We had a good call with one of our companies today in which we discussed sales rep efficiency. The Company has two seasoned reps which are generating a respectable 2.6x and 3.2x as much revenue 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 revenue 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 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 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.
-When you model out your cash need for the year, assume you can add reps at a reasonable pace, those reps will need time to ramp (3 to 6 months), 80% of reps won’t hit their quota, and set the quota at a level commensurate with what your middle of the pack reps are achieving.
-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).
-For every 5 reps you hire, go ahead and assume you need a VP of Sales or sales manager.
-Don’t hire reps unless you’ve got the leads. Poor leads or a lack of enough qualified leads is a great way to kill morale and waste a lot of time and money.
-Once a rep is generating revenue at least 2x to 3x their compensation, if you have enough cash 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 (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.