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Efficient Growth Deep Dive: Sales
A key ratio to investing in sales
I recently read a quote from Xactly (sales compensation software provider - I have no affiliation with them) that states SaaS sales representatives achieve only 58% of their quota. Man, that's brutal…I'd hate to be on that sales team.
Further, if you consider the most common sales compensation structure within SaaS; it is a 50/50 or 60/40 base + bonus split. I'm guessing there are a ton of sellers out there that are not making what they thought they'd be earning over the last 12 months.
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On its face, this probably seems like relatively little new information, but if you think about efficient growth and the pure cost of running a sales team; it represents a massive efficiency lever to unlock for operators. Ok…let's dive in.
When I think about sales performance and overall sales efficiency, the number one metric that comes to mind is the ratio between Bookings & Sales Capacity. This post aims to help you:
Understand the components of this key ratio
Help you apply it to your company
How to use it as a guide for additional sales investment
How this can be a canary in the coal mine for sales team culture and health
Understanding the Metric
Bookings : Sales Capacity Ratio Explained:
For the purpose of this article, this will be all "closed won" bookings for the time period you want to measure.
The total quota handed out to your sales team.
4 AEs Total
3 Fully Ramped = Quota * 100%
1 Actively Ramping = Quota * Ramp Discount Rate
The sum of these numbers would be the total “sales capacity”.
To drive this home, here is an example of this concept in a graph form:
You can see on the x-axis the different quarters and on the y-axis is the dollar amount of bookings. You'll notice in Q3 that there were 5.5 "Ramped Account Executives" which means that there was some level of discounting for people that were ramping.
Key things to notice about this graph:
During the first two quarters, AEs were probably making a lot of money! When you have an even distribution of over-performance, it is a great time to add more sellers!
As more AEs were added to the team, the gap between new bookings and sales capacity closed, but never inverted. During this period some AEs started to dip below their individual quota which can be dangerous if left unmitigated.
Although it our key metric stays above 1.0 in this graph, you will almost certainly have phases where this metric drops below 1.0. Over the long run, most mature organizations settle around a 0.8 ratio, but I'm advocating for a higher standard in times where efficiency is key. Resisting this reduction in the metric as long as possible will help efficiency, but may be an opportunity cost over the long.
Applying the ratio to your business
Ok, now that you have a better feel for this metric and how it moves over time, it's important to talk about why this ratio is so critical for early stage GTM Teams. To do that, I’ve broken it down into four main topics and I’ll discuss how this single metric can tell you a lot about each of them:
Effective Growth: Baseline for different investment levels to drive growth
Team Building: Culture of winning and momentum
Performance: Establishing what great looks like at your company
Investing: When and how to invest into sales
Like many, I have heard tons of stories about venture backed startups that did massive funding rounds over the last few years. Since then, much has changed in terms of capital availability and we see investors moving back towards true milestone/benchmark based investing. I love seeing this reversion to performance. It aligns investors, operators and individual contributors within companies much more closely.
Think about your goals for the upcoming quarter and how much quota has been handed out to your sales team. If you aren’t confident in hitting them, then ask yourself the following questions:
Is sales capacity really the problem or is it demand generation? Could fewer reps accomplish the same outcome?
Many boards and leadership teams want to have an over-assignment of sales capacity be booking goals to make sure growth goals are met at the company level, but worry less about individual AE-level. Is the reason for increasing sales capacity making the CEO and the board sleep better at night or the sales team?
What do I need to do to help the existing sales team accomplish more than 100% of their quota on average? Do they have a chance in the current set-up or am I just telling myself that?
If you are in the camp where you expect to accomplish anything less than 100% of the quota you have assigned and you are an early stage company, I would urge you to think hard about this approach in these times. Somewhere in that math you are wildly over-spending and the reps are going to leave if they don’t believe they can make their numbers. This results in a terrible team culture and very inefficient growth.
Recruiting great sales and marketing people has never been easy. If you want to build great teams in any market, one of the best ways to recruit is doing so when you are “running down hill” vs “struggling to find growth”.
Here are things people say when their startups aren’t cranking:
“We have so much funding!”
“Reps will definitely hit their quotas!”
“Our OTE (On Target Earnings) is amazing!”
Here are things people say when their startups are cranking:
“We are consistently exceeding our quarterly goals at the team and individual level.”
“We have overperformance from AEs and we need to hire someone to spread out the demand.”
“We have paid out X% over OTE to our reps over the last 2 quarters.”
What’s interesting is that a smart seller would choose a lower OTE (on-target earning comp plan) for the second company, because their belief in achieving their quota is much higher. We did this effectively at Amplitude where we set our OTE below market and our bonus structure well beyond market. This aligned reps with the risk of the business, but was a plan we were confident in offering high performers against seemingly lower comp plans.
By having a team that is overperforming, you are able to attract better performers. Strength leads to more strength. It is an extremely powerful compounding effect over time because your sales organization is full of winners and high-fives.
Most commonly, teams will need to cut their sales team down or at least freeze additional AE hiring to allow performance to catch-up with the sales capacity. If growth isn’t world class for your stage of company and your bookings : sales capacity is well below 0.8, it’s time to slow down and make sure you understand this metric intimately. You should also be prepared to make some changes. This is an extremely difficult thing for CEOs to do, but it is 100% the first step towards turning sales into a much more efficient and eventually profitable lever for growth.
Now that you have focused on trimming down your sales team to drive amazing performance, it is important to know when and how to invest.
As I touched on above in the graph, one great indicator is when you see reps overperforming. The lowest possible risk approach goes like this:
You have a team of 4 Account Executives and your bookings : sales capacity ratio is steady at 1.25. This means that you can definitely (without generating any additional demand) hire 1 more AE to bring your rate back down to 1.0. Here is the quick math:
Bookings : Sales Capacity Ratio = 1.25
Number of Ramped AEs = 4
4 * 1.25 = 5
In this case, it is clear that the team can support a 5th Account Executive.
The problem with this approach is that it can be very conservative.
Another way to consider investing into your sales team is by looking at demand generation. If you see that your existing team is over a 1.0 Bookings : Sales Capacity Ratio and you have too many leads for them to effectively manage, then it might be a good time to start recruiting more sellers.
In any case, take it slow and make sure you get your ramping of new sellers in place. Adding 1 strong-performer at a 1.0 Bookings : Sales Capacity ratio is much more cost effective and usually just about as effective to growth compared to adding 2 at the stated average of 58% quota attainment. This is highlighted here:
Compensation: 50% Base / 50% Bonus
Cost Breakdown of Different Approaches:
”Aggressive Investment Approach”
Total Bookings: 58% * $1,000,000 * 2 = $1,160,000 in Sales Bookings
Cost of 2 AEs @ 58%: $158,000 * 2 = $316,000 in Salary + Bonus
Cost of Sales compared to bookings: 27%
“Efficient investment Approach”
Total Bookings: 100% * $1,000,000 * 1 = $1,000,000 in Sales Bookings
Cost of 1 AE @ 100%: $200,000 * 1 = $200,000 in Salary + Bonus
Cost of Sales compared to bookings: 20%
In the example above, it is true that we missed out on $160,000 in Sales Bookings, but the efficiency gain, impact to culture and likelihood of retaining sellers is huge! Further, our cost of sale is 20% with the single strong performer vs. 27% with the two average performers. Imagine the impact to culture and costs at 10 or 20 sellers.
In 2020, many sales teams fell into the aggressive investment approach of working to capture every last dollar of ARR and growth at all costs. As we all know, things have changed. Today, it is harder for founders to raise venture capital, add debt to the balance sheet or find acquirers. This means that the market is demanding that all companies improve the health of their company and increase efficiency. While this initially feels like a shock to operators, once you start to run your company on a new set of metrics, you'll find that you have time to focus on nailing culture, solving real problems for customers and enjoying the process of building something to last.
I'd love to hear your thoughts and other levers you are finding to build an even better version of your company. Until then, happy building!
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