SurveyMonkey to Lay Off 100 and Retool Business Product

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.

(Disclaimer: I work there :)

Disclaimer: I used to work there.