Sales people are really good about selling themselves, but generally not so great at actually selling the thing you are hiring them to sell.

Right, which is why you let them go if they don't hit quota. What they do is the most measurable part of the acquisition funnel. Laying off a large group of them speaks to financial issues/improper planning vs. just regular weeding out if poor performers.

Quotas are fine for an enterprise with a decades old sales process that has data to measure. SurveyMonkey was entering a new market and growing the sales force quickly and before they even knew what a reasonable quota was.

You could say that's bad planning, you could also say it's throwing spaghetti at the wall to see which sales person sticks. Data gathering, if you will.

That doesn't work when you're setting targets for very aggressive growth. A much higher % of salespeople won't hit their quotas, and not because of bad performance, but usually because of bad (aggressive) planning.

Letting those many people go would mean spending too much money on replacements, that probably still won't sell their quotas.

in the essence, you market analysis (value generated to customer, willingness to pay, potential market size is wrong.

As you said, this looks like a business model failure, not a sales failure.

If they layoffs are largely sales, I'll bet the cost of acquisition was getting out of control. I've found in practice it certainly can be hard to keep an eye on LTV (the long game), since sales teams live and die for month-over-month results. To support a people-heavy sales process, you need to have decent headroom in your margins, and they might not have had a lot of success getting people from the $25 to the $85 price point.

That's a big assumption. LTV modeling and controlling Cost of Acquisition (which includes both salary/commission and sale rate) is hard.

As a former salesperson and manager...

It’s not so simple when you sell a product with recurring revenue. When you sell something like a computer, you get a chunk of revenue right away, you make margin on that, and you pay your salesperson out of the margin. You can work out quotas based on the salesperson’s base salary and overheads. That’s a very simple model, and nearly everybody understands it well enough to know when a salesperson is profitable and when they’re not.

But when a product has recurring revenue, like seat licenses, you have to model the revenue and mach it up to the compensation. You could tell the salesperson that they get commission when you get revenue, in which case an enterprise sale will pay very little today, put provide an annuity over a long period of time.

But salespeople hate that. The thing they control, the sale, happens immediately, but the things they don’t control, like whether you lay them off, whether the customer decides to switch providers, &c. happen over time and are much more likely to cut their income than to boost it.

You generally have to be a very mature company with a very well-understood business model to structure salesperson’s income over the long term.

Most growth companies are fraught with risks. Thus, salespeople want a chunk of their money when they make the sale. And thus, you have to model the net present value of the sale and structure the salesperson’s compensation accordingly.

Now you are taking on some of that risk. And the faster you want to grow, the more salespeople you need to hire, and the more of that risk you need to shoulder. Basically, you’re buying future revenue with cash right now. If the revenue doesn’t materialize, you’re out of pocket,and you need to have fewer salespeople.

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p.s. I’m leaving out the REAL reason why many growth companies lay salespeople off when growth stalls. I explained it above in terms of the value of a sale from a revenue basis. But for most growth companies, the value of a sale is in how it boosts the perception that the company is in hyper-groth mode, which leads to higher valuations, which leads to founders and investors making mad crazy bank.

Under such circumstances, the cost of sales can exceed the net present value of the expected revenue from the sale, but companies will merrily dump investment funds into the sales force to keep the company growing at a rate that justifies more investment funds, and maybe get a round where they can take money off the table or go public and make the investors rich.

If the company is “buying growth” with its sales force, and growth stalls, you have to get rid of sales very quickly, because even when they’re making sales, they aren’t paying for themselves. And when they aren’t making sales, they’re dragging the company deep into the hole.

The interesting thing about this scenario (“buying growth,” as opposed to “buying revenue” described above) is how it affects employees whose equity is locked into the long term. Generally, they shoulder all the risk of this tactic not working, while investors reap all the rewards when it works and they take money out early.

This was a very thorough and helpful explanation. I'm intimately familiar with the marketing side of the equation in SaaS businesses, investing in future revenue, etc., but less so on the sales side. Based on this explanation it actually seems like there are quite a lot of similarities.

The original question I had was more around the poor performance vs. poor planning aspect, but it looks like there's another variation on option two which is "intentional (if perhaps overly optimistic) planning."

I'm curious for more of the salesperson's perspective on this. Do most sales people and sales managers accepting these roles have much sense of their targets being overly aggressive? How do those hiring conversations typically go around quota and what is realistic?