company, this same criteria, descriptions, results, etc. creates an excellent foundation for evaluating, managing, and assessing the person within their role, their effectiveness, success, and failure. Clearly the criteria would be adjusted, modified, and updated as time goes forward.

 

Steve Goldenberg: One of the things that Eric Becker said today really hit home with me: learning to say no to the wrong customer. Like most rising companies, our current and prospective customers sometimes end up being more trouble than they're worth. What are the best techniques for saying no, without burning a bridge?

 

Cory Marsan: Good question. I'm a firm believer that honesty is the best policy. In most cases your (former) customer will respect you for this as long as you have some valid business reasons. At Net2000, we went though a painful migration when we moved from resale to a facilities-based network approach. Because our costs to the ILEC for resale were so high (and margins so low or non existent) we had to tell our re-sale customers that we could no longer support them in this manner as economics required us to change our business model. Many converted to our facilities-based approach while others did not. For the most part though there were few bitter feelings.

 

Seth Grimes: Well, there's that old dating technique, "It's not you, it's me." That is, tell the customer whose business you don't want not that they don't fit your needs but that you wouldn't be able to adequately provide the products/services they need.

      I've actually experienced a variation on this problem, which is how to convince sales/marketing co-workers that some of their prospects aren't worth going after. You have to keep working with these people every day so you have to prepared to back up your claims with good, convincing analysis.

 

Gary Honig: One thing I'll add is the demoralizing effect a bad customer can have on a company. The customer who knows that you are a small startup and figures that they can whip you around for a low price can be very demoralizing to your delivery staff. As someone said yesterday, hiring people is expensive. A bad customer can also drive up your turn-over rates.

 

Steve Goldenberg: An entrepreneur friend of mine once told me, "I raised my prices a little bit every year, even if I didn't need to". He did this to keep the shock of a price increase low so that customers didn't complain too much. He got them used to the idea that they would see a small price change every year. Now, this friend was in the funeral home business, so repeat customers were almost a certainty. What are some effective ways to minimize the blow that a price increase deals to a customer? Is raising prices every year a good idea? Specifically, we aggregate paying customers through a partner, which is much more price sensitive than the actual paying end user. What might we do to cushion the shock when we raise prices?

 

Matt Haley: Thinking of raising prices in timely increments makes a huge assumption: that you already have the product and service properly packaged and close to right price. Congratulations if you are already there! More commonly I see prices and packages based on tradition, past experience, and little testing.

      Price changes are easiest when synchronized with value changes. Those can be done in both directions, by adding perceived value and removing perceived value. You may find a product that you thought properly priced is actually in a much more elastic market than you anticipated and a lower priced, lower featured product or service level increases revenue and profit simultaneously. Conversely, you may find what you thought to be an elastic market is not, and marketing to the end user while selling through an indirect channel supports a higher price point with little more cost than listening "channel whine." While painful and aggravating, it is little more consequential than listening to a four-year-old whine.

      Your price received is the customer’s decision. Think through varying the solution delivered, and what value is being delivered. Think through if you can change the timing of payment that may actually have a more advantageous impact on your bottom line. In the funeral home market, pre-selling funerals locked in a lower price, but got the payments done months or years ahead of the costs incurred. You may not have that option, but you may have other options. Pricing is simply one component in the profit equation. Can you vary the product/service mix? Can you introduce product line extensions that offer premium value at a cost less than the incremental price? Have you examined the end users alternatives to ensure you are safe from flanking competition and then determined if you can actually change the price with minimal impact beyond whining?

      I once changed a product price point from $7K-10K to $175K, then to $750K, then $1.5 million with minimal technical enhancements. The biggest change was first internal: Who should we be selling to? How does that market like to buy things? What is the delivered value (the business case)? What is the perceived value? How can I match the marketing/channel/targeting to a better mix? What is the proper product/service ratio? What is the true segmentation we are selling to? Once you answer these questions, which are rather difficult, you can then determine your packaging and pricing. We had to dump our old markets, with the added cost of supporting customers in a market we no longer wanted to sell to. We had to build an internal sales force, create buzz around the product, and sell to a different target title within a customer than we had been selling to. The result was rather astonishing, though. The company went from a value of $10 million to 60 times that in two years. And the high valuation was post market crash while the low valuation was pre-crash.

      Simply put, you can't treat price as an independent variable any more than you can treat product needs independently of the target market. (Matt Haley of Accenture has been a previous speaker at Netpreneur's Coffee & DoughNets events including "Assessing Your Value Proposition" and "Views from the Valley."  

 

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Steve Deller: Cory's presentation today touched on compensation packages for direct sales team members and referenced the need to provide a package that is commission-based and offers proper incentives for reaching specific goals. Our organization is an Internet services company passing from a phase 1 state to a phase 2, with reference clients and a strong delivery infrastructure in place. We are faced with the task of building a competent sales team of primarily journeymen, "hunter-killers" to use one of today's terms. However, we have not been able to find any good resources that provide actual dollar amounts that have been adjusted to today's market climate and the supply/demand of the local resource pool. Some of the numbers we have seen from recent years reference base salaries (for Web services) ranging from $18-60K and commissions of 7-10% of the net sales, based on experience levels. Are these reasonable figures in today's market? Are there publicly available statistics that people have seen that give an idea of what we should be offering for this space?

 

Cory Marsan: The answer to your question depends on many things. First, you need to look at it from a total package perspective; that is, base plus compensation. What is the target income for your candidate at 100% of quota. If your sales cycle is relatively short (say two months or less), your base salaries are typically lower with commission potential being a driver. The reverse is true with longer, more complex sales.

      You can assess competitive compensation packages by interviewing candidates from companies similar to your own. It won't take long to get a pulse on industry standards. There are benchmark studies available as well. You may want to check some of the Web-based HR companies to see what statistics may be available.

 

Jim Stockmal: From what I have seen advertised on private subscription based executive search/position listings such as Netshare, 6FigureJobs.com, and others, some of the most senior Account Executives, Sales Managers, etc., positions are advertised much higher than the numbers referenced for base. Commissions are all over the map, which, as Brad says, often includes extreme payout situations for real stretch goals. However, several part time positions that are almost all commission-based would draw a greater percentage.

 

Shalom Flank: How do you structure compensation and commission for your first dedicated direct sales people, especially for cash-starved startups?

 

Patrick Arnone: A great question but a difficult one to answer without knowing the answers to a number of questions. For example, do you sell a product or service? Is the product a point product, technical one, or an enterprise level product? What is the level of complexity? What is the price point, average sale/order price, and the best-case revenue in your largest deals? Who is it sold to? Who makes the ultimate buying decision? Who has the authority to sign the contract/order—CIO, CEO, CFO, or a line business executive outside the IT organization? In what vertical markets or industries does the product have broad need and appeal? Is this a missionary sale? How much market education must be done? What is the realistic sales cycle to close? Can you accept less than an "A” player? Less than a true "hunter/killer" who will always overachieve their assigned quota, blow away their numbers and always make far more than the CEO in cash compensation? The same or similar questions apply if you offer a service (as well as a number of other questions that I won't go into).

      I will share with you my first-hand experience and knowledge which is both good news and bad news.

      The bad news for a cash starved startup is that even in today's poor market and employment conditions, a true world class A player, hunter/killer type of salesperson with the caliber of the best salespeople from, say, a Siebel or Oracle, enjoy a total cash income target at 100% of revenue quota in the $200K-$250K annually. This $200K-$250K range is generally comprised of 50-60% base salary with the balance in commissions. This type of salesperson is accustomed to earning well in excess of $500k or more per year, with the best-of-the-best in excess of $1 million a year, exclusive of stock options. They tend to carry annual revenue quotas in the $4 million to $10 million range, depending on a number of factors. The commission rates accelerate and increase as the salesperson achieves and always when they over-achieve 100% of their assigned revenue quota. It is not uncommon to see commission rates (when above 100% of quota) in the 5%, 10%, and 15% level. This type of salesperson is generally not laid off, not unemployed or sitting on a bench somewhere, but happily engaged with their current company, making a lot of money, hoping their options will be re-priced and/or someday will not be under water. They tend to be equally motivated and incented by cash compensation as well as stock options based on their assessment of their company's prospects for success. But they are usually receptive to hearing about the next hot company they can join to achieve more of the same.

      The good news is that there are countless numbers of salespeople on the street, laid off, fired, can't find a sales position, etc. with more than 95% being B, C and D level players. Your approach to structuring an effective compensation plan is only limited by your imagination. A fact to consider is that when Tom Siebel launched his company which he did without ever raising any VC money, he compensated his initial salespeople with 100% stock options, no cash compensation whatsoever. Siebel hired the best and brightest from Oracle's A team and several other high flying software companies, built a very strong sales engine that still exists today, and didn't start providing more generally practiced sales compensation models until they were up and running, generating $25-$50 million in revenue. This is possible today, but only for the next Siebel, Oracle, SAP, etc. who need to attract the A player. Beyond this approach, you could embrace a highly leveraged compensation model where base salary represents 0-30% of total cash compensation at 100% of quota with the balance in commissions based on revenue achievement. I personally believe this will attract only the C and D players, especially with target cash compensation less than $130K per year. To attract the B players you need to reach a minimum cash compensation target at 100% of quota in the $150K-$170K range. You always want to motivate, incent, and reward your sales people to overachieve their revenue quota when they exceed 100%. This is good for the company and the sales rep. Note that much of what I shared doesn't apply if you are a company with a strict services offering, especially operating with lower gross profit margins.

      Lastly, stock options, while still of interest to the A and B salesperson and of value as a recruiting tool in building a strong sales team, don't demand the importance or leverage to you today as they did over the last few decades. Good luck.

 

Seth Grimes: I'm actively looking for a sales/marketing lead for my company -- we resell an analytical software package and provide associated and non-associated professional services -- so I've been struggling with these same recruiting and compensation questions. I have a proposal from a company that outsources recruiting and managing sales staff, Sales Focus (I have no other connection to them) and they provided the following table of compensation figures, exclusive of commission:

 

level         experience         base salary

entry            1-3 years            $35K-$50K

mid              2-5 years            $50K-$75K

high             5-10 years          $70K-$95K

rainmaker    10+ years            $95K-$120K

 

For my company, I'd expect 4-6 sales per year where software sales would run about $100k so the commission could add substantially to the base salary. I figure about 10% commission for a sales person. (Sales Focus would charge me 15% with the difference being their "vigorish.")

 

Ben Martin: Here's an interesting article from Entrepreneur.com, The Right Carrot, and a related book on the topic of compensation and motivating salespeople: Compensating New Sales Roles: How to Design Rewards That Work in Today's Selling Environment by Jerome Colletti and Mary Fiss.

 

Larry Wolter: Where do you see business development influencing your sales cycle? Should business development be centralized or de-centralized within the service areas?

 

Deepak Hathiramani: At Vistronix, we view business development as a critical function that is the responsibility of every team member including a dedicated business development team. At this stage of the company, we believe a centralized business development team with a targeted agency focus is the right answer. Every business development team member must possess the ability to recognize an opportunity for any of the operational groups/core service offerings. One of the reasons we prefer a client focused centralized business development function is the fact that it allows each business development team member to develop and nurture the client relationship within an account. One shortfall in this strategy is that the decision maker/sponsor for each of our core offerings/solutions may not be a single individual. In short, there are positives and negatives to each approach and you should select the structure that best fits your strategy.

 

Ben Martin: Eric Becker of Sterling Venture Partners made the point that he and his partners use a "human capital assessment" program both in due diligence as well as each year with all of their portfolio companies to encourage them to recognize the strengths and weaknesses of their teams and to do something about it, often through training, skills development, hiring, and lastly, making those difficult changes that we all tend to avoid -- changing someone's' role within the company or counseling them out of the company. He suggested the following book as a helpful resource: Topgrading: How Leading Companies Win by Hiring, Coaching and Keeping the Best People by Bradford Smart.

 

Gene Gartner: I'll have to admit that I am not a fan of using assessments during the hiring process. The companies that I have seen do this tend to have a very homogenous personality. The assessments tend to turn out cookie cutter people and it is much easier to fall into “group think.” I liken it to the companies that only recruit from certain schools. After awhile, everyone looks the same. I like diversity in all things. Having diverse personalities and ways of thinking creates a greater possibility for finding the unusual solution or next great idea. Homogeneity in anything just leads to incrementalism.

 

Ron Peterson (of Three Arrows Capital): I'm reminded of Daniel Goleman's books on emotional intelligence and how study after study shows no correlation between management success and effectiveness with either academic achievement or with standard intelligence measures. This is in contrast with a tendency to populate executive ranks with people holding impressive academic credentials, in Goleman's terms, usually the worst pool that you could draw from! This phenomena probably hails from our collective obsession with education as well as a feeling that you've done your "due diligence" if the guy eventually screws up. The academic achievements form a protective barrier for the Board or whoever makes the hiring decision. I certainly made that mistake in the distant past, much to my discredit.

 

Anthony Strande: Mind citing the reference to the idea that more education is worse? Does this mean that less education is better? Or does the argument run something like average people like to congregate with average people and the world is composed of mostly average people?

 

Gene Gartner: I guess this hits on a couple of my hot buttons. Education and intelligence are not detrimental to management success. I think the problem comes from smart people who go through education and believe that there is a management science. There is science only in the fact that you need to be able to understand the analysis of the business. Ultimately, every company succeeds based on the management of the collective talents of the company. Managing talent is not a science but a feel.

      One of the funniest things I heard about managing came from Billy Martin, the former manager of the NY Yankees. He said this about managing a major league baseball team: "There's gonna be probably 11 or 12 guys that really like you. There are gonna be five or six that hate you. The key to being a successful manager is keeping the other seven or eight guys that haven't made up there minds away from the ones that hate you."

      I'm not advocating that style of management but Martin did win a lot with some very diverse personalities, including his own.

 

Brian Barrett: Right out of college I was given a personality assessment test by a company I was interviewing with. I was hired for the job but not given the results. A couple of years later I had proved to be a good performer for the sales team, and the then President called me into his office. He thanked me for my superior sales performance and showed me the results of the assessment I had taken before I was hired. The assessment stated that I would not make a good salesperson because I had too much empathy and that hiring me was not recommended. I later became the President of the company.

      In 1996 I interviewed with a company. Part of the process included an assessment, a single sheet of paper with words in two columns. I read the instructions. I did not understand them. I asked my would-be boss for clarification and was again told the instructions as they were on the sheet. I pointed out the ambiguity of the instructions and was told to just do the best I could. I was not asked for a second interview. I would not have gone back either since I felt any company that placed any value at all on a test that could have such ambiguous results did not have the open-minded culture I was looking for. My suspicions were later confirmed when a friend joined the company and was fired months later on a bogus charge.

      In June of 2001, the national sales force of a telco of which I was a part was given a one-on-one, four-hour test of their individual abilities. I felt the assessment was very professionally done and was confident that the results would reflect accurately our abilities. The results were to be tabulated and distributed in August 2001. Unfortunately, I had made quota only once in 10 months and was let go at the end of July. A friend and fellow salesman called me in mid-August and told me that I was ranked highest in the national sales force in ability. The company went bankrupt and closed days later. The head of the testing firm later told me my results were at the top 5% he had ever given and wanted to get me in with some other international companies he was recruiting for.

      To sum up, my first experience with an assessment test was interesting because the vary trait it claimed would be my downfall is the trait I credit with my success. My second experience was important because it made the organization that required it look ludicrous and accurately displayed a cultural shortcoming. My third experience, obviously with a head-strong startup, was interesting because the company had spent many thousands of dollars (probably over $100K) to assess the sales force rather than spending the money making the corrections that I and others recommended that would have positively enhanced our customers experience, thus making them not only more inclined to buy more themselves, it also would make them referral sources for new business. Upper level management was looking at sales as the problem when the product was the problem.

      Assessments can be useful when applied correctly but I don't think they can ever be the final word or viewed in a vacuum. Draw your own conclusions.  

 

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