Commercial planning survival guide: Part 3 - How to close the gap
Commercial planning survival guide: Part 3 - How to close the gap
And how to look good in front of Finance while doing it
Whether we like it or not, it’s planning season!
That’s why I’m writing a 3-part series on how to not only survive commercial planning, but how to make a better revenue plan while we’re at it.
Make sure you’re subscribed to not miss the series:
Part 3: Closing the gap (this post)
Ok, you have figured out the simple bits of building a plan you can hit for next year.
You followed all my wonderful instructions in part 1 and part 2 (and left a like and a comment because it was just so incredibly useful).
But now we will go on to the interesting and f***ing difficult part:
You found what is the pain of every planning process: The Gap.
This is what people literally get into physical fights over.
This is what will very likely get someone fired in 9-12 months from today.
This is what may cause your company to wind down - if you get it wrong.
I am not kidding. I have seen all of the above.
Something tells me that you have too.
The hidden assumptions behind the gap
Every financial plan I’ve ever looked at had a tab called assumptions.
It’s where Finance spends a lot of time tweaking the assumptions around the plan to get to the revenue result that they want to achieve.
It’s often “innocent” changes:
Move winrates from 10% - 20%
Cut the average sales cycle by 3 days
Raise ACV by 5%
But what they are doing is not “tweaking assumptions.”
What they are really doing is changing some numbers to get Cell “AC39” in the overview sheet to return “25.000.000 EUR”
This is where the trouble starts.
And I don’t blame them.
They get a task to find a path from A to B, given the cash they have available.
In 100% of cases, they will find that path using a spreadsheet.
And when that is done, they in fact completed their task successfully.
And the reason they will end up tweaking all those innocent numbers is simple: all of those tweaks come “for free” (or so they think).
No need to pay another sales rep. No need to buy more ads from Google.
You only need to “be tough” on the commercial team to attempt to execute it.
But not only might those assumptions be unfounded, they are usually also hidden in some spreadsheet that commercial might not even have access to.
And what’s worse, many times, even the finance folks won’t even know how much money is leveraged on each assumption…
In reality, each of those assumptions needs to be assigned a workstream to attempt to achieve that.
Does the top-down plan involve increasing CVR by 5%? That would mean improving the sales process, training, or product features.
Are we reducing the average sales cycle by 5 days? That might mean we need to implement better sales enablement tools or improve lead qualification.
Increasing ACV by $10k? We’ll need to move upmarket or greatly improve the product.
Let’s be clear: In 95% of planning cases, the tweaking of assumptions is causing this massive pain.
So when you discuss a gap - this is the real reason.
And it’s not that every one of these assumptions are impossible to accomplish. But they all come with a cost (in either time or money).
This is where we need to step up and plan for those actions, and come back to finance with specific budget asks to address them.
Now that you’ve figured out where the gap is coming from, let’s talk about what you need to consider in your plan to close that gap.
We really only have two options - and very little time
The only way to close a gap is to increase quantity or quality in the funnel (or realistically a combination of both).
On the quantity side, we’re talking about more input. However, you measure them. Be it leads, MQLs, Opps, or Sign-ups. More input usually means more cost:
More reps, more ads, more content, more stuff.
Or you go more quality.
This usually means fewer inputs but better ones (saving some costs) or better throughput (more revenue).
But achieving those improvements doesn’t come for free either - despite what finance thinks.
It might be soft-cost of folks that you already are paying, but who now need to do something else.
But the bigger issue with all improvements is that they are snowflakes.
While you can buy more ads or more reps and expect kind of a similar additional outcome.
Improvements are rarely cookie-cutter executions.
Which means all of them carry a ton of risk.
Yes, higher ACV by rolling this new product.
But will it really work?
There is a TON more risk attached to improvements.
So this could result in time & money spent WITHOUT any impact.
And since most gaps are filled with those improvements/assumptions...
I guess you can see where this is going.
Don’t forget the compound
Fooling around with assumptions to close the gap is not the whole problem.
It all becomes a bit more crazy when you realize that very few people grasp the compounding effect.
Let's say you create 4 “innocent” improvements:
Decrease CPL by 15% but invest the same budget
Improve MQL to SQL CVR by 5%-points (15% to 20%)
Get ACV up 10%
Get winrate from 12% to 15%
This innocent list is really an improvement of:
17.5% + 33% + 10% + 25% = 85.5%
Ok, this now looks really massive. 85% improvement across the funnel. Wow.
But you are still forgetting the compound, really these assumptions result in:
1.175 * 1.3333 * 1.1 * 1.25 - 1 = 115%
In the example above, in finance’s mind, all of these improvements come with 0 cost.
And you have just more than doubled the output of the funnel (yes, 115% is really a 2.15x).
Same cost, +2x’ed outcome. Easy peasy hitting 25M in Cell “AC39”
How to navigate the gap: Top-Down
We all know finance’s real boss is the board. And in many cases, you will have a lot of investors sitting there.
What they want to know and see are investor metrics.
Things like CAC Payback, CAC:LTV, Magic number, etc.
And this is what I would use to work on pushing back in a top-down fashion.
Have your Finance team calculate all those investor metrics for the proposed plan and have them plot it out over time (or you do it for them).
And they will say yes, because they know the investors will ask for it too.
So when I, as a CRO, spotted a crazy improvement in either of those metrics, this would be an easy first way to push back in general.
“Wow, this plan has us going from CAC Payback of 17 to 11 in just a few months”
“Jeez, you really think we will be able to 2x out CAC:LTV?”
Etc.
This works as an overall gut check but is also a great basis to start the negotiation process of pushing back. Taking out or tuning down some of those assumptions.
How to navigate the gap: Bottom-up
What will be a bit closer to most of us is looking at the plan in a bottom-up fashion.
Meaning, really going through all the assumptions with the team and working through, what exactly would need to happen by whom in order to reasonably pull off those assumptions.
This will essentially be a rough version of a “project plan” for the coming year. It will be super flawed, but it will allow you and the team to actually think through and see some issues.
At the end of this, you can go back to finance and ask some questions like:
So how much revenue lift do you expect from this assumption? (keep in mind they will forget about the compound)
How much budget for us to execute this have you planned for (usually: none)
Well, we would need to do X, Y, and Z, which will take us 3 months, and we expect to see the impact in 6 months - earliest. Especially if there is no budget behind it at all.
This is then a reasonable way to push back on that assumption.
Don’t be mister/misses negative
Ultimately, finance isn’t setting those expectations because they want to. It’s because they need to find a path through a very, very narrow corridor of options.
So instead of only going to them and telling them how none of this is gonna work, go to them with an alternative plan.
A set of assumptions/improvements that you and the team can get behind. But that might not get you all the way to fill the gap.
If you do it like that you actually might have a shot.
On the podcast this week
