A rational argument can be made that the highest unnecessary cost for an enterprise software company is the hidden burden of unnecessary discounts required to hit arbitrary quarterly sales quotas driven by third rate venture capital boards.
The highest ongoing cost is clearly the sales and marketing machine necessary to make an early venture capital-backed software company generate the revenue necessary for it to get the equity payoff so desperately needed by the venture capital owners.
That cost is shown on the income statement.
The cost of quarterly revenue madness is more sinister.
Quarterly revenue madness is driven by an identifiable force: a venture capital company has only two ways to make money. They must sell the company or do an IPO. If an IPO is out of reach, they must drive quarterly revenue to show enough momentum to “build a story” to get this dog sold at a much higher price to the unsuspecting, usually big company buyer.
Thus, zero focus on profitability, customer support, great employees—and the dash, at any cost to top line growth.
So they hire transactional Sales VPs and CEOs who will flog the sales force into happiness, give unsustainable discounts, anything, to make a quarterly number. They do not live a normal life, they live, commercially quarter to quarter.
It does not last.
Quarterly revenue madness is all about discounting a “sure thing deal” 20% or more to move it 5 days earlier—5 days into this quarter, not the next.
It eats away at the company’s margins, creates a toxic sales environment for both the employees and the customer, and fundamentally changes the hoped-for relationship between the company and its customer.
It drives down the talent quotient of any company who mandates it, attracting order-takers driven by end-of-quarter discounts. It is often used at D, E, F venture round firms who are rapidly approaching the Dead Zone where none of the employees and founders will ever make anything on the stock.
Let’s define the marketplace. There are strategic enterprise companies and there are low level transaction companies and they are mutually exclusive. If one is a strategic software firm, one has sales strategies, marketing messaging, business dev initiatives wholly different from transaction-based firms.
Transaction based firms may well benefit from having quarterly revenue quotas. They typically have kids living in the office, dialing for dollars all day. They are the ones—you know them—they call 30 seconds after you download their white paper asking “…so is there anything I can answer about the whitepaper you just downloaded” and haven’t even opened yet.
When you get that call, it is a transactional company with quarterly revenue quotas.
You get the chirpy voice calling until you die about that document you downloaded two years ago.
They call that “checking in on your prior interest`.”
I still get a call, several times a year, for an accounting package about which I inquired 3 years ago. I look forward to the new person calling me.
Most of these companies sell tools, low end offerings from $250,000 down to $20,000—more toward that lower end. You know them, Applitools, Mongo, New Relic, Chef, Git-Whatever. They sell stuff bought not by executives, but by the grunts in the organization who need the hammers and nails of software craftsmanship.
Companies selling large-scale solutions sell to committees, groups, and senior executives. The decisions are seldom fast and the sales cycles are from 6 months to several years. Pricing starts at a million dollars and goes way up from there.
It is impossible (except in the mind of the transactional VP of Sales) to map such sales cycles to quarterly goals.
Yet it happens. Why?
People who sell really strategic stuff do not move to transactions unless they have to. Perhaps they made a mistake, perhaps they had a different agenda, perhaps they are awaiting the right strategic deal or maybe they just needed to bypass Obamacare for a couple of years as they built their own company. Just nobody does it unless they have to.
Strategic skills are clearly a higher order talent and they are paid a lot more. They are not going to move to transaction level sales.
However, the reverse is not the case. Transaction people crave moving to strategic sales.
Transactional Sales VPs and Marketing VPs, even CEOs want to be perceived as running a strategic software firm. That’s what the popular kids do. But typically, they are recognized as transaction types and passed over.
Ask any hot headhunter—nobody wants the person who ran the transaction sales force.
The first question one is asked by the headhunter is: “what is the unit of sale.” When you reply, $50,000 but we often had deals at a couple of hundred K,” the interview moves to “…I have another deal I want to talk to you about.”
So what does an ambitious transaction VP of Sales do?
Here is where the problem starts.
I know, I know this is unkind but I could not find a way to say it otherwise.
Transactional Sales VPs do not have the skills, right down to their DNA level to do strategic selling at a high executive level. They may do occasional larger deals, but nothing in comparison with the multi-million-dollar regular cadence of the strategic crowd.
Short people know they are short. Left handed people know they are left handed. But less-skilled people do not know they are less-skilled and more often they think they are clever. Very dangerous for those who report to them.
So the lower skill (but very nice people) transactional types do not know they cannot really play at the strategic level. When they do so, they bring along their transactional DNA to identify themselves.
I was in a meeting at a Fortune 100 company with the poster boy for transactional Sales VPs. We had a meeting with the SVP for a company well known to all Americans. The transactional Sales VP arrives in jeans, a collarless muscle shirt, bright multi-colored socks, with a backpack. He peppers the executive with technical questions even the sales engineer never asked, typing into this laptop.
The meeting was getting cringy but the transactional Sales VP did not pick up on it. About 30 minutes into the visit, the customer executive looked over at him, and curiously said: “Oh, what do you do here? I thought you were the tech rep.”
CRINGE!
That said it all—there is no feedback loop at the strategic level for transactional people, so they do not know that they, well, cannot play there.
I later learned this guy was a career sales engineer who spent a bit of time in sales and found his way to a Sales VP slot at an even more transactional company. So this is a pretty florid example but it does make the point.
They hired him when the previous transactional Sales VP was fired after he made the place as toxic as a nuclear waste dump by berating the people around him; making the point that E and F venture round companies generally attract these types, who have nowhere else to go.
They do not feel the cringe!
And what is the number one way to spot the transactional VP of Sales? You guessed it!
Quarterly revenue targets.
But there are more clues.
Try the QBR—that waterboarding exercise for sales reps where you go through every deal you will do for the quarter. You identify the executive buyer for that $11,000 tools purchase. What critical business needs are they trying to meet (as if the grunt buying it has a clue)? And who is the purchasing agent and will they be in the office on Tuesday, which is the last day of the quarter? Make sure you validate they will not be off on spring break or a wedding or a funeral. Nothing can get in the way of us getting that $11,000 PO.
And, of course, if the deal “slips” how will you make it up because the company depends on it.
When you have to sit in a room, as I once did, and have to listen to 10 of these a day, for 4 days, you scream MEDIC!
Unfortunately, your transactional Sales VP thinks you said MEDDIC, and he applauds you.
Then there is that dreaded conversation with your regional manager, typically a useless appendage who sits in his/her home office looking at Salesforce.com reports all day making sure you have filled in the right fields.
Every few days, as you report in the question is always the same: “What can we do to move the deal this quarter?” That is their only question, every deal, every quarter. Imagine, being put on earth and the only commercial value you can offer is–can we find a way to get this poor soul of a customer to take an arbitrary action to move this deal to this quarter?
Only someone so totally clueless as a transactional VP (or the regional manager who hopes to be a transactional VP) would think one could deliver a large, committee-led or executive driven, transformational deal to meet his company’s quarterly goals.
Now, let’s look at the costs of quarterly quotas—and why strategic selling executives never use them.
First there is the toxicity it brings to the sales force. Why?
A sales rep, no matter how lowly or transactional (is there a difference?) usually wants to serve the best interests of the customer.
The customer does not have quarterly vendor spend goals, beaten into them by their management, reviewed endlessly, about putting money into the pocket of the software vendor – before the end of the quarter.
Who knew?
So the transactional sales rep’s job is not to serve the customer—rather it is all about having that customer perform a certain contorted action, regardless of the inconvenience it might cause, to meet the arbitrary goal of the vendor’s transaction Sales VP.
That is toxic activity. As a strategic sales pro said to me recently, “it sucks out your soul.”
Doesn’t sound too bad until you remember this happens every 90 days, often to the same customer. So every few months, the same rep is forcing the same customer(s) to align their activity, much of which is out of their control to the vendor’s schedule.
And it fosters high turnover and attracts low talent.
I was once at an event where to make their quarter, the transaction VP and his regional minion, had a customer take an iPhone photo of a purchasing system computer screen with a PO requisition on it to “book” the “order” to make the quarter. Sound like strategic selling to you, dear reader?
And why? What is the benefit to the customer? None.
Customers smartened up. They saw that the transactional VP will sell his or her soul every quarter to “make their number.” And the price of that soul is a massive discount. And it caused a behavioral change from the customer.
It is regularly the subject matter in purchasing courseware to take the software vendor to the end of the quarter, hold them hostage, and get discounts far beyond anything available during the rest of the year.
The transactional Sales VP has created a cadence where the pigeons have trained the park visitors and expect to be fed and they wait until the software vendor shows up with the bird food.
In a true example, I witnessed a transactional Sales VP take a deal for $275,000 a year that was scheduled to close on October 3, and beg/pressure the customer to force the transaction 5 days earlier—offering a $55,000 discount.
This product will be used for 5 or more years. That makes that 5 day move a loss to the company of $275,000. Wow, a free year! But wait, there’s more.
This is a SaaS service and all new units of the service now must be discounted by the same amount. That made it a $550,000 loss for a 5 day arbitrary move.
So in order to get a deal moved 5 days, a company lost $550,000 they would have received if they waited a few day! Is this madness?
There’s more! We aren’t stopping here.
This transactional Sales VP did this for a bunch of deals, like 6 or 7. And he did it every quarter.
We are now talking millions of dollars a year here. All money lost to the software company—driving down revenue thus increasing cost of sales.
And what was the Sales VP’s rationale?
“We are running a business and we have to generate revenue every quarter.”
And we have the clueless VP of Finance—you know that person–the one who makes sales reps “save the company money” by logging into a hotel booking system where you cannot cancel a room—to save a few dollars. That is the same VP of Finance who is just fine with paying a customer $550,000 to move a deal a few days earlier than it would have come in anyway.
D, E. F, G venture companies do not get the Harvard MBA in Finance nor the top of the elite law school grads doing their contracts. And this talent desert results in these kind of decisions.
The entire organization is infected with C and D level players, collectively making such decisions an “A Player” team would not even consider.
OK, so if you really questioned my comment about this organizational stupidity—try this:
Does this business really need to pay $550,000 for a contract to come in 5 days earlier than it would have arrived otherwise–to run the business?
The next time you read a tech company finance report and see a 40% to 70% cost of sales, remember, it is the brain dead transactional Sales VPs who are bringing you this party and the even dumber CEOs who hire them.
You, dear employee are paying for this stupidity with your stock dilution. Make you feel any better?
And you will know why strategic sales tech companies avoid dilution and transactional Sales VPs like the plague.
This kind of madness is driven by one force—early venture capital that diluted the equity and made an IPO out of reach–so they have to sell this baby, so get those numbers in every quarter for our “sell story.”