A formal Commercial Strategy is a necessary component to drive sustainable growth as a company scales up; it articulates the behaviors that customers’ Buyers and Approvers expect from the company’s commercial organization.
Relevance of Commercial Strategy
There is a common incongruity around commercial plans in fast-growth environments:
- The approach to sell to the first few customers to capture early revenue doesn’t have to be sophisticated; but, it has to completely evolve for a company to grow exponentially and sustainably.
- However, companies often scale up by just adding more headcount in sales reps and/or increasing marketing spend via digital marketing or content, while adding one or two layers of managers that aren’t directly responsible for revenue generation.
We don’t need a mathematical model to see that this only leads to a lower return on investment for every incremental dollar spent on commercialization.
1: Linear organizational scaling fallacy: This unsophisticated approach results in diminishing returns and risks a stalling revenue growth curve after early success. For simplicity, let us assume that every customer is equally easy to sell to in perpetuity (not actually true; see fallacy #2).
- Let’s assume that marketing spend is $0 throughout this example.
- Say, the company has 5 sales reps (likely to be top-class, self-starter reps as they took the risk of joining a fledgling company) during the early stage and that every one of them sold 10 deals of the same value in the first year and validated that the company has a market. The company is now able to find additional investors and more commercial investment, while it has a benchmark of 10 deals per commercial resource.
- Say, the company hires 5 additional sales reps and one sales manager to manage all 10 reps. Three things happen very often:
- even at the same compensation levels, the second group of 5 reps are likely less experienced, less proactive, and know the company’s offerings less (even after ramping up). Thus, they will likely sell less than 10 deals a year because the hiring rigor for the 2nd batch will be lower than the 1st cherry-picked batch
- the manager is likely not directly responsible for generating revenue, and
- as the number of reps goes up, the fast-paced hiring process results in higher attrition and thus less average productivity.
- So, what do we have in the new steady-state? We have 11 selling resources who are likely selling less than 100 deals in total, which means the company is now hitting significantly less than 10 deals per commercial resource. This illustration characterizes a linear scaling approach.
The takeaway: Scaling up linearly and tactically is not an effective commercial investment; growth will likely stall when all new investment is consumed.
2: Fallacy of shotgun selling: Vast majority of fast-growth companies are solving niche problems and have a niche set of customers that greatly appreciate the company’s offerings. Among those niche potential customers, early customers are usually ones that really feel the pain of the problem or have a high risk tolerance to try new solutions. Some other early customers are incentivized by favorable pricing. Apart from the ease of selling into them, they are likely to have little else in common and span across many customer groups.
As the company scales up, there are fewer and fewer of such easy customers. Beyond the early few, customers will become increasingly demanding as the company will be selling to prospects with very specific, but differing needs. If a company continues its early shotgun selling tactics, either the volume of sales will decrease for the same amount of commercial investment or margins will drop due to increasing cost to serve disparate customer groups.
The takeaway: Without a cohesive commercial strategy, the company’s unit economics will suffer beyond selling easily to early customers and the commercial model is unlikely to scale. A company’s commercial strategy has to become exponentially more sophisticated quite early to avoid a gradual decrease in return on commercial investment and eventual flattening of the growth curve.
What is Commercial Strategy?
Commercial Strategy is the second half of corporate strategy and it focuses on the customer, not internal dynamics. It dictates which decision drivers of Buyers and Approvers at customers in the Sweet Spot are most important and how the company plans to excel on those decision drivers. This articulation becomes the north star to corral all commercial resources around and channel all commercial investment into.
What are Decision Drivers? Decision Drivers are Buyers’ and Approvers’ criteria to translate the marketing and selling promises made by sellers into how well the seller can actually solve their problem after purchase. They are analogous to behaviors an interviewer would expect from an interview candidate to decide how well the candidate would eventually perform the job.
Note: Internal organizational structures, operational technology decisions, sales pipeline metrics, compensation decisions, etc. do not constitute a commercial strategy. All of these are very important operational components that support commercial strategy and such aspects can be fleshed out as part of Strategic Planning and Operationalization efforts.
Approach to Define Commercial Strategy
Similar to the approach to define Product Strategy, this approach is a gap assessment. As shown in the illustration below, the path is to understand pre-sale expectations (Decision Drivers) of Buyers and Approvers, assess the company’s strengths and weaknesses across those expectations, and prioritize the Decision Drivers that should be built into the company’s commercial DNA.
1: Develop Discipline to Focus on the Sweet Spot
Unless managed effectively, a commercial strategy, however perfect, can become shelf decoration. Arguably, this is one of the biggest commercial challenges in a fast-growth company as differing opinions on avenues for growth can become a major organizational distraction. It is imperative that the entire commercial organization consumes and embraces the company’s articulation of the Market Position, the Sweet Spot and the definition of the Customer. Senior executives on the commercial side have to stay aligned with the CEO and analytical leaders to embrace the company’s Market Position, Sweet Spot and Customer. This is absolutely critical because the following three aspects are predicated on this foundational adoption.
2: Understand Decision Drivers
Going back to one of our Sustainable Growth Philosophies, Systems Win. A scaling company should be preparing and planning all of its efforts to develop a commercial system that optimizes commercial investment. This means that the company has to get very analytical in identifying the Decision Drivers that are valued by Buyers and Approvers at potential customers in the Sweet Spot.
- Buyers care about overall value delivered to solve the problem and usually speak for Users.
- Approvers care most about the downside risk of the deal such as pricing / discounts, or overarching considerations that are beyond the purview of the Buyer.
Decision Drivers can be wide-ranging, and identification requires an objective and unbiased assessment. Following are examples of general themes that a company should work towards understanding:
- What are the Decision Drivers that the Buyer and Approver (independently) use as proxies during the first-time buying process to assess whether the company’s offerings would meet the needs of various stakeholders?
- How are these Decision Drivers different for follow-on buying decisions?
- How do Buyers and Approvers rank these Decision Drivers?
- Which of these Decision Drivers do the Buyer and Approver consider differentiators? i.e. Areas that could positively set a company ahead of the competition.
- Which of these Decision Drivers do the Buyer and Approver consider table-stakes? i.e. Areas that are unlikely to help win deals; but without which a company is unlikely to even be considered by the customer.
3: Evaluate strengths and weaknesses
After understanding the Buyer’s and Approver’s Decision Drivers, it is important to assess how well the company performs on each. This is the aforementioned gap analysis. The approach to gathering this information will include customer interviews and analysis of historical data. Key themes to evaluate are:
- How do Buyers and Approvers rate the company on each Decision Driver?
- Does the company perform well on top differentiators? If true, this implies that the company has a leg up against competitors when compared side-by-side.
- Does the company perform poorly on top table-stakes Decision Drivers? If true, this implies that the company is unlikely to even be considered by the customer.
The company has to lean heavily on its experienced, analytical players to develop these qualitative and quantitative assessments. An insightful or strategic maturity level Objective & Analytical Culture pays off under these situations, making high quality, trustable data and insights available.
4: Prioritize and Choose top decision drivers to form Commercial Strategy
Once the company can qualitatively and quantitatively articulate answers to themes in the three sections above, this is a simple, but a disciplined exercise of making tough choices. The company must prioritize the Decision Drivers that it has to excel on. These are areas that the company needs to improve on and strengths that it can capitalize on. Commercial Strategy is a strategic trade-off decision that articulates which buying Decision Drivers the company will focus on improving based on the time and resources available AND which drivers it will not focus on.
Conversely, individual or team-level decisions to focus on expectations that Buyers and Approvers do not value highly, while improvements on prioritized areas are pending, are organizational distractions away from the company’s commercial strategy. i.e. commercial strategy should drive all commercial planning and operations.
To conclude, a comprehensive Commercial Strategy is the intersection of expectations valued by customers to make buying decisions and those that are prioritized by the company; the entire commercial organization should be spectacularly good at these demands from Buyers and Approvers, without distractions.