The last two newsletters have been a bit weighted toward customer support, so this week we’re shifting focus to the pre-sales side of the customer journey. We’ll look at a basic sales model and how it fits into the larger customer journey.
If you work in sales, a basic model for how you get paid is that for each new customer you bring in, you get to keep a percentage of the sale, i.e. a commission. So if your commission is 5%, and you sell $10,000 worth of goods, you get to keep $500. You might also get a base salary, probably commensurate with your experience, but if you make your career in sales, the commission is what drives you.
It’s a good model in that it aligns the incentives of the business with those of the salesperson. The business wants more customers, ideally very quickly, and the salesperson wants to make money quickly, so the business is happy to pay the commission because new customers are exactly what it wanted. Like I said, it’s a good model. Mostly!
There’s the Wells Fargo account fraud scandal, where bankers literally created millions of fraudulent checking and savings accounts for Wells Fargo customers without their consent. They were bankers, of course, not salespeople, except, nevermind:
In [Wells Fargo CEO] Kovacevich’s lingo, bank branches were “stores,” and bankers were “salespeople” whose job was to “cross-sell,” which meant getting “customers”—not “clients,” but “customers”—to buy as many products as possible. “It was his business model,” says a former Norwest executive. “It was a religion. It very much was the culture.”
I could stop there, but how can I possibly not include this gem:
In 1997, prior to Norwest’s merger with Wells Fargo, Kovacevich launched an initiative called “Going for Gr-Eight,” which meant getting the customer to buy eight products from the bank. The reason for eight? “It rhymes with GREAT!” he said.
Having existing customers purchase additional products from you is generally a good thing, so it makes sense that as a business, bankers’ incentives were aligned around selling more products to current customers. Except they forget to check that the customers consented to the purchase of those products. Toxic culture leads to bad outcomes for customers. Oops.
Tweaking the model
The Wells Fargo example is admittedly egregious, so let’s return to our basic sales model before it’s been corrupted beyond the point of redemption. You pay your salespeople a cut of each sale. Win win for both the business and the salesperson. Simple.
The first place I expect this system would fail would be in bringing in the wrong type of customer for the business. This can happen in obviously bad ways, where the seller promises things the business can’t deliver, thus leaving the business with an unhappy customer who can’t get value because the product doesn’t do what they expected it to do. Or it can happen in more subtle ways, where the salesperson sets expectations with the customer correctly, but the customer just isn’t a great fit for getting value from the business long term, so they’re much more likely to churn than a better fit customer. The usual remedy for this in the basic sales model is to introduce clawbacks, where if the customer churns before hitting a specific benchmark, the salesperson will lose their commission for that sale. This way, you only reward salespeople for bringing in customers who are going to generate revenue long term.
Tweaking the sales compensation model is how most business’s are going to continue to align the motivations of individual salespeople with the needs of the business. As Matt Roberge writes in The Sales Acceleration Formula:
Whether you’re a CEO or a VP of sales, the sales compensation plan is probably the most powerful tool in your tool chest. In thinking back to the critical strategic shifts HubSpot made as a business, most of them were executed via changes to the sales compensation plan.
If you want customers on an annual contract, only pay commissions on annual contracts. If you want more customers to sign up for onboarding, pay a spiff (a spot bonus) for selling onboarding. If you need more focus at the top of the funnel bringing in new business, send the person who creates the most qualified opportunities on a post-COVID Disney Cruise.
Photo by Mike Arney on Unsplash
Sales and the Customer Journey
With our basic sales model in hand, how does this map to the customer journey, the stages a customer goes through in their relation to us as a business? To illustrate, here are some very simple journey stages:
Awareness > Evaluation > Conversion > Success > Renewal
This isn’t perfect, of course. You might want to add a Discovery phase between Awareness and Evaluation. You might add Advocacy after Renewal or illustrate it in a way that it encompasses everything post-conversion. I wanted everything to fit on one line in an email newsletter, so I left out some details.
Where does sales fit into the customer’s journey? The sale—the actual closing of the deal that cements the beginning of the customer’s paid relationship with the business and is also the part of the sales model where the seller can get paid a commission—that happens at the Conversion phase of the journey. Evaluation is where the demo (and earlier, discovery) happens. And if the seller is doing outbound demand generation, they’re also involved in the Awareness phase of the customer journey. But it’s really all about conversion. All of the parts of the basic sales model lead to that point of Conversion, delivering good fit customers to the business.
Customer Creation
Earlier this year I read an HBR called “The Loyalty Economy”. The whole article is excellent, but I want to focus on just the first sentence. Actually, just a single word, but since this email is already running ridiculously long, let’s go nuts and include the whole sentence:
The true purpose of a business, Peter Drucker said, is to create and keep customers.
The word that sticks out to me in the above quote is create. What does it mean to create a customer? There’s this beautiful hymn I became aware of when I was in high school band called “Salvation is Created.” What about “Customer is Created"—what would that look (sound?) like? How does that differ from a customer that hasn’t completed the creation process? There’s something about creation that implies an appropriate level of perfection, that this business who has agreed to pay you money can also be accurately described as a fully-created customer.
Let’s look back at the customer journey stages:
Awareness > Evaluation > Conversion > Success > Renewal
We know when the sale happens. When does customer creation happen? At what stage can you say, "yes, we have fully created a customer”? Perhaps for simple products that require very little education, that happens at the point of sale, but I expect for most products and services of even moderate complexity, signing the contract doesn’t equate to customer creation.
I expect it’s common that businesses equate closing the sale with creating customers—the basic sales model is pervasive after all. But if you fail to create customers, you should probably expect churn:
In working with a number of SaaS portfolio companies, I have found that there are two causes of churn that occur more frequently than any others. They are: 1. Failure to successfully onboard the customer and 2. Loss of the champion who drove the purchase.
The Sales Model and Customer Creation
I’m curious to know more about businesses who place a heavy emphasis on customer creation in their customer acquisition model. How are teams structured? What does the sales compensation plan look like? Does the business celebrate the moment of customer creation (onboarding completed?) as much or more than getting a signed contract? How are numbers reported to the board? I’m genuinely curious and if you have good examples, please email me.
If it seems I’m getting oddly passionate about a single word from Drucker and maybe even overthinking it a bit, it’s because ultimately focusing on the customer is what’s valuable for business. Two weeks ago I wrote:
The question of what customers care about is the most fundamental question for any business. They’re the only stakeholder consistently putting money into the business in the form of revenue. Employees take money out of the business. Shareholders put their money in, but they’ll want (more of) it back. In order for the business to survive and continue to serve the interests of its shareholders, employees, and customers, it must focus on what matters to customers. Customers are where the money comes from.
The customer doesn’t care as much as you do about getting the contract signed. They care more about getting to that moment where they’re able to realize value from your product or service in a meaningful way. That’s the moment of customer creation, and if businesses align their sales models tightly to understanding and measuring customer creation, that’s certain to be a recipe for longterm success for both the business and its customers.
Etc.
Things I’ve read:
Co-founder of Segment dives deep into How to sell a B2B product. I love this approach to sales. Super empathetic to the buyer.
The Company That Sells Love to America Had a Dark Secret Toxic culture. Class action lawsuit on behalf of women that’s been stalled for over a decade. Yet shareholders win a 9 figure suit. This is soul-crushing—sorry—but their story is worth hearing.
Read the Other Buffet News section.