As a VP of Sales, you’re probably not too familiar with SaaS metrics or costs — that’s the CFO’s job, right?
Well today, we’ll breakdown how to understand SaaS costs basics, and then explain how to accurately set sales goals and metrics that drive success. We’ll also review how to determine if your team structure is working or not, as this is a crucial factor that impacts revenue goals.
This exercise is important because Sales Development is not seen as a direct revenue-machine but a cost center, and therefore you’re probably trying to minimize your Sales Development costs.
8 Step Checklist For Setting Sales Goals:
- Understand how CAC works.
- Compare Marketing and Sales costs.
- Stop chasing marketing attribution.
- Combine Sales and Marketing goals with Sales Development.
- Set revenue goals for your SDR team.
- Work out your new CAC with this revenue goal.
- Break down revenue goals into Sales Development goals.
- Calculate the number of opportunities per SDR per month.
1) Understand How CAC Works
Imagine I give you this deal. If you give me $15,000 today, I’ll pay you back $1,000 every month for the next 36 months. Would you take it? I’ve asked that question to many people and the overwhelming majority says, “Of course!”
That’s how SaaS works. Imagine you sell a $12,000 ACV product. Most clients stay with you for three years, so about $1,000 per month for 36 months. So, how much would you be willing to pay to get that client?
If you actually look at SaaS metrics, the cost of acquiring $1 of ARR is $1.15 in 2017. That’s about $13,800 to get the above client to pay $1,000 every month for as long as the client stays with you. This is an average that includes HubSpot, Salesforce, and all those awesome companies, so stick with me for the $15,000 for now. It’s a good deal!
2) Compare Marketing & Sales Costs
Back to your company. VPs of Sales know that their AEs’ quota should be 3-5x their OTE, so let’s take 4x as an average, that’s $0.25 for every $1 in ARR. Then we can add tools, data, benefits, insurance, office space, and the very important cost of management! We might end up at $0.40 per $1 of ARR.
So, if we get to $0.40 with the sales team, but the true cost is $1.15, where are the other $0.75 coming from!? Marketing (mostly). As a seller you probably know that Marketing has huge budgets. From online ads, to trade shows, sponsorships, events.
Literally for every $1 ARR you acquire, the cost of sponsoring those shows including plane tickets, hotel rooms, people’s time and all the rest, it’s $0.75. Even worse, their solutions are not scalable, 2 booths at Dreamforce don’t get you twice as many deals closed as one booth. Marketing is clearly not concerned about costs.
So far it looks something like this:
3) Stop Chasing Marketing Attribution
Great CMOs, CROs, and CFOs are now looking at the actual customer funnel top to bottom, from trade show scan to closed-won Opportunity, and trying to figure out what lead source investment is best.
This is incredibly complicated as many leads have been touched by multiple marketing campaigns, from a newsletter to a white paper to a trade show and an inbound SDR before they become an Opportunity, so assigning a percent of influence to all these is a math nightmare. However, if you can get even close to it, it’s super helpful.
In the world of marketing 1+1+1+1+1 could be equal to anywhere between 3 and 20, and it’s hard to know.
4) Combine Sales & Marketing Goals with Sales Development
“The most valuable activity in the sales process is a set appointment.” – Jeb Blount
Imagine you’re at a startup that just hired their 2 first sales reps. Your marketing budget is close to zero, and you’ve mostly growth hacked your way to $200K in ARR. Now you need a predictable way to grow revenue and go to your investors for your next round. You’re about to hire SDRs. How do you set their sales goals?
Just think of your Sales Development organization as the marketing and lead qualification component. Your SDRs will be copywriting, sourcing Account and Contact data, getting on the phone and evangelizing your message to get you meetings.
Am I saying that you should spend twice as much on SDRs as you do on your AEs? Not exactly. But if you have no marketing whatsoever, and your AEs do not want to do any cold calling or source deals themselves, you will need to have 2 SDRs for every AE.
If your AEs are willing to spend half their time sourcing deals and can self-source 40% of their pipeline, maybe a 1:1 SDR to AE ratio is fine, but then remember that when you consider the salary of that AE, you should assign a significant portion to Sales Development and not Sales.
5) Set Revenue Goals for Your SDR Team
Again for simplicity purposes, let’s assume that your AEs are 100% dedicated to closing deals and don’t source any deals. Your SDRs are 100% outbound and have no help from marketing. How do you set goals?
Make sure that the revenue contribution of your Sales Development is equal to 1.5x your total spend on Sales Development, which includes, salaries, commission, benefits, insurance, office space, tools, data, management, etc.
That means, that is you have 2 SDRs at $80K OTE, an SDR Manager/Sales Ops person at $130K OTE in San Francisco, and you spend $50K in tools, data, and office space. The calculations are as follows:
Salaries = ($80,000 * 2 + $130K) = $290K
Benefits and others = 0.3 * Salaries = $87K
Tools and data = $50K
Total cost = $427K
Required revenue = 1.5 * cost = 1.5 * $427K = $640K.
6) Work Out Your New CAC with This Revenue Goal
Assume now, that your Cost of Sales, as explained above is $0.40 per $1 of ARR. That would mean that that from that $640K in revenue you got, the cost is as follows:
Cost of sales = $640K * 0.4 = $256K
Cost of Sales Dev = $427K (from above)
Total CAC = $256K + $427K = $683K
Total Revenue = $640K (from above)
CAC Payback = Cost/Revenue = $683K / $640K = $1.067
At $1.067 CAC payback period you are running your sales organization more efficiently than HubSpot and Salesforce! Wohoo! This is actually possible when you’re small because your Target Addressable Market is huge and your team is small.
As you start growing you’ll realize that you need more layers of management, more sophisticated data tools, you’ll have more SDRs churn, poached, fail, etc. and you’ll have other challenges to adjust for, but as of today, if your Sales Development organization can source 1.5x it’s cost, you’re golden.
7) Break Down Revenue Goals into Sales Development Goals
Continuing with the example above, you have SDRs and they need to source $640K in Revenue, therefore their quotas should be $320K each. At an $80K OTE, their quota looks in this case to be 4x their OTE.
In the majority of cases, I have found this to be true when you build an in-house team. Your SDRs, similar to your AEs will need to contribute 3-5x their OTE, as closed-won revenue in order to be sustainable.
Remember that you’ll need to give your SDRs time to ramp. Specially outbound SDRs, will require 1.2-1.5x sales cycles before any revenue comes in and you can start doing these calculations.
8) Finally, Calculate Opportunities/SDR/Month
Assuming that you have already created an SLA and that you have a good SDR to AE handoff, we can estimate you’ll close 7-15% of deals. Let’s pick 10% for easy calculations.
If your close rate is much lower than this for outbound, you either don’t have a good SLA, or your AEs do not know how to perform outbound demos, which are different from inbound.
Now we need to get your ACV and start reverse engineering how many Opportunities each SDR needs to create per month for this model to be sustainable. Let’s assume you have a $30K ACV.
With a $30K ACV, your SDRs need 11 demos closed per year to be sustainable, or about 0.9 per month. Since you only win 10% of Opportunities, your SDRs then need to get 9 demos performed to pass the SLA criteria per month, which is a good indicator you can use after your SDRs have ramped up.
Usually about 20% of demos no-show, and therefore your SDRs need to get 11 meetings scheduled, which is about one meeting every 2 days.
Conclusion: It’s All About Tying Sales Goals Back To Revenue
The math will of course vary according to ACV and close rate, but you can go ahead and do your own calculations. In the long term, we recommend measuring the effectiveness of Sales Development by tying it to revenue.
However in the early days, to get some hints about whether things are working out, you can run the reverse math as I just did and determine if your SDRs are building 10x the pipeline that they need to close.
I know that not everyone is a math geek like I am so feel free to contact me on LinkedIn, and follow my content there as well. I’m always happy to provide further insights or help you run the numbers for your company.
The post The Scientific Approach To Setting Sales Goals For Your Sales Development Team appeared first on Sales Hacker.