The Science Of Enterprise Software Sales — My Lessons From AppDynamics

One of my goals in writing about AppDynamics is to help and inspire the next generation of founders and entrepreneurs. In my last blog about AppDynamics journey from an idea nine years ago to our $3.7 Billion acquisition last month by Cisco, I talked about some of the key milestones that led to our success.

In the weeks since I posted my last blog, one of the common questions I got asked is about my experiences building a world-class enterprise sales organization for a software startup. Enterprise software sales often feel confusing and intimidating to people not familiar with it.

I started AppDynamics as an engineer-turned first-time entrepreneur. We launched the company out of stealth in 2010, and we missed our sales number the very first quarter we were in the market. We had a strong product with a lot of market demand, but we missed primarily because we didn’t understand much about enterprise software sales. I wanted to make sure that didn’t happen again. I’m very proud to say that we exceeded our sales numbers for each of the 22 quarters (that’s five and a half years) I was in my role as high-growth startup CEO after that. In those 22 quarters, we grew from $1M in annual sales bookings to about $300M. How did we do it?

Before I go further, the very first lesson to understand is that you simply can’t build a great enterprise sales machine without greatsalespeoplee. You have to invest significant time and energy in recruiting top sales talent across all levels. At AppDynamics, we were fortunate to attract very talented people — smart, driven and with high integrity — across our entire sales organization.

That investment in talent, together with our focus on “the science of enterprise sales,” were the keys to our long string of quarterly sales successes.

So what is this “science of enterprise sales?” I’ll attempt to demystify this by sharing what I learned at AppDynamics. I learned that that you could distill the science down to five concepts that you need to master.

#1 Your Path to $100 Million (or $1 Billion) Sales

A software “unicorn,” or a company with $1B+ valuation, is typically a company with $100M of revenue that is growing more than 40-50% a year. Now, there are many ways to get to that $100M. You can have 10,000 customers paying you $10K/year, or 1,000 customers paying you $100K/year, or 200 customers paying you $500K/year, etc. Successful businesses can be built in any number of ways.

What is critical is that you have a clear understanding and a reasonable model of yourpath. At $100M, how many customers will you have? How much will they be paying you? Are they going to be Enterprise or SMB? Are they going to be in a few specific verticals?

You have to make sure your product strategy, go-to-market strategy, customer success strategy, and fundraising strategy are all aligned towards this model. You will almost certainly have to evolve and adjust, but modeling your path to $100M of annual sales will be the foundation of everything else.

At AppDynamics, once we got close to $100M, we built a new model called “our path to $1B,” which became the foundation for our next phase.

#2 The Sales Capacity Model

In 2011, we were interviewing for VP of Sales for the Eastern US. We had just filled the position, but we had one last candidate, Dali Rajic, who had flown in from Chicago to interview so we didn’t want to cancel. I asked him, “How would you deliver targets consistently and never miss?” He said, “I manage to sales capacity, not to deals. When you manage to deals, you miss. If you have enough productive sales capacity and the right sales process, you can never miss.”

So what is this “productive sales capacity” mumbo jumbo? Productive sales capacity means how much sales all your trained sales reps combined can generate. The good news is that there are only four primary variables that determine if you have enough productive sales capacity in any given quarter.

(a) Number of “ramped” sales reps. In enterprise software sales, it takes time for a new sales person to ramp up and start producing. What counts is not how many sales reps you have but how many of them are ramped and productive.

(b) Productivity of each rep. Once a rep is ramped, how much new business do they typically produce? Your sales organization’s efficiency will be driven primarily by this variable. (Ideally, the productivity per rep should keep increasing for many years as your product, brand and processes mature.)

(c) Churn in ramped sales reps. Losing a productive sales rep will impact your capacity, so you have to correctly model how many you are likely to lose and work to minimize it.

(d) Time to ramp a newly hired sales rep. That can take anywhere from three to nine months (based on your product and market). You have to correctly model this number, and simultaneously work to reduce it.

If you understand and carefully track these four variables, at any point in time you can calculate your productive sales capacity.

Getting your assumptions right on these variables will be the key if you want to consistently hit your numbers. Your sales leadership’s #1 job should be to recruit, ramp and retain sales reps on time so that you always have the right amount of productive sales capacity. If you can predict sales, not by looking at deals in the pipeline, but by looking at your sales capacity, you have mastered this concept as a startup!

Even though we’d already filled that Eastern U.S. sales position, I was blown away by Dali’s structured approach and confidence so I asked to create a special position for him. And it turned out to be a great decision; today, Dali is our Chief Revenue Officer and runs worldwide sales for all of AppDynamics.

#3 The Demand Generation Model

Now that you have made sure you have enough productive sales capacity, you have to understand your demand generation model and ensure that your reps have enough deals to work on.

This model has three primary variables.

(a) Average deal size. What’s the typical dollar amount of a closed deal?

(b) Deal close rate. If you have 100 qualified sales opportunities, how many of them do you successfully close? Typically this is between 25-40% for most companies.

(c) Average sales cycle. How long does it normally take for a new, qualified sales opportunity to close?

Once you know these three numbers, you work backward from your sales goal. Say you have to do $1M of new business sales in a quarter and your average deal size is $100K. You need to close ten deals. To do that, you need 3-4x that number of qualified opportunities based on your opportunity conversion rate. And, if your sales cycle is four months, you need these 30-40 opportunities in your pipeline a few months before the quarter starts.

Opportunities can come from your sales people making outbound calls, from your marketing team doing online advertising, or a trade show, or dozens of other sources. As long as you are clear about who is accountable and responsible for these opportunities, and as long as you model and manage them to ensure your sales team has the right number of qualified sales opportunities on time, you will be in good shape.

#4 The Sales Process

So now you have enough productive sales capacity, and you have enough qualified sales opportunities for them to work on. How can you possibly miss your number?

You will still miss if you don’t have a rigorous sales process. There are three main objectives of having a rigorous sales process.

(a) Eliminating opportunities that are not well-qualified. Your sales people are very expensive and any time wasted will negatively impact the organization.

(b) Justifying the technology/business case for your solution. Businesses typically don’t pay hundreds of thousands (or millions) of dollars to a vendor unless they can justify a business case and ROI. You will need to help the customer to do that.

(c) Eliminating surprises. You need to know the stakeholders, influencers and decision makers, which competitors are vying for the business and many other variables. Without a rigorous process to do that, you will likely get surprised and miss your numbers.

I have had the privilege of working with perhaps the best master of a scientific enterprise software sales process — AppDynamics head of Europe, Jeremy Duggan. When I interviewed him back in 2011, I asked him, “How would you go and sell to say a large, conservative bank in Europe as a very small American startup?”

He smiled and said, “It’s all about having the right process, mate,” and described a two-phased process. The first involved systematically identifying the right individuals in the organization through a series of targeted meetings. The second phase was a rigorous process called “Business Value Assessment,” where we would work with prospects to understand their pain areas and quantify the business value of our software.

This process was so successful that even though we were a small startup, we began to acquire all of the large banks as multi-million dollar customers. Soon we rolled this process out to our entire global sales organization.

Keep in mind though that there is no magical process that every startup could just copy. You have to design the right process that works for your product, your market, and your competitive landscape, and that will also evolve as the size of your company grows. You need people who not only can execute a process but can also design the right process.

#5 The Growth Constraints

Towards the end of 2012, I was interviewing Joe Sexton for our President of worldwide field operations role. We were about to do $20M of sales bookings that year and planned to more than double to $50M the following year. Joe asked me, “Why can’t we triple sales instead?”

That raises a question you have to always ask as a high-growth startup: what are your growth constraints? They typically come down to only a few kinds:

(a) There isn’t enough demand for your product to achieve a higher growth rate

(b) You can’t compete effectively on your product/pricing, etc., to take the share of that demand you need to achieve a higher growth rate

(c) To grow any faster, you need more cash than you or your investors can, or are willing to, spend

(d) You have enough demand, enough competitive advantage, and enough cash. But you are constrained by how fast you can recruit, train and absorb new people.

You have to think constantly and carefully about each of these and to address them you may have to plan one-to-two years in advance — e.g., expanding into adjacent markets, seeding new international markets, raising the right amount of funds, etc.

(We did hire Joe, by the way, and we set the goal at $65M instead of $50M. We beat it and finished at close to $80M that year.)

Summary

These five concepts comprised our blueprint for the “science of enterprise sales” at AppDynamics. Numbers two, three and four are the operational foundation of a world-class sales machine, and you need world-class sales leaders to own and manage them. Numbers one and five are strategic bookends to that operational foundation.

If you are a software startup targeting large enterprises, start with two things in mind: there is more science than art to enterprise software sales, and you can’t leverage that science without the right talent.

Good luck to you in your entrepreneurial journey!

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[This post by Jyoti Bansal first appeared on LinkedIn, and has been reproduced by permission.]