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I’ve been thinking about what separates small companies (almost universally beloved) and big companies (loathed). I think I’ve figured it out, and it all comes down to The Great Value Swap. Small companies focus on creating customer value, which accidentally creates shareholder value, and big companies focus on creating shareholder value, which accidentally destroys customer value. I think a grand unified theory would unify customer value, shareholder value,and employee value. But for now, think of it as food for thought.
What is the price threshold at which your company could no longer afford to field a sales team?
“The single most important decision in evaluating a business is pricing power.”
Two ingredients, a low price and a high-touch sales process, when mixed together create a poultice equal in its ability to seduce and kill founders and their companies.
Why it Matters: On the path to $1B in revenue, every company needs to figure out how they will get there. Will it be selling something for a lot of money to a small list of customers or selling something at a low price to an extensive list of customers? Depending on the answer to that question, a company has to decide how it will get customers to pay, and there are three choices, and choosing the wrong one can kill your company.
If that’s the case, how do some companies end up in the graveyard? Who would try to field an expensive sales team for a low-priced product?
Within months of founding Mattermark, we sold subscriptions to our product for $500 / mo. or $4,799 / year. Our fully-loaded cost per rep was probably between $200 - 300K. At the lower range, that means we’d need to close ~3.5 deals per rep per month, and at the higher end, that means 5.2 deals per month to reach break-even, but we’d have to hit double that to hit traction. Our CEO closed between $500K - $1M in the first year, and I closed another $500K in under a year, putting us well above a sales yield of two, leading us to believe we were ready to scale a team of salespeople. But once we hired salespeople, it was a rare month that our reps could close more than five deals a month.
What happened was that the complexity of our sale in the early days, when we were selling to early adopters, was low, but as we crossed the chasm in our market, complexity went up, which caused our sales yield to drop. And when our sales yield fell, we blamed it on poor sales performance instead of recognizing it as a red alert. We either needed to simplify our sale, build a self-service path, increase our prices, or create more value via new features. The company tried all of those things, but it was too late.
I hope this serves as a cautionary tale, both the theory and practice, for founders to avoid the graveyard at all costs. Please print out this 2x2, post it at the top of your Notion, look at it every day, and figure out which of the non-graveyard quadrants you’re going to occupy and use to win your market.
In my last issue, I wrote about The Sales Learning Curve, a concept and paper that Mark Leslie co-authored. This piece, Leslie’s Compass, is a fantastic complement to this week’s big idea. The compass is all about the relationship between sales and marketing intensity, and the piece is full of great questions to ask yourself about your product and your go-to-market strategy.
Late last year, Gokul Rajaram (whose experience goes from Google Adsense to Facebook to Caviar to Doordash and more) shared that he’d been hearing Chief Product Officer (”CPO”) candidates that series B and C companies hadn’t yet found product-market fit (”PMF”). It seems CEOs are hoping a CPO hire will solve that. The tweet itself is good food for thought, as are many comments. My favorite? “Any CPO capable of finding PMF for a series C company is better off starting their own company.”
Since the theme of this issue is pricing and value, this brand-new episode on the history of the NFL is perfect. In their end-of-episode wrap-up, Ben and David conclude that The NFL may be one of a very small number of organizations that manages to capture all of, if not more, value than it creates.
Naming is a pain in the ass. Thankfully, Eli Altman, founder of A Hundred Monkeys (a firm you can pay to come up with a name), created a workbook anyone can use to guide the naming process. I’ve used it myself, but trust their portfolio of names: Dolby Atmos, Standard Deviant Brewing (a favorite of mine), and more. The book combines theory on naming with exercises to help you think different about what to call your new thing.
This is a bit of a deviation from management content, but I’m a big believer in managing ourselves first (as in: managing our health!). Hat tip to Brian Wang for introducing me to this app. It’s the easiest app I’ve ever used for tracking my macros (protein, fat, carbs). It’s beautifully designed and has been a helpful feedback mechanism as I’m trying to cut body fat and get healthier overall.
That’s all for this week. I’m looking forward to what’s next!