When to hire your your first salesperson (by Tom Tunguz)
http://tomtunguz.com/when-to-hire-a-salesperson
To many entrepreneurs, hiring the first salesperson is a mystery. When should I do it? How much should I pay this person? How do I structure the work?
The great part about sales teams and sales departments is that they quantitative - sales teams thrive on numbers. At the most fundamental level, sales productivity has to exceed costs.
So let’s answer the question of when to hire an salesperson by understanding the financial mechanics of a sales team. When building a sales team, there are three things to consider:
- The costs of the sales person - salary and performance pay
- The output of that salesperson - sales productivity
- The inputs required to make a salesperson successful - lead volumes
Let’s discuss each point in order.
Costs
Assume it costs $70k annually to hire an inside sales person: $30k in base salary, $30k in on-target earnings/performance pay (or OTE) and $10k in benefits. This means at the very least, your first sales person must close $70k in business for you to break-even on the hire.
But in the early days of a sales team it’s typical to see a sales-quota-to-earnings ratio is about 1:2 or 1:3. As a sales team and product matures and price increases, this ratio can grow further. I’ll use 1:2 or $140k annual quota for this example.
Outputs: Sales Productivity
Sales productivity has two components: average deal size and deal velocity.
Our hypothetical salesperson must sell $140k of products each year or about $12k per month. There are many ways of accomplishing this goal. At one extreme, our salesperson could close one $140k deal each year. At another, she might close twenty-four $500 deals each month. Any permutation in between meets the quota requirement.
Selling a $140k contract is a very different sale to a very different customer from a $500 contract. Most enterprises won’t buy $140k worth of software over the phone from your inside sales person. They want to meet someone, build a relationship and trust and negotiate a contract. You’ll need a field or outside sales person for that and they fetch salaries of $250k+!
Additionally, pursuing a few very large contracts introduces huge variance in sales forecasting. It’s called elephant hunting for a reason - high risk, high reward.
As a startup with presumably constrained finances, the ideal first sales person produces predictable and consistent sales. This is better for performance measurement (understanding how well the sales person is doing) and cash flow management (ensuring sales is filling the coffers early and often).
As a result in addition to a quota, sales managers often prescribe a sales velocity or the number of deals closed within a period. Sales velocity is dependent on your product’s price and the total number of customer contacts a salesperson can make in a month.
At best, the average salesperson has the time to convert 60 leads to customers. Assume a sales person works 20 days per month for 9 hours per day. Assume each sales call takes 45 minutes of time, 15 minutes of preparation/followup and each sale requires 3 calls (introduction, product demo and close) and voila - 60 leads.
But not all leads convert. Typical conversion rates for inside sales teams are roughly 20 to 30%. Of the 60 leads, only 15 should convert to customers. Those 15 customers need to produce about $12k in monthly quota to pay for our sales person which implies a pricing floor of $800 per month or $9600 per year.
Unless your product can fetch that price, a sales team structured in the way outlined above would be unprofitable.
Inputs: Leads
Our sales person must contact 60 qualified leads, users with intent to convert to paying customers, to achieve quota. To satisfy that monthly demand, the product and marketing teams must attract enough new users and qualify leads through the funnel. Otherwise, the salesperson will lack the leads to be successful.
Freemium businesses convert about 2 to 4% of new user accounts into paying customers. More traditional enterprise sales tend to convert 10 to 15% of leads (people signing up on the home page asking for information).
A freemium business needs to generate about 3000 users that could pay $800 per month to gin up 60 qualified leads each month. And a traditional enterprise software startup needs to create 400 signups. Until your startup is filling the top of the sales pipeline with roughly these numbers, you risk hiring a salesperson too early.
Other things to consider
There are many other factors to consider when laying the foundation for your sales team including customer churn rates, customer costs to serve (account management), payback periods, contract requirements, sales person experience, internal time allocation and so on.
But when your startup’s software can command a high enough price and when your lead volumes reach a certain threshold, you should have the confidence to hire your first salesperson.
