The Most Common Growth Potholes & How to Avoid Them

Are you keen to scale your company? If so, Mark Roberge’s advice and insights will be invaluable for you. Mark is the Managing Director of Stage 2 Capital, a Senior Lecturer at Harvard Business School, and was formerly the Chief Revenue Officer at HubSpot. Additionally, he is the author of the bestselling book “The Sales Acceleration Formula”.

Mark sat down with Predictable Revenue to speak about the most common growth potholes, and provide some guidance on avoiding them. “I just look at so many different sales and marketing teams” explains Mark, “and there’s some pretty glaring potholes that I see almost all the time in growth. I want to share the top seven with you here today.”

GROWTH POTHOLE #1: Increasing Price Without A Sustainable Moat

This problem often befalls companies that are doing well and have what seems to be a good product-market fit. Typically, their board then applies pressure to raise their prices, and they do. While this may work initially, the company will likely face issues later. “The thing is, you are a much more attractive disruptive target for future entrants,” Mark states.

He argues that there are three lenses, which should be used when trying to determine optimal price. These are:

• Buyer ROI – How does the customer evaluate the return on investment for your product?
• Competition/ Substitutes – How much would it cost for the buyer to acquire similar value from an alternative solution?
• Unit Economics – At what price do you need to sell to make your unit economics work?

GROWTH POTHOLE #2: Confusing A Temporary Moat With A Sustainable Moat

As stated in the last point, companies shouldn’t increase prices until they have a sustainable moat. But just what is a sustainable moat? This is an area where even experienced businesspeople are often misinformed.

“When I ask an entrepreneur ‘what is your moat?’” explains Mark, “they often reference a feature in their product. And then I ask them ‘how long would it take the competition to copy it?’, and they say, ‘six months, at most’. So that’s not a sustainable moat.”

Indeed, many teams rely on features that are “copyable” to create a moat. However, these are only ever temporary moats.

To determine whether something is a sustainable moat, Mark has designed a test:

Sustainable Moat Test

Imagine five “rock star” engineers in Silicon Valley:
– Raise significant funds through Sequoia
– Copy your entire product
– Sell it to your market for half your price
Do new buyers still choose you?

If you’re still winning when competitors are offering consumers your entire product for half the price, then you have a sustainable moat.

“This is hard to do,” reflects Mark, “and you don’t have to do it. There are success stories out there where companies just outpaced their competition. But I think a lot of the best success stories, whether purposely or accidentally, ended up in a sustainable moat.”

It’s worth going into detail on the differences between sustainable and temporary moats.

As can be seen from the table above, competitors can replicate everything in the “temporary moats” column with relative ease. However, sustainable moats are elements that remain unique to the respective companies. Given how important these are, it is clearly beneficial to expound on each one.

NETWORK EFFECTS

Firstly, network effect refers to the dynamic whereby each additional person who joins a community makes it more valuable to the existing members.

Illustrating this, Mark uses the example of the telephone. “The first phone sucked,” explains Mark, “no one else had a phone!” But then as people gradually adopted them, the value of the phone network increased.

BRAND

The next sustainable moat is a “brand”. The modern equivalent of this is category creation. For instance, HubSpot was frequently faced with imitators. However, even though the competition offered the same product, HubSpot continued to win because they were the ones who created the “inbound marketing” category. “If you’re going to do inbound marketing, you’ve got to do it with HubSpot,” adds Mark.

ECONOMIES OF SCALE

“Economies of scale just means that we have so much volume that it’s advantageous,” explains Mark. This can be seen in cloud infrastructure companies such as AWS and Snowflake. Similarly, AI can arguably be considered an ‘economy of scale’ sustainable moat. 

“I believe that the AI algorithm that has processed a billion transactions is naturally going to be better than an AI algorithm that’s processed a hundred thousand”, posits Mark. “That creates a sustainable moat that we will win even when the competition is underpricing us.”

SWITCHING COSTS

Switching costs refers to the financial, operational, or any other barriers that prevent consumers opting for a competitor’s alternative product. “I don’t love this one because it doesn’t help you win the greenfield” states Mark, “but, it’s still valuable and Salesforce is the classic example.” 

Mark describes how Salesforce is one of the most successful software companies in the world. However, when people talk about Salesforce, they rarely do so in glowing terms. “I think they think it’s expensive,” explains Mark “but it’s valuable because they’ve pulled a lot of stuff together. It’s like all your stuff is in there, so you can’t go anywhere else.”

DISTRIBUTION CHANNELS

Distribution channels can also be sustainable moats, with modern examples being product-led-growth and direct-to-consumer channels. 

”I’m really bullish on product-led-growth these days,” says Mark. “If you can figure out how to get someone to adopt your product without involving a human, and see value in it, and then monetize it through a sales team, that is hard for someone else to imitate.”

GOVERNMENT POLICY

Government policy doesn’t work with software as much, because it’s patent oriented. But sometimes relationships with regulatory bodies can function as sustainable moats.

CAPITAL REQUIREMENTS

This example of a sustainable moat somewhat conflicts with “funding” being classed as a temporary moat. Nevertheless, when a project requires a company to have enormous amounts of capital, it does then become a sustainable moat.

A good example is Tesla’s attempts to commercialize space by building space rockets. “You and I can’t get together and try to disrupt Elon and SpaceX”, Mark observes.

GROWTH POTHOLE #3: Promoting Your Best Salesperson to Manager

It’s important for companies to recognize that just because someone is the number one rep on a team, it doesn’t mean they should become a manager. 

 “What we really have to think about,” explains Mark, “is the role of a salesperson, and what does it take to be good there? What is the role of a sales manager, and what does it take to be good there? And they’re pretty different!” 

For instance, someone can have a big ego, be quite aggressive, and be a highly successful salesperson. However, these are not good traits for a manager. On the other end of the spectrum, it’s also unwise to promote your worst reps to management positions. “We want to look at anyone who is consistently hitting quota as a manager candidate,” advises Mark.

The problem then arises as to what to do with high performing sales reps if you can’t promote them to management. The answer, says Mark, is to “make sure we make a growth path for salespeople who don’t aspire to be a manager. In addition to your compensation plan that you have every year for your salesperson, there should be a promotion path to grow and stay as a salesperson.”

Mark has provided an example of what such a path might look like:

This allows those sales reps to remain in roles that are suited to their skills, while also offering them a route to progress through. “It’s crystal clear what I need to do to get promoted, and when I do my variable comp gets bumped up, and I get more options, and I have a new set of goals,” explains Mark.

GROWTH POTHOLE #4: Prioritizing Predictable Revenue Acquisition Ahead Of Predictable Customer Value Creation

Another major misstep that companies often make is prioritizing predictable revenue acquisition ahead of predictable customer value creation. 

So when should a company focus on predictable revenue acquisition? 

The simple answer is when they have good product-market fit. But companies need to be clear about precisely what that is. Mark states that we need to identify a leading indicator of customer retention to identify when a product-market-fit is achieved.

To help in this area, Mark has developed a scientific, data-driven approach to product-market fit. The core of this is the following formula:

[Customer Retention Leading Indicator] is “True” if P% of customers achieve E event(s) within T time.

This looks complex if you’re not familiar with so let’s look at some examples to better illustrate how it works in practice:

• Slack – 70% of customers send 2,000+ team messages in the first 30 days
• Dropbox – 85% of customers upload 1 file in 1 folder on 1 device within 1 hour
• HubSpot – 80% of customers use 5 features out of the 25 features on the platform within 60 days.

 “So, in terms of HubSpot” illustrates Mark, “it’s much healthier for their manager to state that they are aiming to have 80% of customers use five features out of the 25 features on the platform within 60 days, than to state that their new goal is $1 million in revenue.” 

“Don’t jump too quickly to setting topline revenue as your goal,” adds Mark, “especially before you’ve proven the predictable customer success creation and defined your lead indicator.”

GROWTH POTHOLE #5: Compensating Salespeople On Bookings Rather Than Lifetime Value

If a salesperson signs a million dollars of bookings, but half cancel a year later, and another rep signs $900,000 of bookings, but only 10% cancel and another 10% upgrade, these people should be on different compensation plans. The latter rep should be provided with greater rewards, given the higher amount of total revenue they’ve made for the company.

Of course, companies can’t wait a year to fully commission their salespeople. “You have to reward or penalize salespeople at the time of behavior” notes Mark, “so how can we do that?”

Mark recommends paying reps half their commission on signing up the customer. Then, paying the other half when they hit their leading indicator of retention achievement.

GROWTH POTHOLE #6: Massive Hiring Of Salespeople In The Month After A Financing Round

Mark states that most companies make the mistake of hiring a cohort of salespeople immediately after a financially successful period. Almost always, most of these people are then fired the following year. 

Companies need to have the demand generation, sales management, and onboarding capabilities in place first. They also need to pay close attention to variables such as leads per salesperson, close rates per lead, and average sale price.

GROWTH POTHOLE #7: Assuming The GTM Playbook That Worked In One Market Will Work In The Next Market

This pothole occurs when a company assumes that the playbook they established in their current segment will work in the next segment. Segments can be the product, market, or channel. 

“Any time we change one of those variables, there’s a high probability that the ‘go-to-market’ machine that we’ve built is not optimised for the new segment,” advises Mark.

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