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January 26, 2016

Quotas & Sales Cycles: A Little Alignment Goes a Long Way

multi-colored balls

Once your startup’s first product starts to resonate in the market and sales pick up some steam, you need to leverage every bit of that momentum to propel your company to the next level.

At this point, some simple realignment to your compensation structure and sales cycle can reap huge dividends—the right timing and delivery strategy can help maximize the impact of your sales incentives.

In particular, sales quota periods should align with sales cycles. Here’s a hypothetical example:

  • If your sales cycle is 30 days or less, give your sales reps 30-day quotas.
  • If your sales cycle is 2-3 months, then give quarterly quotas.

It’s axiomatic that deals pile up toward the end of a sales cycle. On average, nearly half of all deals close in the last week of each sales cycle—and the longer the cycle, the bigger the pileup. If you’re in sales, you’ve been there—scrambling around trying to close multiple deals all at once, which we know is not an efficient use of resources.

Rethinking Your Compensation Models

At one of my previous companies, Cornerstone OnDemand, we decided to try paying salespeople over the life of the customer contract, and found it worked better than the more standard practice of paying the entire commission across the year of the contract. Applying this principle to a three-year contract you might, for example, pay the salesperson 10 percent the first year, five percent the second year, and 2.5 percent the third year.

This type of compensation structure gives sales reps an incentive to stay close to customers and ensure that they are having good experiences with your products. Salespeople are also walking away from recurring commissions if they leave. You are putting golden handcuffs on your sales force and aligning your company with customer success.

However, remember that time is a deal killer. The buyer might change departments or leave the company, the budget could go away, or a competitor could slip in and steal the deal. At my first company, an economic downturn froze budgets at one of our larger prospects, and one of our $500,000 deals vanished. A shorter time frame incentivizes salespeople to get deals off the table quickly, and ultimately, close more of them.

Optimal Cycles are a Moving Target

Quota periods are often proportional to the size of your target customers. Annual quotas are common in most enterprise businesses (5,000-plus employees), while quarterly quotas typically work well with mid-market companies (500 to 5,000) and monthly quarters can be optimal for small (under 500) businesses.

If you try to close an enterprise deal on a quarterly cycle, you may alienate the customer, or end up with a sub-optimal deal, or a much smaller deal. By aligning quota structures with your customers’ natural technology-acquisition cycles—which can be measured in years in the enterprise, versus a few months or even weeks in smaller businesses—you can optimize your deals and outflank competitors.

A lot of companies make the mistake of sticking with annual quotas when they try to move down market, or keep short cycles when they try to move up market. In the marketing automation space, some of the key players such as Eloqua and Hubspot, started trying to sell to smaller businesses, without adjusting their annual sales quotas. Marketo swept in with shorter quota periods and quickly became a market leader.

Offsetting your sales cycles from the competition is another effective tactic. Your buyers are purchasing all kinds of products that are typically aligned to the same sales cycle. These buyers can only make so many decisions at once, and you can get more of their attention by using an off-cycle schedule.

This off-cycle effect can be particularly productive when your fourth-quarter or annual cycle ends in January instead of December. You are enabling your salespeople to tap into two different years’ budgets, and giving them an opportunity to make two year-end pushes in back-to-back months.

Don’t Torpedo Sales Management

Cycles that are too long or too short can also hamstring your sales management capabilities.

When you hire new sales reps, you need to spot the poor performers quickly so you can intervene. Annual sales cycles and quota periods can delay the identification of key weaknesses. A good ramp-up strategy includes careful choice of the right sales targets for onboarding new hires.

Shorter isn’t automatically better, however. Cycles that are too short can set potentially great people up for failure. When entering a new market (i.e., geography, industry, size of customer segment), you need to be patient with regard to initial closing expectations. Before you can set the proper quotas and sales cycles, you must build your sales model and get some reference accounts.

For optimal alignment, you need to study sales cycles closely and weigh sales management considerations against customer requirements to come up with the right balance for your business.

Small Alignments, Big Synergies

At this stage, the sales engine of your startup is now taking shape, and there are lots of things you can to do to turbocharge it. You need to build replicable sales processes that will multiply your successes and cultivate channel partners who will help you conquer new geographies and customer categories.

Meanwhile, some relatively minor adjustments can produce some very disproportionate results. If you improve your quota management through better alignment with your sales cycles and your customers’ buying cycles, you can create some truly great synergies that lead to big payoffs.

Sean Jacobsohn is a venture investor focusing on business cloud technologies at Norwest Venture Partners.