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Recruiting is the #1 priority for a VP of Sales. Getting the best people and enabling them to succeed is a fundamental part of this job description. It should take up at least 20% of their time.

That makes the current economic climate tough to take. One of the first things to happen in lean times is a hiring freeze. As the company takes stock of what it can and can’t afford with reduced cash flows, something as expensive as a new hire — in any department — is given second thoughts.

VPs of Sales will need to do more with less if there is such a squeeze on capital. But this can be a blessing in disguise. As they can’t increase the headcount to hit their numbers, to still achieve growth they’ll have to look for other ways to improve their sales process.

With less resources forcing VPs to be more efficient, they should look thoroughly at where in the sales cycle enhancements can be made. Sales leaders can push the business to be far more resilient — better able to deal with both the current lean times, and in a more powerful position to take advantage of the markets once the financial situation improves.

Here’s why you should consider slowing down your sales hiring, and what you can do to mitigate cuts to your company, still achieve growth, and make more money available to get the reps you really need.

Slowing Down Sales Hiring

When you hire a new salesperson, it’s not just their base salary and any commission that you’ll be paying every month. There is an entire infrastructure that supports each member of your team to ensure they get leads and then close deals successfully. If you are hiring a new account executive, then they become part of a group of people and departments moving the customer from prospect to success. They need:

  • Marketing, to develop leads.
  • Sales Development Reps, to qualify leads.
  • Customer Success, to make their sale successful.
  • Consultancy, to upsell and provide post-sales services.

Each AE might only take up a fraction of the resources from these team members, but when everything is totaled, this investment could come to close to $1M per AE. In his presentation on The Key Drivers for SaaS Success at SaaStr 2016, David Skok showed this point excellently. As they are still ramping up, new sales hires are highly cash flow negative in their first few months. You are investing more in them than they are returning in sales. This leads to a cash trough:

Cumulative Net Profit With 1 New Hire / Month

InsightSquared_Rep_Hiring

Based on The Key Drivers To SaaS Success, slide 51B

Eventually AEs will pay that money back and start to become profitable for the business, but the length of the trough means that you’re spending a significant amount of time in the red. It could take 3 to 6 months for them to ramp up fully, then another 10 months to pass the payback point and be net-positive contributors to the company. During that initial period, you’re continuously losing money.

If you’re well-funded and flush with cash, then this shorter-term loss is acceptable for the long-term gains. But in leaner times, when cash flow is tighter, it can be difficult to sustain this type of loss for this period of time.

The problem just compounds with more hires. Though the payback period will be the same, the cash trough would be twice as deep with another hire:

Cumulative Net Profit With 1 or 2 New Hire / Month

1 or 2 hires

Based on The Key Drivers To SaaS Success, slide 52

The long term gains of 2 new hires per month would usually make this an economic no-brainer. But if you can’t afford to get through that cash trough, then you’re not going to get to enjoy the increased gains on the other side of the payback period.

This is why it’s important to consider slowing sales hiring during economic downturns. The more sales reps you hire, the deeper that trough gets. You might not be able to survive the initial outlay of capital before you get to the profit.

3 Ways To Get More With Less In Your Sales Process

If you still want to increase your headcount, or at least not decrease it, then there are some other ways you can improve your sales process to cut costs and increase cash flow. These options can not only cut back on the spend in your sales and marketing bucket, but also improve your short-term cash flow, which is exactly what you need if you still want to ramp up your sales team.

Collect Cash Upfront with Annual Contracts

SaaS is a great model, but all customer acquisition costs (CAC) come up front, whereas the usual monthly recurring payment model has you recovering those costs incrementally over time. Having your payback period spread over a year constrains your own growth spending. For instance, say you have a product priced at $1,000 per month. If your CAC is $12,000 then for an entire year you’re paying back this CAC with your incoming revenue:

Net Profit & MRR

InsightSquared_Rep_Hiring_-_Google_Sheets 4

This means that you’re cash-flow negative for all this time. Once you pass that 12-month marker, then the deal becomes profitable with positive cash-flow. But before that, you’re funding CAC with either investment dollars or cash from other customers further along their lifetime. Switching to an annual, upfront payments can negate some or all of this problem. If you invest $12,000 in CAC and then immediately recover this cost through a one-time payment from that customer of $12,000, it allows you to become cash-flow neutral immediately, and cash-flow positive through your other customers.

Net Profit & Revenue

InsightSquared_Rep_Hiring_-_Google_Sheets 5

Additionally, tying customers into an annual contract will help decrease churn, increase ARPU, and give your customer success team more opportunity to promote the core values and upsell your customers.

Fix the Leakiest Part of Your Funnel

Making your sales process more efficient is one of the most effective ways to cut costs. There will be dozens of marginal gains to be made all across your sales organization. Improving efficiency in each of these by just a few percentage points can compound to significant gains and savings throughout your entire funnel.

The best place to start is to find where you’re losing the most customers from your funnel, and experimenting with ways to shore up those losses. SaaS Venture Capitalist Tomasz Tunguz specifically suggests that fixing this “leakiest part” of your lead-to-close funnel is the quickest way to save money.

For instance, if you are losing the most people between your initial email campaign and qualification, then increasing this conversion rate will lead to an increased number of closed deals, compared to trying to improve a more efficient phase, such as the demo-to-close step.

In Tunguz’s scenario, improving the email-to-lead conversion rate by 5% leads to a 33% increase in closes. This is because the larger gains earlier in the funnel cascade down, leading to more opportunities at each step. Improving demo-to-close by the same amount, 5%, only improves outcomes by 8%.

Improving Conversion Rates in Your Funnel

conversion funnel

Experimenting with email services such as Customer.io for personalized acquisition campaigns can easily increase this number. This is a quick win, and there is still plenty of room for growth.

Reduce The Length of Your Sales Cycle

By reducing the length of the sales cycle, you can bring more customers in more quickly, leading to a jump in revenue.

In this case, if your sales cycle is usually 4 months long, and your average deal size is $100K, then you’ll be making $300K per year per cycle. If you can shorten the cycle by just 1 month, to a 3-month cycle, you’ll make an extra $100k per year per cycle. This is a matter of increasing efficiency to cut costs.

All it requires is the ability to dive deep into your sales process, analyzing it from many angles:

  1. Slice it up: Your sales cycle isn’t one big number — it’s made up of a variety of different metrics. You need to split it up by stages, reps, and lead sources to determine exactly where the bottlenecks are in your cycle.
  2. Tweak it: Once you know the where, what and who of your slow cycle you can start to take action. Run experiments to see if you can improve individual aspects of your sales process. For instance, if sales demos are causing slowness, you could:
    • Schedule demos earlier in the process
    • Improve training to enhance demo presentation
    • Automate some of the demo phase to free reps for other sales tasks
  3. Lose deals faster: A great way to increase the efficiency of your sales cycle is to weed out the non-buyers early in the game. The fewer drop-offs you have later in your funnel, the more time your sales reps can spend with the prospects that really matter—the ones that are going to become customers.
  4. Calculate your loss cycle: Instead of analyzing how long it takes to make a deal, look for how long it takes to lose a deal. If you then compare it to the cycle for deals you won, you can look for differences in the two, and nail down those leading indicators of non-buyers. Non-buyers spend longer in the funnel as they drag their heels and string along sales reps. If you can identify these early, you can look for ways to either move these prospects faster, or move them on.

 

Slowing down your sales hiring doesn’t necessarily mean stopping. Depending on your cash flow you might still have the money to push through that cash trough to profitability. But by taking pause and looking at your financial situation you can find out exactly where you can optimize your process, where you can find efficiencies, and build a stronger, more resilient process.

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Andrew Tate
Andrew Tate is a UK-born, US-based writer. He spent 10 years working as a scientist in labs around the world and now specializes in using data to tell stories.
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