Hiring your first salesperson can cause long-term damage to your business if it isn't ready to grow. Here are three pitfalls you should consider before increasing your sales staff.
There are at least three major pitfalls you should try to avoid when you bring a new salesperson into the business--particularly if you've never done it before
Every new business goes through certain critical transitions, and a particularly important one begins the day you decide you need to have another salesperson in addition to yourself. Bringing on clerical help or frontline people is a different story. You do it because you have to--because you simply can't handle the work on your own. But when you hire a salesperson, you're making a decision to grow, and how you go about it can have long-term consequences for you and your company.
My friends Bobby and Helene Stone reached that turning point about three years ago. They have a small computer-supplies company, Data-Link Associates, that they operate out of the basement of their home. I'd helped them get the business going--a process that Bo Burlingham chronicled in his July 1995 article, "How to Succeed in Business in Four Easy Steps."
By the middle of 1996, the business was on track to do $388,000 in sales for the year and had long since achieved critical mass--the point at which sales to the existing customer base generate enough cash to keep the business alive. So Bobby and Helene were no longer under pressure to add customers just to survive, but they weren't ready to stop growing. At one of our regular meetings, they asked me what it would take to bring in their 27-year-old son, Steven, as a full-time salesperson. I told them that, like most things in business, it would take good planning.
There are three major challenges you face when you hire a salesperson, particularly the first one. To begin with, you need to make sure that he or she is going to have enough time to succeed. How much time is enough varies from business to business, depending partly on the selling cycle. In my storage business, for example, it typically takes two years to close a sale. In other businesses, the selling period can be just a few weeks.
But even in businesses with a short cycle, you need to give new salespeople time to adjust to the culture, learn the products, develop a sales base, and so on. You can't expect them to start making sales--and I mean good sales, with healthy gross margins--as soon as they walk through the door. In fact, it's generally wise to assume that new salespeople won't make any sales during the first year. Why? Because you won't be able to judge their performance objectively if you're counting on their sales to make ends meet.
So I advised Bobby and Helene to put off hiring Steven until they had accumulated enough cash to pay his salary for a full year. Even then, I said, they shouldn't bring him on unless they were projecting the same volume of sales in the next 12 months--without any contribution from Steven--as they had in the previous 12.
My advice was, I admit, very conservative. I wanted Bobby and Helene to have a big cushion. I knew they'd have trouble handling the stress if they ran low on cash. So we agreed on some goals that would pretty much ensure their survival even if everything went wrong after Steven came on board.
As it turned out, they hit the goals by the end of the year, which brought them to the second challenge: giving Steven the right kind of training.
When you hire a salesperson, you're making an investment, and you have a right to expect a return on the investment in a reasonable amount of time. Let's say the person costs you $45,000 in salary and benefits, plus another $5,000 for other expenses (telephone, travel, whatever). Suppose also that your average gross margin is 40%. The salesperson would have to bring in $125,000 in sales at that margin ($125,000 x 40% = $50,000) just to cover what you've spent on him or her in the first year.
That's a tough concept for many people to grasp. Most companies don't even try to teach it. But you'll have continual problems with your salespeople if they don't understand how the business works and what you're counting on them to contribute. They'll make bad sales. They won't follow the rules. They'll constantly complain about being unappreciated and underpaid because they don't know what's really going on.
Education is the only way around those problems. You need to change the way your salespeople think. You need a process that teaches them the business while they go about their jobs.
Bobby and Helene used the same process with Steven that I'd used with Bobby. They came up with a plan, gave Steven goals for gross margins as well as sales, and got him involved in tracking how he was doing. Having a little competition helped. Steven dug up Bobby's records from his first year and set out to do better. Meanwhile, he and Bobby competed to have the best sales and gross margins each month, with Helene acting as referee.
It took time for Steven to learn. He finished 1997, his first year, with sales well ahead of what Bobby's were in his first year, but with lower gross margins. Although he'd covered his salary, the company still wasn't breaking even on its investment. So we went back and focused on the gross-margin issue, and gradually Steven caught on. By August it was clear that 1998 was going to be a blowout year for him in terms of both sales and gross margins.
Which brought us to the third major challenge: keeping him focused and motivated.
In the fall, Bobby, Helene, and Steven said they wanted to meet with me. They'd come up with a new compensation scheme for next year. Their notion was to motivate Steven by giving him an incentive to exceed the numbers in the plan. He would receive a monthly salary, for which he'd be expected to hit the agreed-on targets. In addition he'd get a commission on any sales he made above the targets.
They asked me what I thought. I told them I thought it was a bad idea.
I don't like commissions. OK, I admit that I'm sometimes forced to pay them to new salespeople, but eventually, I move the best ones to straight salary. Why? Because with a salary, salespeople work as members of a team. When you put them on commission, you're giving them an incentive to follow individual agendas.
That's what I feared would happen with Steven. Let's say his monthly target was $20,000 in sales. How would he feel if he got to $18,000 with three days left, and Bobby and Helene needed his help to fill mail orders? Or what if, at the end of the month, Steven found himself with a choice between servicing a high-margin account or going after additional low-margin sales? The first might be more important to the company, but the second would be better for him.
Commissions create divisions in a company, and that plan was bound to drive a wedge between Steven and his parents. I asked them, wasn't it better to pay him a salary, adjusted annually to reflect all his contributions to the company? They could give him a bonus if he did something extraordinary, but shouldn't everyone be rewarded for doing what's best for the company as a whole? They thought about it and agreed.
So here we are, seven years after we began working together, and Bobby and Helene are going strong. They've made it through the start-up; they've passed critical mass; they've brought in another salesperson. The company will finish this year with total sales of $725,000, up from $162,300 in 1992. The average gross margin is 38%.
There's just one problem. Bobby and Helene are running out of room in their house. It's already very tight with three full-time people and part-time clerical help, not to mention all the computer supplies they keep on hand.
So sometime soon they'll face their next big transition: moving the business to a new location. Can they handle the change? Will they still love their jobs when they have to commute to work? Will they be able to maintain their gross margins? Stay tuned.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc. 100 company and a three-time Inc. 500 company. This column was coauthored by Bo Burlingham.