#78- The causality dilemma in sales
The chicken or egg problem - what comes first in sales?
A couple of weeks ago, a founder from one of our portfolio companies asked us "How do we plan for growth? Do we get more leads and then hire reps, or do we hire reps and then look for leads?" It's a classic debate, should we focus on building the pipeline or hiring the reps? Some say a strong pipeline will attract top sales reps, others say the right reps will drive pipeline growth.
In my experience, I think having the right reps is key. Without experienced and skilled salespeople, it's unlikely that a pipeline will be built and nurtured effectively. It's like trying to make a TikTok without a smartphone or internet, you need the right tools to make it happen.
I talked to a founder who has over 20 years of IT and software sales experience and she said that the number of opportunities in a software company's pipeline is almost always in direct correlation with the number of reps on the team. The ratio tends to be around 10-15 opportunities per rep, and the primary way to increase that number is not through more marketing, but by hiring more reps. The higher the ACV of the company, the lower will be your opportunities per rep, and vice versa. The table below may provide more clarity:
The pipeline is more of a reflection of your company's sales capacity, rather than a measure of how well your marketing efforts are creating new opportunities. It's more of a trailing indicator, rather than a leading one. And the reason is that reps and managers tend to base their acceptance of opportunities on their capacity to handle them. This is partly due to the common expectation of carrying a 3-5x pipeline coverage, where if a rep is not carrying enough pipeline, they may be pressured to accept more opportunities, lowering their acceptance criteria. On the other hand, if a rep is carrying more opportunities than their capacity and their manager notices, they may be asked to relinquish some opportunities or have their territory split with a new hire. This dynamic causes reps to be selective in the opportunities they accept, only taking on the best ones and rejecting others that they may have accepted in a different situation.
In practical terms, unless your sales process is highly structured with strict definitions and minimal discretion, the number of opportunities in your pipeline will be closely tied to the number of reps on your team. It's going to be determined by a constant factor that is multiplied by the number of reps.
From a mathematical perspective, if your company is operating efficiently, you should have a financial model and corresponding funnel model in place. This can help you estimate the number of SQLs and the marketing budget needed to achieve your revenue targets. In other words, the pipeline generated is not necessarily a reflection of market demand, but rather a result of the financial and demand generation models. Rarely do you get the pipeline you thought you deserve, you get the pipeline you work hard and plan for. So, when it comes to building a sales pipeline, it's important to remember that having the right reps in place is crucial for success.