Speaker 1Hey, folks, it's Marco Bares from the Science of Scaling. On this episode of Science of Scaling, we're going back to audience Q&A. We've got a bunch of questions from you. I love it. Our Matthew Brown, our producer's here. And Matthew, what's the question we have today?
Speaker 2All right. So today's question comes from a Spotify comment from G.I.J.S. Boston, and they ask, how do you decide whether CS or sales owns revenue from customers? That one's come up a
Speaker 1lot, just a lot in the last quarter, just in the stage two portfolio. And it's a good question. As a ecosystem, we tend to be trendy. We tend to have a cool way of doing it, and everyone kind of gravitates to it, even though in most cases, it's. Contextually, it's only optimal to do it in certain contexts. And right now, it is in vogue to segment between hunters and farmers, as we're kind of saying. So have one team close revenue, new revenue from new customers, and have a separate team renew and expand that revenue. And sometimes on the post-sale, we call that CSOs, we call them account managers, or there could be both. So that's the question. It's a good one. Let's dissect it. And let's abstract way out. So just general framing of it. And the way I want to frame it is around the question of specialization through the go-to-market cycle. So we used to not be in a specialization world, like decades ago. You set up your own appointments as a salesperson, you close those appointments, and you renewed those relationships. And then, I don't know whose work it was, maybe Aaron Ross in Predictable Revenue, like maybe 20 years ago. So he popularized the role of the SDR and BDR through his experience at salesforce.com. Cool. That was great. Changed the ecosystem. And a lot of people copied it. But it's not always right. Okay, so let's just talk about when should you specialize, when should you not, how do you decide when to, what's the pros and cons of both those? All right, so let's just take two. So on one extreme, you have what is used mostly today. BDR sets appointment, account executive closes appointment to customer, account manager onboards, renews, and expands. Okay, simple. Maybe there's a CSM in there, but let's just play with that. Okay, what's really cool about that? What's really good about that? Well, you, arguably the toughest part of that is that you're not going to be able to get that sequence is closing a new customer. A lot of people think that, getting your foot in the door. And so that's arguably the hardest skill to find. Let's just play with that anecdote, which in most cases I agree with. You don't want to waste that skill on low value stuff. If you were successful in hiring an amazing person who knows how to take a new appointment and get your foot in the door. And close that customer, you don't want to waste that skill on setting appointments, especially if you can find a 22 year old college grad to do it, that you can pay $70,000 to. And you don't want to waste that skill on renewing contracts, especially if you can find, you know, perhaps a lower skill person and paid less to do it. So that's where this whole concept comes from. The other argument to it is the skills required to do HP. Is different. And it means it's a different type of resource. There are people who are career hunters. And there are people who are career account managers. And those people who are amazing account managers, maybe wouldn't be good hunters. And those people who are great hunters, maybe wouldn't be good account managers. And so this specialization allows you to optimize and deploy each person to the point in the funnel. Where they have the appropriate skill. Okay, so that that's the theory behind this. Now, the disadvantages of that design is in the complication of handoffs. Because like when one person has to set appointments for themselves and then close that appointment and then renews and expands those appointments. No one would ever set a bad appointment for themself. And no one ever, no one would ever sign up a bad customer that they had to deal with. Right? So, so that's the risk that happens is now all of a sudden you've specialized these roles, which we've discussed the advantages. But now these individuals are motivated to act upon what we call local maximum. Where it's like the BDR is just trying to get you to do it. The BDR is trying to get as many appointments as possible. The account executive is trying to close as many customers as possible. And the account manager is trying to retain and expand as many customers as possible. And those can be optimized around those individual metrics. Whereas as a group, you're basically trying to optimize lifetime value divided by CAC, potentially. You're trying to get as many healthy, long living customers for as low as price as possible. But when you specialize. When you specialize the roles, you can end up with local maximums. The other thing is, and it's related, is it's really hard to design compensation plans for each of the contributors to that journey. That solves for the actual overall arching goal. All right. So that is the pros and cons of what's in vogue today, which we would call role specialization. Now let's argue the other side. Let's argue like, hey, what if we had no role specialization? What if we go back to an older way of designing sales teams where the seller cold call sets their own appointments? They work those appointments and turn them into customers. They onboard those customers and then they do renewals and they do expansion. That actually exists. Take a look at companies like McKinsey and BCG. Partners, kind of glorified salespeople. And yeah, they have a team under them, but they're doing every single aspect of. Yeah. So there's examples out there where this exists. And the pros and cons are the exact opposite of what we just talked through. Like the pros are there's perfect alignment. They're never going to set a bad appointment for a meeting that you have to do. And you're never going to close a bad customer for a customer you have to maintain. But the disadvantage is you don't have specialization and you can't deploy the beautiful skills only on the toughest parts of that funnel. So that's where we end up. And that's what we have to like look at and evaluate what are we dealing with with your specific question, Matthew, of specializing between a hunter and farmer or having the salesperson continue to retain and expand the customers that they show. Okay. So there's two questions and I've done this a lot and across our stage two portfolio, I would guess of the currently like 45 companies we have across the three funds, I would say. We've probably specialized those roles like 85% of the time and not 15% of the time, just to give you a data point. But this is sort of a sequential questioning you have to go through to make that strategic decision. The first question is when you sell a new customer today in your model, what percent of the potential lifetime value is captured in the first sale? Okay. So like if you are. If you're selling customers for whatever 30,000 ACV and you've set up a model that like over the course of a couple of years, you might expand their contract by five or 10% every year, you're capturing a lot of the value in the first sale versus if you're signing up a customer and they start at 30,000 ACV, but they could become a million dollar account. Then that's. That's a different context. If there's not a lot of potential expansion, then you probably want to specialize. But if there is a lot of expansion, you might want to keep that with the salesperson. Okay. The second question, which is sequential to really help you hone in on the right answer is if we are in a situation where most of the LTV is not captured on the first sale, it's going to happen in the expansion. Okay. Okay. The second question is how complicated is the work to expand? If it's just like, like in HubSpot situation, just buying more contacts, that's not hard. But if it's actually like, you know, we also have this in the HubSpot context, selling new departments, like they started with service hub and now we want to close them on sales hub and marketing hub. And that means we need to leapfrog over to a different decision maker in a different department. That's hard. So that's the answer. If a small percentage of the total lifetime value potential. is captured in the first contract, and the skills needed to expand that to that potential LTV is high, then you should probably keep the hunter and the farmer the same. You should probably have your hunting salespeople also do the renewals and expansion. However, if the LTV is small, potential LTV compared to the opening ACV, you should probably specialize. Or if it's large, but the work needed to expand it, like just adding more seats or adding more contacts is easy, then you should probably specialize. So hopefully that gives you some direction with your context. Now, let's dig a little bit deeper and talk about the how, okay? Because we have to recognize the risks that need to be mitigated that we talked about in the beginning. Right? So we understand, okay, if we decide, we go through those questions and sequence, we're like, okay, according to more, we shouldn't specialize. We should have our salespeople also renew and expand. Now, the risks of that is like you're wasting valuable hunting time and hunting skills on low value tasks. So just because they're owning the renewal and expansion doesn't mean they can't do it. They can't do it. They can't do it. They can't do it. They can't have a team under them. Just like some account executives have BDRs that kind of work with them and for them, they can have junior account managers or CSMs that work with them. So they ultimately own the renewal and the expansion, but the provisioning of the product and the training of the team and running through the details of the contract assembly can be delegated to a resource that helps them. They just need to be there to like, you know, if we need to, if we landed with services hub and we need to get over to marketing hub, we don't want to lose the relationships that that hunter created to get services hub. When they sold the first deal with services hub, they probably got to know the CFO. They probably got to know the head of legal. They definitely got to know the head of services. They're now champions for them. And they can tell them about what is the marketing leader up to what's their tech stack all about. What are some of the challenges that they're having? What are some of their priorities for the next quarter? And they can use those relationships to get over to the CMO and upsell the marketing hub. Actually, now they think about it. If you want to learn more about champions, go back to our episode on champion development with Jay LaBeouf at Descript. Check that one out. So that's the work they do. They don't have to do the user training, all that kind of stuff. So we can give them a team, give them a person. Underneath to help with that. Now, let's design the other piece. Let's say that we go through Mark's framework and we decide, okay, we should specialize. We should have account executives that only bring customers in. And we should have an account management team that does the expansion renewal. Remember, what were the risks of that? The risks are that our salesperson is going to sell crappy customers because they don't have to deal with them now. That's risk number one. And then risk number two is what if they actually do sell a customer that expands into a big account? Should they get credit for that? Well, we've de-risked that already with our framework to some degree. But let's talk about that first one of like, all right, this is good. We're specializing, which means we're maximizing the amount of time that our talented hunters are spending hunting and minimizing the time that they are using their time on renewal. And that's the first step. And then the second step is to make sure that we're maximizing the amount of time that our talented hunters are spending hunting and minimizing the time that they are using their time on renewal. So we have to design a compensation plan that doesn't solve for that local maximum we talked about, but solves for the overall goal of the whole go-to-market team, which is lifetime value. That compensation plan should not be correlated to ACV and ARR. It should be correlated to LTV. So philosophically, we could, we could argue that like, they should just get paid a percentage of the money that flows in from that customer forever. Now don't do that. That does check that box of like aligning LTV, but you're going to end up with a bunch of salespeople that end up in the Caribbean for six months of the time because they're just collecting a paycheck for not doing any work. So the other aspect of sales compensation design is you have to have the salesperson, feel the reward of a good quarter quickly and feel the pain of a bad quarter quickly. It's, I don't know the behavioral science piece to that in academia. I probably haven't found it yet. Maybe you could put it in the LinkedIn quotes. If you can help me, I'm sure it exists, but it's well-known across the realm of sales comp design. And so we can't do that, like get a percentage of everything they pay for the next, like as long as they're doing it. And so we can't do that. And so we can't do that, like get a percentage of everything they pay for the next, like as long as they pay. So what we have to do is we have to figure out as early as possible, if the customer that the salesperson sold is good and comp them accordingly, or if it's bad and comp them accordingly. And there are like some ideas out there that people have done, like, you know, let the customer success manager rate them. But like, that's hard. You're going to sign up for a cultural nightmare, you know, like, and it's just like, I don't know. I don't think there's a huge advantage for a CSM to ever say a customer is good to say they're all bad, blame the salesperson. Right. So you need sort of like a factual way. And that's another advantage of one of the aspects of science of scaling with the leading indicator of retention. Right. So if you have a customer that you think is good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, and you think they're good for you, is what is the leading indicator of retention for new customers? Said another way, what is it that we can see in our customers' behavior and usage and results with our product in the first month of their tenure with our product? That if that occurs, they're going to be with us forever. They're going to be a high LTV account. And if it doesn't occur, they're probably going to churn. Right. So it's important to define that for a variety of reasons. And another reason why is surfacing in this question around specialization and compensation. So here's a simple plan that I've used in many cases is you're a salesperson and we are specializing. When you sell a customer, you'll hand that off to an account manager. They'll deal with the onboarding, the renewal, and the expansion. You get paid half of your commission when the customer signs the contract. You get the other half when they achieve the leading indicator of retention. Now you don't have to wait too long. Most people achieve, if they're good, the customer will achieve their leading indicator of retention in 30 days. So that will happen within the quarterly commission paycheck. And so really cool things happen. Let's just say like the common example I use on leading indicator retention is Slack. A lot of us know how Slack works. And Slack's leading indicator of retention was whether or not the customer sent 2000 team messages every month. If they did, they would stay forever. If they didn't, they would churn. So there's the sales comp plan. Hey, Matthew, you're a seller. You sign this customer. I'm going to give you half when they sign the contract and half when they send their 2000 team message in a month. And guess what Matthew does? He gets the customer using the product before they even sign. He leverages the free trial. He sets them up. He gets the team all set up and using, and they achieve that 2000 team message before they even buy. Frigging CS them and the account managers set up. Now it doesn't mean you're trying to turn your salespeople into CS people and account managers. They don't need to start learning all the nitty gritty and that's the CS person's job. It's just, they got to set good expectations. They can't lie about what it takes to set the product up. They can't lie about the potential ROI that it will produce. They can't lie about what advanced features it has. They have to set good expectations and tell the truth so that that customer hits the leading indicator of retention. Then stuff starts to get exciting. So the other final piece I'll say about it is I'm not a huge fan of the lead indicator retention. I'm not a huge fan of the lead indicator retention. I'm not a huge fan of setting up models where the hunting rep will get any expansion revenue that occurs in the first year and the account manager will get any expansion revenue that happens after the first year. It just sets up a culture that is fighting. I can just see the customer expands the 11th month of the contract because of all the great work the account manager did. I can just see the I deserve that because I sold a great account. I'd rather just work with our CFO to create more of a team comp. It doesn't have to be a double comp. It's just more like modeling to understand what projected expansions we expect and how much could get paid to the salesperson, how much could get paid to the account manager. And we don't have to position that as a sharing. It's just like, hey, you get like 5% of your new and 1% of the expansion as a seller. And as the account manager, you are supposed to hit a 110% net dollar attention. I don't care how you get there. There's different ways to model it. But unfortunately, that's the way I mostly see it. First year, rep, second year, and be all an account manager. And I think that sets up the wrong behavior. So great question. It's kind of shocking that it's still a very relevant question we're working on. But as you probably saw through the narrative, a lot of people continue to get this wrong. And I hope this framework and some of the details around implementing whichever option you chose for you was helpful. So anyway, I love this because I know what to talk about. You know, I don't know what to talk about when I'm on these things. And I want to talk about where your questions are. I'm constantly reflecting on where the ecosystem is stuck and how I can help. And if I don't know the answer, I'll go out and do a bunch of research. I'll do a bunch of research on it, both in practice and academia and the intersection they're in. So keep the questions coming. You can drop it to me on LinkedIn. If you're on Spotify, there's a comment section. You can drop it there. You can email us at podcasts at HubSpot.com. And maybe your question we'll tackle next. I'll see you on the next one. Thanks, everyone.
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