In this episode of Startups For The Rest Of Us, Rob talks with Steli Efti of Close.com, about his highs and lows of the past year as well as a in depth dive into starting your first sales process.
Items mentioned in this episode:
Welcome to Startups for the Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing startups. Whether you’ve built your fifth startup or you’re thinking about your first. I’m Rob, and today with Steli Efti, we’re here to share our experiences to help you avoid the mistakes we’ve made. Each week on the show, we cover topics relating to building startups without venture funding. We’re ambitious founders, but we’re not willing to sacrifice our lives in order to get our startup off the ground.
This week, I talked with Steli Efti. You’ll know him as the founder of close.com, but also as one of the world’s foremost experts in startup sales processes. Both getting them going, optimizing them, scaling them up, sales compensation, inbound and outbound, all that kind of stuff. Steli has written close to a dozen books and eBooks on this topic. Today, he’s on the show. I asked him some fun questions. I asked him what his high of the past year was. I asked him what his low was and we dug into some topics from the book. Just hearing him talk about sales is like a master painter talking about how to put color on a canvas.
Steli knows so much and has thought so much about this topic that he could literally stand up and do a 30-minute talk that is well structured, coherent, and would help the audience at the drop of a hat on almost any sales topic. You could just ask him a single question and he would do it. He’s a wealth of knowledge and information, and this is the second time he’s coming back on the show. If you haven’t heard of Steli, he runs one of the world’s most popular CRMs, it used to be called close.io, and it recently got the .com, so it’s at close.com now.
There is a small amount of money, a single round, and I believe they either have since bought out their investors or at least investors are still onboard, but they went from trying to do the big venture funded thing and pretty quickly switched to being a fully remote basically indie funded, independently funded SaaS startup. They’re much more in the vein of a Zapier or CartHook, where they took that initial round and they did technically take funding, but much more a bootstrapper at heart. They run it like a bootstrap startup where I’m assuming there’s been profit thrown off.
Steli doesn’t talk about revenue numbers. If I were to guess, they have to be north of let’s say $7 million or $8 million. I’m guessing somewhere between $8 million and $15 million, if I were to guess. Again, he’s never told me that and their numbers are not public, but it gives you an idea of the scale that Close is running at.
On that note, I have been noodling on this term, trying to figure out a better term to describe these kinds of companies, the companies that did raise a small amount of funding. Whether it’s from […] or TinySeed, or whether it’s from a group of angels, there’s a whole swath of companies now. The RightMessage, CartHook, close.com, Zapier, LeadFuze, Churn Buster. They do raise this single rounds, but they’re not venture track. And yet, they’re still going to be highly profitable life-changing businesses.
They’re not technically self-funded anymore, but they’re also not VC funded. I’m loving this term independent. Independent SaaS, independently funded. I don’t know if I’d go so far to say they’re indie funded, or indie SaaS, but that is what I’m noodling on. It’s a nice catch-all phrase. I think the thing I like about independent is it doesn’t just speak to whether they’re funded or not, because saying somebody’s funded or not, it’s just a mechanism. It’s just, have they taken money? If I’ve taken $1 in funding versus $100 million, is that a binary thing? It’s not.
The idea of independent startup, independent SaaS to me is that ethos. It’s that I’m an ambitious founder, and I want to build something great, and I want to impact my small corner of the world, but I’m not here to make a dent in the universe. I’m not here to do the big Silicon Valley, go big go home, be a $1 billion company. I’m not willing to sacrifice my life, my health, my relationships to grow my company. It really is the MicroConf, Startups for the Rest of Us ethos.
We on this podcast and we at MicroConf have never been anti-funding, never. Go to Startups for the Rest of Us and search all the transcripts for funding and you’ll see that we have since the beginning talked about it as one option towards getting to your goals and if you can get to your goal of having a business that supports you, or building $1 million or $10 million business without losing control, without sacrificing yourself, doing it in a sustainable and organic fashion, in a way that fits around your life goals, then why wouldn’t you do that?
It’s just knowing what you’re getting into and what you’re doing. Independent SaaS and independent startup, I like that term because it implies that you haven’t given up control, that the founder or founders are still in control, and that they’re independent of this big machine—the VC industrial complex people might call it—where you lose the ability to sell your company even though you have a minority investor because they have some right to block a sale, or you can be removed as the CEO of your own company, or they demand that you sell you’re your company if you want to keep running and take dividends out.
The idea of being independent is really striking me lately and that’s something I’ve been noodling on and I think I’m going to continue to work with that term. I just like the way that it captures a lot of essence and a lot of nuance in one phrase.
I wanted to mention one other thing. Steli is speaking at MicroConf Europe in just about a month from when this airs. If you want to hear more from him or meet him, shake his hand, give him a high five, you can meet him at Dubrovnik, Croatia. Just head to microconfeurope.com, buy a ticket, and you could see him in a month. With that, let’s dive into the conversation.
Steli Efti, thank you so much for coming back on the show.
Steli: Thank you so much for having me, Rob.
Rob: Do you realize that five years almost to the day, it was September 16, 2014, you came on episode 202 of this podcast, outbound sales for startups with guest Steli Efti. Do you remember that?
Steli: No, I didn’t.
Rob: I don’t think we had ever met. I don’t think we’ve spoken at MicroConf by then and someone tweeted, it may have been patio11, it was someone I knew and trusted tweeted and said, “This guy knows what he’s talking about.” Again, I have never heard of you at that time. This guy knows about startup sales and I was like, “Okay,” and I read one of your books you had. I don’t remember which book it was, but I looked through it and I was like, “This guy seems to know what he’s talking about. I’ll bring him on,” especially back then, we didn’t do many guests at all on the show.
I was a little hesitant about when you came on. Mike dropped it. I think we went for 30 minutes and I was like, “All right, we’re all done.” I had people saying, “You should have just let it go longer,” this is one of the few times where we had people say, “Steli was on a roll,” it was great. Super funny man.
Steli: I definitely remember, I was listening to your podcast before I got invited to be on it and I remember in the very beginning of the episode, just my feeling was, you guys were quite unsure what I would do on it. Here’s this weird salesperson who we give key control over the situation, given too much space. Then over time, I think we had a lot of fun and it seems like you guys were like, “He’s not that bad. This might be useful to people who are listening.” I remember that.
Rob: We loosened up a little bit is probably what happened. We were like, “Uh-oh. Here we go.” You never know what a sales guy is going to do on your podcast, but it’s good to have you back and today, to give listeners an idea of what we’re going to cover, I want to just catch up with you a little bit here about some highs and lows over the past 6-12 months with close.com. Congrats on getting that domain by the way. That’s killer.
Steli: Thank you.
Rob: Then we’re going to talk a little about yours and your team’s new book, The 2020 Startup Sales Playbook: How to Close Deals, Grow Revenue, and Scale a High-Performing Sales Team. Let’s dig in, man. Folk have already heard from the intro about close.com and then how you’ve been on this long journey. I love to ask founders, if you think back over the past six months or maybe over the past year, what is the moment, your low point in terms of the company, in terms of some crisis. Something where you thought, “Oh my gosh, this sucks.” It’s that moment where you start questioning, or you’re really just kind of in the depths of despair.
Steli: That’s a good question. I think the last year, one of the biggest challenges was that we had hired a director of marketing. That person didn’t work out. The beginning of 2019 went to part ways with that hire and I had to embark on another mission to try to find our new director of marketing. The reason why that was hard is that, it took us a long time to find the first director of marketing and I think that by the time we hired him, he had really impressed us with a few things that we had found out in the interviewing process.
Working with him, he never lived up to the work product that he created during the interviewing process. I think I made the same mistake that I try to teach so many other founders not to make, especially when the higher salespeople or sales leaders for the first time is the typical mistake of, I have never hired somebody in this position before, this is somebody who comes from such a great background, such an amazing company, has done such incredible things, and this is such a senior role. Maybe I just need to be a bit more patient. Maybe I need to give this person more space to let their magic work. Maybe the little red flags that I see, maybe I’m overly critical.
I think I didn’t trust my instinct and act on my instinct fast enough, and by the time that I realized that things weren’t getting better, and this was not the right fit, we just had wasted an enormous amount of energy and time, and a bunch of things we’re going the wrong direction. Having to step in and part ways with that hire was really painful, and then even worse was that I knew, “Okay, next time around, I’m not going to make this mistake. I need to again, really increase the standards that I set.” In general, people tell us that we have unreasonable expectations and standards when it comes to hiring.
I knew that this time around, I would have to just make this my full time job and it took six months. It took the first half of 2019 to find our new director of marketing. I’m super glad we’ve invested that time because the person we hired is a world apart from the last hire and what he’s been able to do in a very short period of time, but it was just painful. Hiring is always painful and hiring super senior people which is something I’m increasingly doing is even more painful. It just takes so much time, so much energy. When I think about the last year, if I think one thing that’s soul crushing, it was the hiring process to find the director of marketing.
Rob: Yeah. If you’ve never hired at that level, at that senior level, a C level person, or a director, a managing director, whatever the title is, it’s shocking how few qualified candidates there are out there. A lot of us are used to hiring developers, or salespeople, or designers, and while there’s always a shortage, we know that there are tens of thousands of qualified people. If you’re remote, it’s hundreds of thousands, I would say, for any given position around the world, but when you’re looking at a C level or director level, there’s not that many. There’s not that many with the experience.
You can find a director at Target, director at Cargill or IBM or something, “Are they really going to be a fit?” having a director with actual startup experience maybe in SaaS, by the time you narrow that down, the universe of candidates is very, very small. I have been through and I went through it after the Drip acquisition because we hired a bunch senior people and that was an experience I had never done. When it took six months as you said, it takes six months to find the right person and then you find out they’re not the right person, it’s devastating. It impacts your morale, the morale of the team. I can only imagine. Did you feel like you took it harder, or your team took it harder in terms of a morale hit?
Steli: I don’t know. That’s a good question. The truth is maybe I’m so good at suppressing certain emotions that I’m not fully aware of the impact of some of the things. I wouldn’t even describe that I took it really hard. It was just one of those things where I knew I messed up by letting the situation go too long, giving this person too many chances, waiting too long, and then I knew the price I would have to pay. I part ways with this person and now the next year, I won’t do anything else than this.
It was more of a look in the mirror and going, “Yes buddy, this is not going to be fun, but you’re going to have to go through it,” then being devastated, being really down, or depressed, but I wasn’t shaken. It’s hard to say honestly sometimes, but I feel like we have a pretty senior team in terms of people are pretty experienced. When this happened, obviously everybody knew, this is going to affect our numbers, this is going to affect a lot of the things that we want to do, but there’s also a sense of, yeah, this is part of life and we will figure it out. It’s not great, but it’s not the end of the world. Nobody was necessarily super shaken.
I changed my strategy so much with this hiring. One big thing that I did that I hadn’t done in a long time was going really strong on outbound, not just relying on inbound candidates. I basically reached out to almost any CMO, VP of marketing, and director of marketing of any company that’s in SaaS that is significantly more successful than us. I reached out to a ton of people. I would ask for advice calls. I’d be like, “Hey, I need 50 minutes of your time. I’m trying to hire somebody.” There was always a mixture of me trying to build a relationship with this person and see if they might be the right hire, because the great people, they already have a job, they’re not applying for my job most of the time.
Maybe there’s an opportunity to hire them, but even if not, maybe I can ask them for some advice about my thoughts on hiring a great person like them and seeing if they have any advice, any tips, any ideas, or learnings that they could share with me, then I would always ask for referrals recommendations. “Do you know somebody that’s looking? Do you know somebody that fits that could get excited about this opportunity?” and that was an incredibly important part of the hiring process, but it’s so draining. It was so draining. I would have weeks where I’d have 6-7 of these calls every day, plus all the evaluating take homes, inbound candidates, and calls with inbound candidates, second calls with people after take homes.
It was just a super draining process and at times in the middle of it I was just like this is really not fun. I wish I would have to go through this. It was more of a quiet suffering than being devastated or being crushed. That would more accurately, I think, represent how I felt this year.
Rob: Quiet suffering, I like that phrase. I think that describes a good chunk of starting a company, actually. Let’s get off that topic. What’s been your high point? What is a big victory? Aside from getting this book out the door—congratulations, it’s a huge deal, it just went live I think in the last week or so—what’s the thing that you really look back on in the past year and you think, “We crushed it. That was such a high point.”
Steli: Actually, I’m very grateful for this. There were a couple of things this year, but I think the biggest was we’ve completely revamped our pricing in the first quarter of this year. That was by far the largest, most complicated, and riskiest project in our company’s history. The product Close has been around since January 2013, so that’s six years at the time that we did this project. In six years, this was the most complicated thing we’ve ever done. For us, our pricing was quite complicated because we did a few crazy things.
One, we gave you unlimited telephony features in packages with certain plans.You could do a limited North America calling and SMS in pro plan and unlimited international calling and SMS on our business plan. On top of this, we were the only SaaS product in this year and space, maybe even the only SaaS product ever with some significance that offered mixed and matched price plan. You could have one ORC or you could choose three different plans for three different users in your organization.
We did a bunch of other things. We have to change all of this. We lowered our base entry price, we disconnected the telephony feature and the cost associated with it from the core plans that we had. We stopped mix-and-match, so you had to choose one plan for all your users. We did a bunch of changes around prices that were quite complicated. We have a customer base of thousands of customers and with organizations of 300 users in one ORC that had seven different types of plan prices and used telephony in some crazy set-up way.
It was a very, very complicated project for us to switch new pricing, to communicate it with our current customer base, to use that opportunity to do a lot more annual contracts, to change the way we did discounts. It was such a complicated project both from how our product works, how do UI and billing works, how our relationship with our customers are, marketing funnels, everything.
It was one of those projects. There’s very few things that you do in a startup where it’s really life or death, most experimental things, you change. If they don’t work, it’s not usually life or death. It’s like, “This is annoying. This didn’t work as well,” but you can change it. This was one of those projects where we knew if we mess it up, this could cost us an insane amount of money and this could really affect the business. We’re also acutely aware during that time, a lot of other companies have changed their prices and a bunch of these pricing changes didn’t go down really well. We were hyper aware of treating our customers really well, over communicating, being really strong in our communication.
We spent an insane amount of time and energy preparing for that drastic pricing change and it was very stressful, to be honest, especially for me, as I was orchestrating all of it. That pricing project went down super smooth, no bugs, no hiccups, no backlash, most of our customers were super happy about the changes in our communication style. We hit every single KPI we wanted in terms of what we wanted to do with it. We wanted it to be more fair with our customers. We wanted to have more growth. We wanted to have a simpler business model. We wanted to see certain metrics go up. Now, six months after we launched, all these numbers are up. It was a huge success for us, but it was also super nerve-wracking because it was quite a complicated project.
Rob: Yeah. I often find it that when I asked this question to folks like, “What’s been your high point over six months or a year?” that the high points come after a period of extreme stress or extreme uncertainty or just extreme hard work because you don’t get to that high point by sitting on your laurels and not taking risks and hard work. Risks stress people out, so I find it the two go hand-in-hand. That’s great, that’s great to hear. Now, did you grandfather when you raise prices?
Steli: Sort of, but not really. We didn’t grandfather in the sense that you could stay on the old price forever, no. A bunch of customers actually net-net with the new price would pay us less money. Happy days, nobody complains about that. A good chunk of our customers would pay us around about the same amount. Nobody complains about that either. There was a small group of customers that would pay us more, some of them significantly more. In those cases, we had to go case by case and communicate with the customer trying to figure out how do we deal with this.
Some cases just highlighted that the relationship was completely out of whack. I would show them, “Listen, you’re paying us $5000 a month, that’s great, but you’re generating $8000 in calling cost.” Honestly, it is not a healthy relationship. We want to continue to support you for the next decade, but it won’t work if we are losing money every day we work with you. How do we deal with this? How can we come up with some plan that puts us in a much healthier place? I see most of the customers were like, “All right, this kind of makes sense,” and they work with us and we figured it out.
Then, there were some customers, usually the smaller ones, they said they would pay us $150 and they would have to pay us now $200. Those $50 for our business, they’re not that relevant, but for them it will be a significant percentage increase in cost. In some of these cases, we just offered them a good choice and say, “Hey listen, you’re not month-to-month, with the new pricing, prices would go up but here’s what we want to do. We want to invest in the relationship and for that we also need to see that you want to invest in the relationship. If you signed a one year or two year contract, we’ll give you a discount. Your pricing will change, but with the new discount, you’ll probably stay around $150. You’re not going to see any increase.”
We did some of that but what we didn’t do is we didn’t allow a customer to stay on the old price because our old price was not just a number, it was unlimited calling internationally, plus the ability to add users at any plan at any time. That was just something we couldn’t afford to support with thousands of customers indefinitely. It was a bit tricky. We had to be very careful with the customers that would have negatively been impacted, on how to offer them some deal that would move them to new price but still make this a good relationship for both and we’re able to do that.
Rob: Yeah. Whenever I talk to founders about changing pricing, I have this playbook. It’s like, “Look, grandfather if you can,” but that’s not always the case. People who say you should always grandfather, there’s some rule that God handed down to Moses that we should always grandfather things. That’s not true, but do it if you can. There are sometimes reasons why you cannot do this. The bases are going to go bankrupt, your plans are way under water, whatever, there’s a bunch of reasons. If you decide not to grandfather, then exactly what you just broke down, whoever saves money, you don’t need to worry about them. Whoever’s breaking even, you don’t need to worry about them. Anybody who increases, try, if you can, go one on one, just like you said.
Either cut deals, maybe give a little bit of a discount if you can, maybe do the annual plan—I love that idea—get creative with it. Just because you have 1000 customers, doesn’t mean you treat them like a number. You treat them like individuals and you break it down. Even if you have 50 or 100 individual emails that you’re sending of like, “Hey so and so, you’ve been a customer for three years…” that takes time to do, but that’s how we do this. These businesses are still serving individuals and companies, so it sounds like, as I would’ve expected, you guys handled that really well, so nice work on that.
Steli: Yeah and I think that just to underline this, it’s in those kind of big moments of change where you either strengthen the relationship to your customers or you weaken it. If I, as a customer feel like, “Wow, this company’s changing fundamentally how the product works they charge for, but look at this. They pinged me three months before they announced anything. They gave me all this transparency. They reached out. They helped. They worked creatively. They really care about me. They really care about me knowing what’s going on, understanding what’s going on, being prepared for it and being in a good space,” that leaves a strong impression with people and they go, “All right, this is a partner that I can rely on a long-term. This company is a company I want to work with long-term.”
The flip side of it is, if for whatever reason I feel blindsided by the change that’s happening, I feel not being taken cared of. I feel like not being valued, that’s going to now break and weaken the relationship and I’m going to go, “Shoot, this is a company I cannot trust. This is a company I can’t rely on. Who knows when the next change is going to come? How much of that is going to impact me? Maybe I should look around for alternatives.”
Anytime you make big changes you just need to see it as an opportunity to strengthen the relationship. Unfortunately, relationships don’t become stronger without a lot of work. You have to put the work in to make it happen.
Rob: I agree. Let’s transition into talking about your book. As I said at the top, it’s called, The 2020 Startup Sales Playbook. Just so folks know, the book is free. You’re giving it away. It’s 100 and something pages. I just got to flip through it. Obviously, we can link it up in the show notes, but I think you said you wanted folks to maybe email you.
Steli: Yeah. I always find it to be one of the simpler options, people always take me up on this. If you want the book you can just send me an email, email@example.com. You can just say, Startup for the rest of us book in the subject line. You don’t even have to write anything beyond that and I will send you the book for free. We got a ton of feedback, I always love when that happens, whenever we release a book.
The biggest feedback we get and this is true for this book that we just released on Product Hunt. A lot of people will tweet or email me or ping me in one way or another and go, “Just spent today two hours reading the book. So valuable and even more importantly, I was surprised that it’s not a lead gen magnet. There was no pitch about Close. This was not all about your software and how your software solve all my problems. This was just a bunch of chapters of highly tactical practical stuff. Two of these things that I read, I’m going to apply immediately in my business and try to see results from it.”
That’s really the aim that we have, the standard that we said when we put stuff out there. We want people to consume it, learn from it, and immediately get some value. We just trust that over a long enough time, we give and give. People know we’re on the sale space. People know we know a lot about it. People of that we’ve helped them. Then, whenever they need software, a lot of people will come back and go, “Let me check out close.com. Let me check out their software because I’ve received so much value from them up front.”
I’m super pump that people get a lot of value from this and we released it because we felt the last time we did a book about how to do sales when you’re super early stage, when you’re just starting out, was a couple of years ago. So much has changed in the space that we want to give people a quick update and set-up a lot of startups for success for 2020 and beyond.
Rob: Awesome, the whole giving things away and just building that brand and building the name brand of close.com and Steli, they really are here to help people. I mean, you’ve spoken at MicroConf many times and you take time out of your busy schedule and it’s not like we cut you a paycheck to do that. People see that and that does not go unnoticed.
As a listener right now, let’s show Steli what the Startup for the Rest of Us audience can do. Flip over into your little mail app on your phone and firstname.lastname@example.org and let him know. Put startups for the rest of us in the subject line and get this book. I’m actually looking at right now as we’re talking. It’s really, really well done. It looks like you actually collaborated with some other companies on it. It had Vidyard and LeadFuze. I’m an investor there and Predictable Revenue and PandaDoc. It mentioned they contributed some essays as well to the book.
What’s the difference? I know that you guys have written 11 books, I think you were telling me before we got on. What’s different about this book? If folks have read three or four of your other books, is this about early stage like, “Hey, I’m one to five sales people and I’m trying to get things going and figure out compensation. Should I do outbound-inbound?” or is it further down the line?
Steli: This is for the early stage of your sales playbook. This is for both the founders that are doing sales themselves just at the very beginning or a kind of the phase where you start hiring a couple of sales people where you try to put together your version one of your sales team and your sales playbook. It’s about the early stage, not the scale up.
We’ve written books about how to scale your sales organization. We’ve written a book about almost any aspect of selling, of the tactical stuff, email, cold calling, negotiations, how to give demos, all that stuff. This is much more of a playbook. A-Z, if I know very little about selling or I don’t have yet a team that is rocking and rolling, it’s about scaling that team and scaling our efforts. How do I get started or how do I take the next few steps after I have maybe close the first handful of deals? How do I do that today? And how do I think about that today?
Rob: That’s cool. As I’m looking through chapters, you have stuff all the way from identifying your perfect customer, inbound, outbound or both. That’s an interesting one. Talk me through how people should think about that inbound, outbound, or both.
Steli: First of all, people all the time ask me, “Is outbound sales dead? Is cold calling dead? Is email dead?” Every year there’s the headline of like everything that is dead now. Everything doesn’t work anymore. When it comes to outbound versus inbound, this is probably one of the biggest questions I get is like, “Does outbound even work anymore? Does it make sense?” and I always say, “It depends.” There’s companies today that are crushing it, crushing it. New startups today that are crushing it because they bet on outbound, because outbound was the right channel to succeed in the market. All their competitors were just focused on inbound.
Then there’s companies that try to make outbound work and they struggled and it never had a real chance. You have to look at who your buyer is. Who is your customer? How do they buy? How do they live life? How do they communicate? To try to understand if outbound would work or not, we have one customer, our largest customer in the world is a company that has become insanely valuable.
I just visited there from the US originally. They’re pretty big here but they also have a massive office in Amsterdam in Europe, expanding their Europe operations. I was meeting with their team a couple of months ago. They were telling me the reason we succeeded and our competitors failed and have all these insanely well-funded competitors that also built this insanely complicated technology, is that our competitors wanted to build software that basically sells itself, that does all these viral loops and does all these cool things to grow, and we just did hardcore, old school hitting the phones.
Our customer is not online all day long. They’re not searching for things all day long. It’s not that easy to target them. Even if you target them and show them an article or something else, they might not just want to spend the time to download things, read things, get into your online funnel but we know our customer is picking up the phone because that’s how they get business.
We just did it simple, focus on calling, and we call people hundreds of times and eventually we got them on the phone. When we had them on the phone, we would create accounts for them, we would do all the work for them. We’re able to crush the competition, build a billion dollar business by going at a very simple, straightforward route which is cold calling because it’s trying to be super neat, tricky, cool, hip, and using all the online ways to market and grow the software.
Inbound versus outbound, the answer the choice between one or the other or both always comes from your customer. Who is my customer? Does my customer pick-up the phone? Does my customer read emails and answer them? Does my customer buy things mostly online? If you research, “How does my customer buy?” based on their buying communication habits, that’s what you should use as the foundation to make a decision if you do outbound sales or inbound sales and not your personal preferences or your wishful thinking of how the world should work.
“I don’t like if people call me and pitch me so I’m not going to build a business that does it that way.” That can work for some people but in some industries, if you have that wishful thinking approach to reality and not a “What is my buyer? What is my customer? How does my customer buy software today?” you can get into a lot of trouble. I would say that outbound and inbound, both can work today. You should have both options on the table as you are considering what to do.
Rob: Another topic that I’m looking at that I’ve always been intrigued by and frankly, a little intimidated by, is creating a sales compensation plan. You have a chapter in here on that. Tell me, the chapter’s fairly short and it gives you some good ideas, but I know that in your head there’s more. There’s more in your about it than what’s here.
I know there’s not a one-size-fits-all sales compensation plan because it’s going to depend on your average ticket size, how long it takes the sales cycles and all that, but how would you think about advising a startup how they should set this up? Where do you even begin?
Steli: It’s a good question. I think a couple of things, there’s some basic principles that apply to many things that apply to compensation plans as well. First principle that I always advice on is to try to keep it as simple as humanly possible because it’s going to get very complicated very quickly.
If you start with a compensation plan that has 11 different criteria to compute the number that somebody is earning, you’re in trouble on day 1 already. That number is going to go from 11 to 45 and it’s going to crush you and it’s going to completely demotivate the salesperson because the salesperson needs to be able to do the math on how much money they’re going to earn at the back of a napkin. If it needs a spreadsheet, they’re not going to be doing the math which means the incentive, the driver of knowing, “If I do this extra thing, I’m going to get this extra bonus. I’m going to be bumped up with these new level of commission,” is not going to apply because the sales reps aren’t aware of it, because it’s too complicated for them to understand how all this works.
You want to sound very simple. You want to, in the beginning, make it simple to administer it and to pay out. I always advise companies highly against starting the first compensation plan in a way that is paying out commissions monthly. Again, here’s why. Doing this monthly is just going to be very complicated in their early days. Computing it monthly is going to be a pain in the ass.
What you want to do in the beginning is you want to probably start out with a commission structure that is much more formed like a bonus program than a commission program and that is paid out quarterly. Every three months, people get a good chunk of money, that they can work three months towards it. It’s not every four weeks. It doesn’t become a big distraction as quickly. It is a bonus that you pay out every three months and you probably want to have a balance of criteria.
We always want to have our sales rep, obviously, focused on closing deals but we don’t want them to focus on closing deals at any cost because that cost matters to us as a company. If I just say, “You’re going to get 20% commission on any deal you close,” most salespeople will close any deal they can close. They’re not going to ask themselves, “Is this customer going to churn a week later? Can we really make this customer successful? Is this really a long-term customer?” They’re just going to close anyone and everyone they can in any way they can, which is bad for us as a business. I’m paying you 20% on something that is worth very little because the customer instantly cancels.
You want to find some balance. The biggest portion of the bonus or commission structure has to be the revenue driving because that is the number one driver but there needs to be a counter balance to that rewards quality. Instead of paying you instantly a commission on a deal that you close, maybe I’ll only pay you a commission on a deal you closed and that’s still a customer three months down the line.
See how, now, this beautiful works with why I wouldn’t want to pay out somebody every month, why paying every three months can make these things much, much simpler? Because large organizations can’t pay commissions. You’re going to have a commission account as a sales rep and you can have a balance that goes up and down depending on your trends, your cancellations, lots and lots of criteria.
When you’re starting only you have a couple of sales reps. You want to put together a commission structure. You don’t have the infrastructure to do this at this level of complexity. Every three months, I’m paying you for the customers you’ve closed last three months that are still with us so they’re checked off as good customers.
I know one company had a criteria where if a new customer books a training session and has a 1-hour training call with our success team, 90% of the time they’re going to be a customer 6–12 months down the line. You’re only going to pay sales reps for deals where they closed a deal and the training session happened. The sales person will send advice to not just sell the product but also sell the training session and make sure that the customer gets to the training session.
If a customer didn’t want to talk to the success team and didn’t want to have a training, that was a big red flag. Why? Why don’t they want to talk to us? Why wouldn’t they want to get training, get, really, as much value out of the product as they could? What’s wrong here?
You want to incentivize and give a bonus or commission on the deals I’m closing, but you want to have a counter balance. One criteria could be customers to be around three months. It could be NPS scores to be a certain level. It could be has received onboarding calls with our successes support team. It could be qualifies because it’s a customer that does XYZ. It could be has signed an annual contract. Whatever it is, something that makes sure that the revenue that are brought in is quality revenue. It’s not just any type of revenue. I call my mom, tell her to buy this and cancel it the day later and I’m getting paid from this stuff. That’s how I would start.
Later on, you can always add more criteria. One thing I like to do for startup sales team is to not just have a bonus for personal performance but also have a little bit of a bonus for a team performance. Sales reps are individual team players. Think about athletes in a team sport, a basketball player, let’s say. If I’m the best player in the team, if I’m the super crucial, super star player, I don’t want to be paid what everybody else is paid, right? That’s not how this works because I performs so much more, create so much more value than anybody else.
I would mostly want to be paid on my performance but my team’s performance also matters. If everybody’s terrible in my team, no matter how great I am, we’re not going to win championships. We’re not going to win as many games. We’re not going to be as high-profile. It’s going to really affect my career, my life as well. It’s going to make me look worse and make my life harder.
Ideally, you want to have something where you pay me for my performances as a salesperson but if the entire sales team hits, let’s say a certain revenue goal or a certain milestone as a team, or maybe even the company hits a certain milestone, a customer-related milestone that I could affect as a salesperson, maybe it multiplies my commission. It adds another bonus to my commission or another incentive to my commission. There’s some alignment that I know if I help another salesperson on the team, I also benefit. If the entire team does well, I also do well on top of my personal unique performance. That’s high level, the way that I would think about this.
Another principle to keep in mind is that no matter how great your first version of commission structure or bonus structure looks like, no matter how thoughtful you were, no matter how many founders like me and other experts you talked to to get advice, whatever you start out with is not going to be the same thing that you are going to have 6 months, 9 months, 1 year, 2–5 years down the line.
Commission structures have to constantly be refined, adopted, adjusted, changed as the world changes, as your company changes, as your sales team changes. It’s really a living, breathing thing. You’re playing with human psychology and incentives and the way your commission structure changes, it will change the dynamic of your sales team, the performance, and the things that your salespeople do and don’t do.
You’re going to have to have this philosophy that you cannot just work on this for a couple of weeks and be done with it. You’re going to have to check in, change, adjust, learn, grow, and eventually, hopefully, you’ll hire a VP of sales where a really big part of that job is to constantly be refining that commission structure and revamping the commission structure as you’re scaling out your organization and your team but start simple. Don’t overcomplicate things. Pay people for their performance but also make sure that their performance is high quality. You don’t just pay them for anything that they do that might not be the real deal.
One last thing I’ll say before we wrap this up since I’m on a roll on the commission thing is please don’t pay people on a rolling, never-ending basis. If you’re in the SaaS space, what a really terrible idea is to say, “Every deal you close, Steli, I’m going to pay you 25% or 30% MRR every month for the life cycle of the customer.” It’s a terrible idea.
The reason why that’s a terrible idea is that every month as I’m closing more and more deals, I’m making more and more “automatic money.” Eventually, maybe 6–9 months on the line, I’m making $10,000–$15,000 in commission a month for all the customers that I’ve closed, cumulatively this year. I know if I don’t do anything, if I don’t do […] this month, I’m still making $10,000–$15,000. If I don’t do anything the next three months, I’ll still make pretty good money.
That’s not the way you want to incentivize a sales rep. Sales reps’ performance will definitely go down if they know that if they get lazy for a couple of weeks, there’s really no consequence. You’d rather pay them a bit more upfront but it’s all for now. Next month, my bank account is zero if I don’t perform then or the next quarter, I’m going to get zero bonus if I don’t really perform versus giving me this chance to build recurring commission which then creates this unfortunate situation where eventually, I know even if I don’t do anything for half a year, I’m still making money every month. Then, that’s exactly what I’m going to do.
I’m going to stop working. As a sales rep, I’m going to get distracted and do all kinds of other things and you’re going to keep paying me indefinitely. That’s not a good idea. I’ve seen a couple of startup funnels wanted to do this and all of them had massive issues with it so please avoid that mistake.
Rob: Yeah, that’s fascinating. I think there’s two things, specifically, you pointed out that I haven’t thought about. One is the dangers of doing recurring commissions. I think that makes a lot of sense as you spelled it out. I haven’t realized how often you would need to be updating your sales commission structure. It sounds like it’s just a fluid thing that changes 2–3 times a year as you go. Does that sound right?
Steli: Yeah, it can. In the early days, you might have to change your commission structure 2–3 times a year. Eventually, maybe, hopefully you’re going to get less, but you might do other things. A lot of times larger sales teams, they do a ton of things that are actually messing with the commission structure without publicly doing so.
They’ll do certain incentives. They’ll have big promotions going on. “This quarter we have this big promotion. If you do this thing, not just bringing in a lot of customers and a lot of revenue, but if you bring in this type of revenue, whoever closes the most new logos in the Fortune 500 or whoever does sell most of our new product as XYZ to the existing customer base will get first-class Vegas with three weekend in a 5-star hotel and $1000 to play,” which is basically just gamifying the whole thing but it’s just money.
They just find different ways to make their sales teams prioritize certain actions and outcomes. If you go to a massive organization, they might not mess around with their core commission structure 3 times a year, but in the earliest, as you’re building on your sales team, you might have to switch things around. Your product might change. The customer you go after might change. You started in the SMD sector and had one commission structure and then you go more and more up marketing, you figure out, “Wow, the way we pay commissions makes no sense for these enterprise deals that our sales reps are now closing because it’s either way too little, it’s way too much, or something entirely different.”
As your product changes, as the market changes, as the customer you’re going after changes, as your sales organization changes and widens, things become complicated. You start with three people that do anything and everything, from prospecting, to cold emailing, to warm emailing, to giving demos, to negotiating deals, to signing contracts, to eventually maybe having a team of SDRs, people that are sales development reps, they do all the prospecting, to teams of AEs, account executives that just close and negotiate deals. All that now changes the commission structure again, right? But the first couple of years, I find that most startups actually have to adjust and change their commission structure quite a bit.
Rob: That’s great, man. Well, thanks again for coming on the show. We’ve covered just maybe 3 topics out of 20 that are in the book but that gives people a good excuse to email you, email@example.com or they could obviously head over to close.com and search around for the book. Aside from heading to close.com to see what you’re up to, where should they go to keep up with you online?
Steli: For people who love podcasts like this one, I think a good group of the audience here is probably aware of it but I’ll say it nonetheless, Hiten Shah who is a legend in our world and a good friend of yours and mine, he and I have a podcast together, the Startup Chat. You can go to thestartupchat.com if you haven’t checked that out or if you’ve forgotten about it. Subscribe to it and take a listen. We publish twice a week on all the major platforms with our episodes on the Startup Chat.
Beside that, @Steli on Twitter. You have my email address, firstname.lastname@example.org. I always love to hear from the Startups for the Rest of Us community and the micropreneur community. If you have questions, if you have challenges, if you have problems, always happy to help if I can and always happy to encounter people in real life or online that have heard from me or about me on this podcast.
Rob: Sounds great, man. Thanks again.
Steli: Thank you.
Rob: Thanks again to Steli for coming on as always and enlightening us on sales topics. If you have a question for the show, please leave us a voicemail at 888-801-9690 or email us at email@example.com. Our theme music is an excerpt from We’re Outta Control by MoOt. It’s used under Creative Commons. If you come to startupsfortherestofus.com, you can see the fancy new website, you can subscribe to our email list and see the full transcript of each episode, typically within a week or two of it airing. Thank you for listening and I’ll talk to you next time.