But you have to have the right foundation. If you don’t, you’ll have at best a middling sales team that feels you’re restricting them, and at worst, you’ll bankrupt yourself by not aligning incentives properly.
I’ve read dozens of sales playbooks over the years. Most of them are garbage. I’ve also spoken to dozens of successful Silicon Valley CEOs on how they’ve set up their sales team. I’ve found those insider information to be much more useful — and it’s what I’ll be sharing in here today.
The very first principle of sales is, well, you have to decide if you can afford a sales force or not. The rule of thumb is before hiring a sales force, make sure you’re charging clients/customers at least $3.5-15k/year. On the lower end of that spectrum, you’ll be mostly focused on inside sales (i.e. leads are generated organically and you have sales close them quickly). If you go above that spectrum, that’s where you can start focusing on outbound sales (to make this easy, we’ll combine outbound with enterprise sales).
Oh, also be sure that you have a handful of customers who love your product — they’ll serve as testimonials/references, and it’s also just good business practice.
Sales is like a magnifying glass; if you have a kernel of gold, it’ll magnify gold; if you have a kernel of shit, it’ll magnify shit. So, you’ve got a product with at least $3.5k ACV, a handful of happy customers, and you’re ready to start hiring your sales team!
Sales Team Basics: How to Set It Up
Compensation: Most salespeople are like coin-operated machines; in this case, be sure to focus on the coin (i.e. their compensation plan, otherwise known as “comp”). You’ll also hear this commonly referred to as the O.T.E., which stands for On-Target Earnings. O.T.E. is what a sales person should earn if they hit baseline targets (not ambitious, nor too conservative).
~80% of your sales team should hit O.T.E. annually.
How do you structure O.T.E.? Do it 50% base and 50% variable. This should work for 90% of startups, except in an economic downturn: you’ll want a much heavier commissioned sales staff.
Commission Rate: 10% until baseline quota is met, then 15% accelerator/kicker. As discussed above, 80% of your sales team should be able to achieve the baseline quota; once that’s exceeded, then the 15% accelerator/kicker acts as a supercharged bonus. Really, it’s a simple way for them to keep their momentum up.
Quota: Keep is stupidly simple — 10x their base salary (assuming 10% commission). A salesperson with a $50k/annual base should carry a quota of $500k/annual. Why so high? Because you need to cover marketing (which generates the leads for these people to close), overhead costs, and their own base salary. Go any lower and you’ll regret it.
If you keep the quota simple, then you’ll save yourself a ton of headache down the road. If a salesperson come up to you and say “Hey, I’d like for my base to increase by $10k”, then you can simply ask them if they think they can generate an additional $100k/year. If the answer is no, then they’ll have their answer.
Most of the time, once they visualize the additional stress, they’ll walk away from the base raise discussion. This formula alone will save you from a ton of awkward conversations.
Sales Manager: How Will I Know If They’re Wasting Time? Again, keep it simple — their only KPI should be to hit 80% of their team’s quota.
We’ll assume that 20% of their team are non-or-under producing. This should still give them enough leeway to hit their targets. If they don’t, fire that manager and promote the top salesperson who used to work under him/her to be the sales manager.
Sales Manager Comp: Follow the same structure as above — 50% base, and 50% commission. If their O.T.E. is $200k, then using the same numbers we’ve used this entire post, give them a $100k base and 2.5% of their team’s commissions.
EXAMPLES —
- Individual Rep:
- Base: $50k
- Quota $500k
- Commission: 10%
- O.T.E.: $100k
- Sales Manager:
- Base: $100k
- Quota: $4 million (assuming 80% of team quota)
- Commission: 2.5%
- O.T.E.: $200k
That’s all you need to get started! No, really. If you have a good foundation, you shouldn’t need to revisit this until you hit >$10 million ARR.
Want some additional pointers/tips? Here you go:
1. How Many Should I Hire? If/when you start hiring for sales, hire 2 to start. Make them compete against each other. If you can only afford one sales rep, don’t hire just yet — wait until you can afford two.
2. How to Frame Your Product? Sales is about selling your product. But the easiest way to get there is not by talking about your product all the time. It’s by disqualifying competitors.
The most effective way to do this is by saying, for example, “A good marketing KPI dashboard tracker should do these 5 things…” Coincidentally, those 5 things will be things your product can do, and more importantly, things your competitors’ product can’t do.
Now that you’ve framed the parameters, you’re the only product that’s eligible.
3. How to Deal With Excuses? A salesperson will, at one point or another, say “If I had XYZ (usually more resources, budget, etc.), I would have been able to close the deal.”
On your first day, warn your salespeople that if they say that (excuses), you’ll fire them.
If they do end up saying it, fire them.
Here’s why: it’s always easy to do a job if you have more of something; more of everything. But their job is to make do with what they have. Whose life wouldn’t be easier if we had more resources?
It’s their job to sell the product they have, not they wish they had.
4. Why Isn’t It Easier to Hire for Sales? It’ll always be hard to hire for sales — why? It’s a matter of adverse selection: the most successful salespeople aren’t looking to leave their current organizations because they’re making bank there. So how do you start?
Hire the best that you can now, and when you can pay more, you’ll hire the next level up. Rinse and repeat.
5. On Enterprise Sales… If you’re lucky enough to get to enterprise sales, know that it’ll be a completely different beast. With the longer sales cycle, different playbook, and other factors, odds are you’ll need entirely different sales people to close these deals. Understand these things before you start to tackle this beast:
- Enterprise never operate with a single mind. There’ll be many key stakeholders, and they don’t always get along.
- Expect a 6-9 months sales cycle.
- Your life will be much easier if your buyer is also the main user of the product. If not, you’ll likely suffer to varying degrees (budget caps, delayed payments, etc.).
- I had a friend who once sold educational software to elementary schools across the country (super smart guy, and was less than 20 years old when he did this). However, the people paying him (the district) were not the main users of the product (students were, but in this case, teachers). He had a hell of a time even though it was a great product: invoices couldn’t be collected on-time, and at the end of each month, the business was facing bankruptcy because cashflow was so uneven.
- Start with at least a single buyer in mind — make sure they have the budget and authority. An entry-level engineer at a 5000 person company may love your product. He’s not going to get you that deal.
- Be realistic: different groups have very different and very specific concerns. HR may be focused on costs; IT on security issues. Don’t change your product to the point that it becomes a Frankenstein monster just to appease all those divisions. Doing so creates the perfect opportunity for an upstart to disrupt you.
- What does an enterprise sales rep do well?
- Navigate hierarchies in large Fortune 500 organizations well. Understand who appears like they matter, and who actually does.
- Able to find the buyer ASAP; knows how to leverage groundswell support for the product into an enterprise contract
- Setting parameters and pitting your product against a competitor’s.
- They’re realistic.
Not Michael 