- Posted on May 15th, 2012 by Jim Semick
- Tagged as: business model, entrepreneur, sales learning curve, sales model, startup growth
You’ve launched your product and are now getting early customer traction. You might even be seeking capital to ramp up the sales team or invest heavily in customer acquisition. But how do you know it’s the right time to scale?
By their nature, entrepreneurs move quickly and there’s always a temptation to hire an army of salespeople or pour money into acquisition at the first sign of revenue. But stepping on the gas before nailing your business model can burn through cash and potentially lead to failure.
Here are five ways that successful startups know when it’s the right time to invest in sales and acquisition:
1. The sales model is repeatable. Your startup team should be laser-focused on discovering the repeatable sales model. In fact, according to Steve Blank, the definition of a startup is an organization in search of a repeatable business model. What makes a sales process repeatable? Your efforts result in sales as you predict – for example sales funnel conversion rates fall within an expected range. If you are still selling within your network of friends and businesses, you have not yet found the model.
2. Customer Lifetime Value is greater than Customer Acquisition Cost. Simply put, Customer Lifetime Value (LTV) is the revenue that you expect a customer to generate for you over time. On the other hand, Customer Acquisition Cost (CAC) estimates the entire cost of marketing and sales for each customer. Successful startups work hard to ensure that LTV is greater than CAC.
In fact, the most successful startups have an LTV that is significantly higher than CAC. Some SaaS companies with a recurring revenue stream like Salesforce.com have LTV multiples that are 3-5 times CAC. Many of the calculations that go into your startup’s LTV and CAC will be guesses, but before you grow, you need to have information based on evidence.
3. Your team has climbed the Sales Learning Curve. Your startup team needs sufficient time to engage with customers, experiment, and iterate the sales process before scaling. The Sales Learning Curve concept is important for the entire organization, including marketing and product because the team must understand how customers acquire and use the product. If you grow the sales team prematurely, learning becomes more difficult and you may not have optimized the sales and acquisition model. Climbing the Sales Learning Curve is important for all startups, but is critical for SaaS companies that require heavy up-front investment in customer acquisition.
4. Revenue per sales employee makes sense. If you are building a company that relies on salespeople, your first sales employee(s) should be achieving (or on the path to achieving) minimum revenue thresholds. Several sales people without significant revenue is a sure sign of a burn rate that’s not sustainable. For example, for cloud-based companies, Bessemer Venture Partners recommends stopping at three sales reps until you get to at least $300,000 committed monthly recurring revenue. Each startup is different, but in general you know you can profitably hire more salespeople when a couple of reps are signing annual contacts worth more than their fully burdened cost.
5. You’ve nailed your core market. Whether you have a field sales force selling enterprise software to IT departments or an inbound sales team selling vertical market applications, you need to be able to repeatedly sell into that market without looking elsewhere for leads. Selling into the market consistently is also a sign that the market is large enough. If you find your team prospecting outside the target customer market or geography to make quota, you are still in learning mode.
Once you find the right sales model that can scale, step on the gas, get funding, and invest aggressively for growth. At that point, a sales team or customer acquisition budget becomes an investment rather than a cost.
Jim Semick is a startup and product development advisor who has worked in the trenches at startups. He writes about validating products and discovering business models that work at http://www.productdiscovery.com.