There are two main ways of building a SaaS sales team: top down or bottoms up. Top down SaaS sales organizations start with a VP of Sales who often hires senior account executives. Bottoms up sales teams hire the first account manager and promote from within. Which is better?
Let’s create a framework to compare the bookings capacity, the ramp period and the cost for three levels of sales hires. These figures will vary by company and sales team.
|Entry Level||Mid Level||Senior|
|Ramp Period, months||4||6||9|
For this hypothetical startup, an entry-level account executive commands $125,000 in on target earnings (OTE), a mid-level AE commands $175,000 and a senior-level rep $250,000. Quota span from $500k in bookings to $1.2M. And the ramp time increases from four months to nine months is the function of seniority and deal size. In addition, the Quota:OTE line indicates that the more senior the account executive, the greater the margin net of commissions to the company.
What are the trade-offs between building a team of entry-level account executives versus a team of senior account executives? This next table attempts to quantify that.
|Level||Salary||Bookings Opportunity Cost||Total Cost||Quota Normalization||Cost of Failed Hire(s)||FTE Equiv.|
Let’s assume that the sales leader knows at the end of the ramp period that the account executive isn’t going to work out, and during the ramp, the account executive closes no bookings. The table above calculates the cost of the organization by adding the salary throughout the ramp time and the opportunity cost of lost bookings, compared to a successful rep. Then, we normalize the cost to $1.2M quota. Finally, we calculate the number of equivalent failed hires.
This company can hire about six entry-level sales reps for every one senior account executive failed hire in terms of total financial cost to the organization, and about 2 mid-level reps. Of course, this calculation does not take into account the recruiting time, management time, impact to culture of a greater turnover rate.
Hiring entry-level reps at the beginning of a startup’s life offers several advantages. First, it’s a less expensive way of experimentation to find exactly the right profile of salesperson to fit the organization.
Second, entry-level account executives’ quota is less than half the senior account executive and this reduces volatility. If a senior account executive attains 0% quota attainment, it is a $0.9 million annual miss (quota x ramp). But if one of two entry-level account executives miss, it’s a $0.125M miss. The cost of a mistaken hire is much smaller.
On the other hand, growing a large sales team with entry level reps is more expensive per booking dollar since each rep books a smaller quota. In addition, larger teams require more management. More junior teams will require greater training.
There is a reason why most SaaS startups start with entry-level inside sales reps. It affords the business the most efficient way of experimenting to find the right profile of account executive. These businesses trade slightly more expensive bookings dollars for greater flexibility and predictability. In addition, it’s also rare for a startup to be able to recruit a top VP Sales, who can bring relationships with senior account executives at the outset.
Over time, the company grows, many SaaS companies begin to develop teams with varied experience levels.
Published 2016-06-02 in Sales