Sales-Product Tension: Small Companies Scale and Big Companies Fail

Steve Denning has a great short article in Forbes, referencing Peggy Noonan on what Steve Jobs had to say about why big companies fail. The article is worth reading - actually, the entire Isaacson biography of Jobs is a great read - but here is the money quote:

The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesman, because they’re the ones who can move the needle on revenues.

This tension between Product and Sales has recurred in every company I have ever seen, been involved with, worked for, advised, or just helped friends manage.

With smaller companies, as you struggle to grow and scale your business, you need every dollar of revenue you can get. When a good revenue deal comes along, one that can goose your numbers and put needed cash in the company's pockets, it is extremely tempting to take it.

Of course, that one deal doesn't quite fit your target market, and they have "just a few" special requirements. This leaves you pondering whether the deal actually makes sense.

If you are in a software or SaaS business, it is even more tempting. Your gross margins are so high, often 70-80%, that what does losing a few percentage points really matter?

The problems are several:

1. The customer demands always are more than "just a few".
2. The "special requirements" inevitably mean labour time: support staff, professional services, core product developers. Your margins are high precisely because you don't use expensive people or raw materials to deliver each unit of product. Throw in people for a custom delivery, and it will be a lot worse than a few percentage points off your margins for this deal. You may lose money on it.
3. Your people begin to feel whiplash as they first focus here, then there, first on requirements for the market, then suddenly "all hands on deck" to meet this one customer's needs.
4. Your customer almost never will be satisfied. When they ask for something that isn't "on the truck" and you deliver, they don't view you as product wizards; they view you as a custom solutions provider but with product-scale prices, rather than a product or online service provider.

Should you never take it? Of course not. There are two very clear circumstances under which you should take the deal:

1. If this is what it takes for the company to survive, it is make or break time, you (usually) are better taking it and living to fight another day. But always do so knowing from the beginning when and how you will exit the customer.
2. If the "special needs" of this customer actually fit with a general market, then all you are doing is accelerating product and market development you would have done anyways.

Short of these two, do not take it.

What I find fascinating about Jobs' view is that the same product-sales dichotomy that stunts small company growth, also causes big company decline.

Sure, the circumstances are different, and, more importantly, the smaller company is stunted by too much attention to an individual customer while the large company decline is caused by too little attention to the product, but at heart, success is about a company culture almost obsessively focused on delivering great products to the entire market.

In the first case, management pushes to do anything to get any sales deal done at any price; in the second, management pushes to increase margin and revenues through sales and accounting rather than great product.

In the end, great companies are defined by great products... which actually make the sale easier and the profits higher.