We had a good conversation with one of our SaaS companies where we discussed sales rep efficiency. The Company has two seasoned reps which are generating a respectable 2.6x and 3.2x as much bookings as we pay them. In other words, if we are paying the reps $100k all-in (includes base, commission, bonus, and benefits), they’re generating new bookings of $260k and $320k per year. Certainly that’s decent performance and these are good reps, but ideally we’d like to see a seasoned, strong rep generating 4.0x their compensation and if they’re really good, 5.0x their compensation. The economics of a sales rep can make or break a business. Below are some additional thoughts to keep in mind:
Hiring is the way to growth. Hiring sales reps is the only reliable way to grow for a business focused on enterprise customers. It’s dangerous to assume growth happens magically, for instance assuming the average contract value will improve because you’re going to add more features or the sales cycle will shrink as the market becomes more aware of you. Stay conservative and assume the only way to grow revenue is the addition of reps, not gradual increases in contract size or other miracles.
Add 1 to 3 reps. When you model out your cash need for the year, assume your VP of Sales can add reps at a reasonable pace: at most 1 a quarter for very seasoned reps and up to 3 a quarter for the less experienced. The more complex the sales cycle, the harder it will be to find reps that are a good fit. Assume reps will need time to ramp, generally 3 to 6 months depending on the length and complexity of the sales cycle.
Failure is high. The rule of thumb is that for every 5 reps you hire, 2 are going to be a waste of time and resources, 1 will be a stud that hits quota, and 2 will be below quota but worth keeping and still economic (generating revenue that is 2x to 3x their compensation). Going 3 for 5 is actually fantastic, but you’ll go through a lot brain damage to get there.
1:8 ratio. For every 8 reps you hire, go ahead and assume you need a VP of Sales or sales manager. You do not need a VP of Sales until you hire 5 to 8 sales reps — while you’re small, the sales reps should report directly to you.
Leads first. Don’t hire reps unless you’ve got the leads and your existing reps are at capacity. Poor leads or a lack of enough qualified leads is a great way to kill morale and waste a lot of time and money. That said, every rep at every level should do some outbounding.
Hire once reps are good enough. Once a rep is generating revenue that is at least 2x to 3x their compensation, if you have enough cash and leads, you should be hiring the next rep or even two. There’s no need to wait for each rep to achieve the magical 4x to 5x unless you think they can do it (many never do).
Growing the enterprise sales team is the best way to forecast growing your topline. Depending on larger contract sizes, shorter sales cycles, random upgrades with no historical basis, and other slights of hand is a good way to miss projections and even worse, run out of cash.
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