CEO Friday: Spin Your Flywheel

When giving the same pitch over and over, you quickly settle into a specific way of delivering a line, and then say it so often it becomes second nature. Most conversations I have with investors or the press really just involve stringing together a series of well-rehearsed snippets that address pretty much any question I could ever be asked. One of those snippets starts with:

“Now, I don’t read many ‘pop business books’ (air quotes), but there’s one I really swear by called the Innovator’s Dilemma.”

That’s been part of my pitch for a long while now. It’s even on tape. So guess how pleased I was to learn who else swears by it? None other than the late great Steve Jobs.

However, never one to pass up an opportunity to disagree with Mr. Jobs, I should mention that I took away a different lesson. Granted, I haven’t read his biography so I’m going off of other reports. But I’ve heard his opinion summarized as:

“Over-focus on profit is the problem, and the solution is to focus on the product.”

Granted, that’s watered down to a nice-sounding but highly ambiguous statement, so I don’t really know what he meant by that in practice (or if he’d have even agreed with that summary). But despite what he may or may not of have thought, I’d say the pursuit of profit isn’t itself the problem. Profit isn’t some happy accident that can only be pursued out of the corner of your eye. Rather, it’s how you pursue that profit that causes the dilemma.

Specifically, if your profit depends on continuously abandoning your core to move up market, you’ll eventually hit the top and be incapable of going back down. This is the inevitable fate of any (successful) organization with a direct salesforce that:

• Is compensated through commissions, and
• Sells to leads gathered from outside the core userbase.

Indeed, if your salespeople are encouraged to always go out and get the “next biggest deal” — and are given free reign to get it from anywhere — how else could they possibly accomplish that goal without abandoning the core market? If there aren’t an equal number of people pushing the product down into smaller markets, naturally you’re going to find yourself drawn into inexorably bigger markets. An organization like this can’t help but use their current market position as a stepping stone to move somewhere else, which as the book explains, is a fantastic rocket ride up to the top followed by disruption from below — typically by another rocket using the same strategy, and then another after that. It seems the cycle of life.

Mr. Jobs broke the cycle by (apparently) decoupling product focus from sales. And luckily he’s a genius with the intuitive vision to predict where the money was, so it paid off.

But I think that’s a risky gamble that could have gone the other way. Apple bet it all on black (or brushed aluminum, in this case), and it paid off handsomely. But don’t forget that it didn’t pay off so well a couple decades back when he tried the exact same strategy: Apple was only able to have this stunning rebound because of its previous tragic decline.

So I feel there’s got to be some other way to break the cycle — some way that doesn’t require going “all in” on the gut instincts of a genius at the helm. Some way to build an organization based on repeatable, customer-focused development that can be accomplished by mere mortals instead of an endless game of “double or nothing” played by the gods.

If product isn’t the answer, and sales isn’t the problem, then where else to look?  And that’s where I lay the blame at something surprisingly benign: the lead source.

Nobody talks much about lead sources. “Leads” — the people at which you point your salesforce — are just assumed to come from the same places other companies get them. SEM and SEO to landing pages, going to conferences and gathering business cards, channel partners, affiliate programs, buying contact lists from the many, many people who sell them, etc. And you might argue that all these leads come from such a diverse array of sources that you’re naturally inoculated against myopia. But all those sources have one thing in common: none of those people actually use your product.

So if your salespeople are always talking with people who don’t use your product, and are always incentivized to start with the biggest first, then they can’t help but pull you away from the needs of all the smaller people who already do use your product.

(This is aggravated further by outside sales typically talking with the “decision maker” — a person whose likelihood of actually using the product they’re buying decreases as the company size increases.)

All of this inexorably shifts your customerbase’s center of gravity up market, day after day, such that even if you’re in the most customer-focused organization, you can’t help but realize “our customers are getting bigger, that’s where our resources should go”.  This inevitably de-prioritizes the initial customers who got you where you are, in favor of the bigger customers that you’re always trying to get. It’s a vicious cycle; it’s a dilemma.

But what if you could somehow keep your center of gravity stable? What if instead of building new features, you just kept your organization focused on improving the features you already have, for the same people who already use them?  It means you have a lot fewer features.  And require fewer engineers.  And have less to support, all of which is higher quality.  Wouldn’t it be great if you could do this, and still achieve your growth and profit goals?

There are some obvious ways to try. One way is to just not take on larger customers — maintain a laser focus in a particular customer segment, always resisting the urge to move upmarket. That’s one way. But I wouldn’t recommend it — in any market, upmarket is where the money’s at. The margins are thicker, the opportunities bigger, the names sexier, etc. Any company that has no interest in going up market is one that intends to be overrun (or at best, acquired) by someone who does.

Another obvious way to do it is to have two teams: one focused on moving up, and another on moving down, such that you always balance out your growth. And that might work, if they’re very carefully balanced.  But that seems impractical to manage, so again, I wouldn’t recommend it.

A third option, and the one I would recommend, is to focus your sales effort on people who already use the product.  This way you avoid shifting the center of balance and create an organization focused on increasing engagement amongst existing users. This approach addresses the core deficiency of the lead source itself: the fact that new leads don’t use the product.

Now you could argue “Of course they don’t use the product; if they did then sales wouldn’t need to talk with them.” If the only way to use your product is to buy it, then that’s quite right! But as we know, that needn’t be the case. The internet is full of services that offer huge value at absolutely no cost. Services that have millions of “users” who aren’t yet “customers”. People who already use the product, even if they haven’t yet bought it.

What I’m describing of course is the classic “freemium” model: give away basic functionality for free such that some users will decide to upgrade. This isn’t terribly new.

But what is new is applying the freemium model in a space where the “deal size” is big enough to enable a sales team to make postive-ROI sales (where the cost of the sale is exceeded by its revenue). This isn’t Farmville — no salesperson is going to earn a commission by convincing you to buy a purple cow. And this isn’t a consumer product that encourages you to upgrade to a $10/mo plan. This is an enterprise product, with customers having hundreds or thousands or more employees. And using the existing users within an organization to serve as leads into converting the organization overall.

Ultimately, the primary purpose of sales is to drive up market. And it’s a slow, steady march taking on new customer segments as you firm up support in existing segments.  But this process is only destabilizing if doing so distracts from the core userbase. If the sales leads are instead drawn from the core userbase, however, then the only way to increase leads (and thus increase sales) is to also grow the core userbase from which the leads are drawn.  So long as your leads some from your active userbase, then you simply can’t lose touch with it.  This makes the entire organization — from the most senior salesperson selling the largest deal, to the most junior support person talking with individual freemium users — play for the same team, aligned toward the same goals.

In a sense, the whole company is spinning up the same flywheel.  It doesn’t matter who pushes, where, or how hard: the bottom-up adoption curve allows everyone to contribute to top-line sales success, no matter where they are in the organization.

This is how you solve the innovators dilemma, without sacrificing the move up market, and without losing touch with the core.

At the very least, this is the strategy that Expensify is using, and it seems to be working pretty well for us.

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