Sales is the heart of any organization. In the world of technology I live in, there is so much talk about entrepreneurial grit, market share, traction, freemium models, and usage. Yet none of that matters without sales. Without dollars in the bank, users and market share mean nothing. This is especially true of small enterprises where survival is contingent upon paying salaries, and nothing will help move your sales along than sharing a piece of the pie through commissions.
Dan Ostland (@dostlund) wrote this post about Fog Creek’s decision not to pay sales people a commission and wondered why commissions are “so widely lauded when they come laden with so many recurring problems.” He wrote:
There are all kinds of problems with commissions, for example, high turnover as salespeople shop jobs to get a slightly more lucrative commission system. Always attempting to maximize personal benefit which results in system gaming like making fake phone calls to hit call numbers, sandbagging deals into the next quarter, sniping new leads, and so on (the list here is actually endless).
The problems include infighting over who gets credit for accounts and sales. They include constantly comparing territories and account value to determine fairness between salespeople. They include an enormous amount of overhead as each salesperson sedulously tracks every transaction no matter how minute to make sure they get paid on it (by the way, they hate having to do this, and it’s a staggering waste of time. It’s also a place where weak salespeople like to hide out).
Those aren’t “sales people problems”, those are people problems.
Further, and at the risk of being forward, it probably signals management problems. I learned long ago that if you make complex, multi-tiered sales compensation plans, you’ll be rewarded with two byproducts: wasted staff time trying to calculate what is owed or earned, and the spawning of natural self-interests trying to figure out what and when to sell in a given month. Dan’s post indicates that his company has fallen trap to these very same issues.
As the business owner, I of course, had to start by selling. My motivation? Control my own destiny, doing what I loved (writing code), pride, and if all went to plan, a comfortable lifestyle. I’m sure Joel Spolsky started Fog Creek with similar goals in mind. But at the core of it all was sales. Without them, nothing followed.
So, I was a sales person first.
Today, I have a single dedicated sales person, and she’s freakin’ fantastic. She’s motivated by having control over her life (she has a young son), doing what she loves (working with people), pride of a great month’s sales and satisfied customers, and since all is going to plan, a compensation plan that’s easily calculable and awards her greatly for her hard effort.
In truth, she’s a great coworker first, and as a sales person she has all the attributes any sales manager wants in their team. Most of all, she’s effective. Her first month on board was our best month ever, and in doing so, she’s on her way to cranking in double her previous job’s earnings. She will be the first to tell you that she is motivated by the same things as any entrepreneur–including the compensation that comes with hard work and retaining very satisfied customers.
Fog Creek found solid footing years ago and doing away with commissions may work for them. There could be many reasons a company might not pay commissions: low margin products, very long sales cycles, declining product interest, or low touch, low value software services.
For us, we have a pretty young product with just enough history and engagement to qualify as traction. We’ve proven our software and now need to find the venues to use it. I cannot think of any better way to get the ball rolling than a sales person with a well-defined commission plan.
A good friend of mine, Cameron Gage (@camgage), is a sales manager who helped craft my own plan, and he’s been an inspiring leader and coach with lots of great insight into what motivates sales people. Cameron says that sales managers must go beyond money, and he suggests learning about your sales people by knowing what inspires them and understanding their long term goals. Is it security? A sense of belonging? Self-direction? Commissions can be the financial marker to a plan layered with other rewards matched to the person.
In my case, my sales person and I discussed her own goals, and I learned that flex-time, autonomy, pride, and the ability to effect her own income were all motivations. With our mutual goals and a “finish line” in place, we’re working backwards, and I’m going to do all I can to make sure she achieves her goals. And by god, if someone helps my sales graph start to bend upward, I’m going to reward her. It’s high time we see our ship sailing in, and our commissioned sales rep is at the helm of making it happen.
Austin has a strong startup culture amid a large community of software developers. As part of that culture, there is a lot of talk about entrepreneurship, new ideas for SaaS businesses, and avenues for securing funding. It’s an exciting place to launch a company, and an entrepreneur can plug into the community for new hires, feedback, or even cheer leading. On the flip side, all the talk about hockey stick growth curves and successful products puts pressure on developers and entrepreneurs to succeed now and fuels a sense of failure if your business idea hasn’t yet achieved success. Worse, the disdain held for “lifestyle businesses” means more entrepreneurs dream of an out-of-the-park product rather than growing a small business.
But it’s no secret that 50% of all businesses fail within the first five years. Trying for the one-shot home run product–with or without funding–translates to even higher odds your business will fail. In contrast, taking a service business approach with a breadth of offerings enables you to grow a client base while seeking opportunities from your client work for new software products.
At minimum, you want your business to provide a reasonable income and involve an area of business that excites you. When my daughter started college at CU Boulder (another great town for software startups) last year, I wasn’t thrilled with her choice of major. But when the university’s president addressed the parents in an orientation, he advised us to encourage our kids to follow their passion, because finding work they love would lead to success.
That’s great advice for entrepreneurs, too. Figure out what it is you want to do, then seek the path to get there. I wanted to write code when I started my business, but without a portfolio of past work, nobody was going to hire me to create software for their company. So, I went door to door and sold website services which at least in some way allowed me to write the code I loved.
As we grew, we looked for opportunities to create new yet sometimes woefully unsuccessful products. And we kept on learning and improving both our services and the products that were finding some success. January will mark our 12 year anniversary, and in addition to earning enough for a comfortable lifestyle, I’ve had the pleasure of working with over 500 clients in varied industries, and I’m thrilled to be the developer behind a great ticketing software.
That’s the kind of start-up culture I’d like to see more of here in Austin. Less dreaming and more working at your passion. Because if you can make ends meet and love what you do, finding a path to a moderately successful product is icing on the cake.
When I began this business 12 years ago, I learned anything and everything I could to satisfy client needs if it helped pay the bills. Over time, our skills grew, our services broadened, and we were flush with new sources of revenue. Even so, we’ve occasionally bumped up to circumstances that has us question whether once new and exciting services and revenue sources were worth today’s financial consideration received.
I wrote last week about the buyout of our agent business (for merchant accounts) through an ISO partnership. Disappointed about the loss of monthly residual income, we realized the buyout provided us the chance to reevaluate the direction this ancillary business should take.
First, we hired our attorney to help create a new agreement. As I paid the attorney’s fees, I realized we’d spent more money negotiating legal aspects of ISO contracts than all other legal needs combined. Maybe I was too caught up working in the business rather than on it, because the revelation surprised me. And the surprises kept mounting.
As the agent assisting with merchant account setup, we help clients fill out an application, explain costs and terms, and smooth ruffled feathers when glitches surface. In addition, support is ongoing as our residuals were based on the fact that we’re the first link in the ISO chain. All told, staff time spent on merchant account related questions ranged between 5-25 hours a month. During hectic months, the earnings to time translates to as little as $25 per hour in earnings. I can’t even hire for that salary!
Comparing the investment in time to setup ThunderTix accounts (much streamlined due to ongoing administrative feature updates) versus that spent in merchant account setup provided another ah-ha moment. We spend minutes setting up a new ThunderTix account. Possibly seconds. And our retention rates are fantastic! Conversely, we might spend hours on merchant account setup, but retention rates with our ISO are less than stellar. Why the difference? We think it lies customer service.
We pride ourselves on exceeding expectations, yet our first-link-in-the-chain status entangled our own phenomenal customer service with the customer service and expectations of an organization that is beyond our control. No financial consideration is worth lost goodwill due to another company’s actions.
Further, merchant fees paid by clients involve labyrinthine fee structures and lots of explanation. We’re talking about people’s money here, and when the dollars don’t add up, a client’s credit worthiness is questioned, or unexpected challenges arise, our own reputation is open to criticism even when ThunderTix offers straightforward, predefined monthly fees with no surprises.
And finally, as the recent buyout of our ISO portfolio indicates, we cannot rely on this revenue source for future earnings. Worse, the new contract guarantees a trivial buyout amount well under the dollar figure our recent successful negotiations yielded.
The early disappointment of losing our residuals has given way to relief. Relief that we’ve opened up more hours to focus on our core product. Relief that our reputation is wholly separated from another service provider’s. And relief that we can focus on one business–our business.
As part of our ThunderTix service, we help our clients set up merchant accounts for accepting credit card payments. These accounts pay a small monthly residual above and beyond our service price, and I remember being pretty stoked when payments reached a couple of hundred bucks a month. Of course over time and as we’ve grown our client base, those residuals have added up to a real chunk of monthly change.
The accounts take place through a partner program with an ISO or Independent Sales Organization, and we are an agent processing merchant accounts on their behalf. We divide profits generated by the portfolio of accounts on a percentage basis.
Two years ago and in a fit of anger, the guy that owned the ISO informed me he was ending our relationship and our residuals would end effective immediately. I marched right over to my attorney, and it was music to my ears when he told me the ISO was now in breach of contract, and the threat of a lawsuit would almost certainly turn things around in my favor. It did.
Not only was my account reinstated and residuals paid on time, but my attorney took the opportunity to write an addendum to our original contract providing us greater protections. Had I recognized the potential growth of that portion of our business, I would have hammered out a better agreement in the first place, but like many small businesses endeavoring into new and uncertain areas, I simply didn’t understand the importance of the contract.
Several weeks ago I was informed that my portfolio was sold thus ending the ISO’s obligation to pay residuals. Instead, he was offering one year of residuals as part of a buyout of the portfolio if I refrained from moving my accounts to a new ISO. The addendum saved my butt, as the original contract would have allowed him to take all accounts with zero compensation to us, and prevented us from moving to a new ISO.
The value of a portfolio is based on earnings, attrition rate, and future growth, and in every category our performance is excellent. I felt our portfolio value was higher and refused the offer.
The value of great customer service and client relationships shines in situations like this. I know–and I believe he knows–that our clients would follow us. We can offer our clients incentives such as ThunderTix service price reductions or free upgrades, and even pay cancellation fees to the ISO should it be necessary. Instead of reaping the windfall he sought, he could find himself with a fraction of his previous residuals.
And wouldn’t you know his buyout offer began inching up. First by 12%. Then another 12%. Five iterations later, we settled on an amount I’m ecstatic about. In addition to the cash infusion, we now have the opportunity to reevaluate ISO relationships. For the time being, I’m just thrilled to be headed to the bank.
In 11 years running a software development shop, we’ve been lucky enough to create a SaaS product, ThunderTix, now representing over 65% of our revenue. On a small scale, our SaaS product, ThunderTix has reached product/market-fit. In other words, we found real customers willing to pay for our event management and box office service and reached a level of product success that Sean Ellis describes as the state where 40% of users “would be ‘very disappointed’ without your product”. Despite the economic downturn, we’ve managed to grow our customer base, residual income, and net profit, while at the same time managing to pare back on our custom software development (and the required staff) that is more support intensive yet less profitable and less enjoyable.
Once we recognized we solved a real need in the event management business (our software allows venues to sell tickets without added–and hated–ticket fees), we gained confidence in bringing our product to market while ironing out the wrinkles any new software business faces. We’ve slogged away for week after week of 80+ hour work weeks bringing our product up to snuff, and our attention to detail and customer commitment has earned outstanding ratings for customer service.
Customer feedback provides an appreciated pat on the back and justification for the long hours we’ve put in, and in the most important metric, we’ve doubled clients year over year. The kudos, rising profits and job satisfaction certainly point to a job well done. Yet I know that our future relies on quantifiable metrics that will help us aim our budget, expertise, and time with accuracy.
That in mind, I’ve been spending time learning more about the numbers that drive decisions for successful startups, and I’m trying to assign values for standard business metrics that measure success: CAC, LTV, churn, gross margin.
My learning suggests that where human touch is involved in the making of a sale, the cost of customer acquisition (CAC) leaps exponentially over a pure web-based service. Yet human touch isn’t something that should be eschewed and quite frankly, it is a requirement for many businesses–for example, retail, medicine, or legal. But in the world of Internet businesses, human touch is considered the evil to be rooted out of any system. Try as we might to find ways to off-load some of the “human component” of our work, it ain’t gonna happen.
In my world, our customers are small venue owners that need to know there is someone on the end of the phone line to help them through a crisis. They want their hands held as they apply for their merchant accounts and gateways. And most of all, they want to feel like they matter.
So while I’ll continue to look at the numbers that drive growth and applaud the occasional web-based sale that occurs without the human touch, I know the biggest driver of our success right now is the fact that I am one member of the human race caring about the business prospects of another human whose business is their life.
My entrepreneurial journey began in 2000 and continues today as I steer the development of our flagship SaaS product, ThunderTix.
A Yankee transplant living in Austin, I am fortunate to be surrounded by other developers. My passion is business, and I love learning and sharing anything about software and product development.