The Phantom Sales Forecast – Failing at Customer Validation

Startup CEO’s can’t delegate sales and expect it to happen. Customer Validation needs to have the CEO actively involved.

Here’s an example in a direct sales channel.

Customer Development Diagnostics over Lunch
A VC asked me to have lunch with the CEO of  a startup building cloud-based enterprise software. (Boy did I feel like Rip Van Winkle.) The board was getting nervous as the company was missing its revenue plan.

These lunches always start with the CEO looking like they had much better things to do. Before lunch even came the CEO ticked off the names of forty or so customers he talked to during the company’s first nine months and gave me a great dissertation on the day-in-the-life of his target customers and what their problems were. He went through his product feature by feature and matched them to the customer problems. He talked about how his business model would make money and how the prospects he talked to seem to agree with his assumptions.

It certainly sounded like he had done a great job of Customer Discovery.

Sales Process
Next, he took me through his sales process. They had five salespeople supported by two in marketing. (They had beta customers, using but not paying for the product.)

Over lunch the CEO told me he had stopped talking to customers since he had been tied up helping get the product out the door and his VP of Sales (a successful sales executive from a large company) had managed the sales process for the last six months. In fact, the few times he had asked to go out in the field the VP of Sales said, “Not yet, I don’t want to waste your time.”

Too Good to Be True
For the first time I started squirming in my seat. He said, “I insist on getting weekly status reports with forecasted deal size and probability of close. We have a great sales pipeline.” When I asked how close any of the deals on the forecast were to getting closed, he assured me the company’s two beta customers—well-known companies that would be marquee accounts if they closed—were imminent orders.

“How do you know this?” I asked. “Have you heard it personally from the customers?”

Now it was his turn to squirm a bit. “No, not exactly,” he replied, “but our VP of Sales assures me we will have a purchase order in the next few weeks or so.”

I put my fork down. Very few large companies write big checks to unknown startups without at least meeting the CEO. When I asked if he could draw the sales road map for these two accounts that were about to close, he admitted he didn’t know any of the details, given it was all in the VP of Sales’ head. Since we were running out of time, I said, “Your sales pipeline sounds great. In fact, it sounds too good to be true. If you really do close any of these accounts, my hat is off to you and your sales team. If, as I suspect they don’t close, do me a favor.”

“What’s that?” He asked, looking irritated.

“You need to pick up the phone and call the top five accounts on your sales pipeline. Ask them this question: if you gave them your product today for free, are they prepared to install and use it across their department and company? If the answer is no, you have absolutely no customers on your forecast who will be prepared to buy from you in the next six months.”

He smiled and stuck me with the tab for lunch. I didn’t expect to hear from him ever again.

What If the Price Were Zero?
Less than two weeks later, I got a call and was surprised to hear the agitated voice of the CEO. “Steve, our brand-name account, the one we have been working on for the last eight months, told us they weren’t going to buy the product this year. They just didn’t see the urgency.” Listening, I got the rest of the story.

“When my VP of Sales told me that,” he said, “I got on the phone and spoke to the account personally. I asked them your question—would they deploy the product in their department or company if the price were zero? I’m still stunned by the answer. They said the product wasn’t mission critical enough for their company to justify the disruption.”

“Wow, that’s not good,” I said, trying to sound sympathetic.

“It only gets worse,” he said. “Since I was hearing this from one of the accounts my VP of Sales thought was going to close, I insisted we jointly call our other ‘imminent’ account. It’s the same story as the first. Then I called the next three down the list and got essentially the same story. They all think our product is ‘interesting,’ but no one is ready to put serious money down now. I’m beginning to suspect our entire forecast is not real. What am I going to tell my board?”

My not-so-difficult advice was that he was going to have to tell his board exactly what was going on. But before he did, he needed to understand the sales situation in its entirety, and then come up with a plan for fixing it. Then he was going to present both the problem and suggested fix to his board. (You never want a board to have to tell you how to run your company. When that happens, it’s time to update your resume.)

The Phantom Sales Forecast
The implications of a phantom sales forecast meant something fundamental was broken. In talking to each of his salespeople, he discovered the sales team had no standardized sales process. Each was calling on different levels of an account and trying whatever seemed to work best. This was just a symptom of something deeper –  while they thought they understood the target customer their initial hypotheses from Customer Discovery were wrong. But no one had told the CEO.

He realized the company was going to have to start from scratch, Pivot back to Customer Discovery and find out how to develop a sales road map. He presented his plan to the board, fired the VP of Sales and kept his best salesperson and the marketing VP. Then he went home, kissed his family goodbye, and went out to the field to discover what would make a customer buy. His board wished him luck and started the clock ticking on his remaining tenure. He had six months to get and close customers.

Customer Validation
The CEO had discovered what happens when you do a good job on Customer Discovery but get too “busy” for to personally get involved in Customer Validation. It wasn’t that he didn’t need a VP of Sales, but he had entirely outsourced the Validation step to him. Until a scalable and repeatable business model is found the CEO needs to be intimately involved in the sales process.

Lessons Learned

  • Ownership of Customer Validation belongs to the CEO.
  • A VP of Sales can assist but the CEO needs to answer:
  • Do I understand the sales process in detail?
  • Is the sales process repeatable?
  • Can I prove it’s repeatable? (Proof are multiple full-price orders in sufficient quantity.)
  • Can we get these orders with the current product and release spec?
  • Do we have a workable sales and distribution channel?
  • Am I confident we can scale a profitable business?

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

16 Responses

  1. One more lesson learned.

    Pivot Discovery:

    If the answer to “what if it were free?” is crickets, you have found your moment to Pivot.

    Great article.

  2. Excellent article, once again.
    Thanks,
    Michalis

  3. The ‘what if we offered this for free’ question is a great metric, and I’ve used it a bunch of times to gauge customer interest. I think that, and the ‘would you buy this if we charged $1mm for it’ (response: ‘no, but I’d pay $10k/mo’) question are two of the most useful ways to figure out how much value your current offering has, and what needs to happen to make it worth paying for. I certainly wish we had asked the first question before we ever started development of our product – it would have saved us a lot of iterations.

  4. Steve a good reminder article!
    At AboutOne we have a person assigned to customer feedback and validation full time – but this is a good reminder to revisit some of our earlier customers, I love the reply from Andrew Holt with the question ideas too. We did this with our market validation and alpha release, but we really should re-do it with the current beta. Thank you Andrew for your reply!

  5. Article is 100% dead on

  6. [...] lose your job. That’s the advice for start-up CEOs from Steve Blank, as he relays a must-read cautionary tale of a chief executive who entrusted too much faith in his VP of Sales and almost lost his job [...]

  7. Now this is worth reading. I couldn’t agree more with this article. I would go further in that great CEOs also need to be actually CLOSING themselves (at least large contracts), not just be involved with sales. How else will they really understand their biz better. As a CEO of two successful startups myself, the sales closing process also taught me how to run the company better operationally.

  8. There may be a second, hidden lesson in here, too.

    If, as CEO, your assumptions and hypotheses are confirmed through initial customer discovery research, don’t fall into a _confirmation bias_ trap. Keep the feedback loop closed even as your march through customer validation and into the execution phase. And, as you point out, you don’t truly have a closed loop if you aren’t participating …

    As an excited, focused, optimistic startup CEO talking to potential customers, it’s natural to be convinced that ideas are on target and thus the righteousness of the cause confirmed.

    In your experience, how common is this occurrence? Is this a critical failure point for startups to watch out for?

  9. Great post – read about this in your book this morning! Funny timing

  10. Excellent article… I hope I won’t make the same type of mistake one day.

  11. Love the insight – thanks.

  12. Excellent post and a great reminder that our perceptions (especially when not paying close attention) are not necessarity consistent with the real world.

  13. I’d love to hear the postscript… what happened 6 months later?

  14. great post and a great lesson for all! i’d love to hear the postscript too as to what happened 6 months later. no matter how good you think your vp is, the ceo must have a hand on the pulse especially in strategic accounts. i think you always have to be part of the cycle, especially the beginning and end AND be able to connect with the customer. as in football, sometimes you have to drop back and punt!

  15. [...] development, most everyone lacks the corresponding systematic process for customer discovery and validation. So all entrepreneurs should check out his blog – here – and read at least chapter 3: Customer [...]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 159,707 other followers