When to build a Sales team
Does your company need a sales team? Here are the metrics and frameworks to look at.
“We are thinking about building a sales team. Where do we start?”
This topic often comes up in my conversations with early-stage Founders.
This decision is unique to each company and its market, product, and customers. But there are some straightforward ways to think about this.
In this post, I’ll give you two frameworks to evaluate this critical decision.
Framework #1 - The Funnel
Think about a sales team as simply adding a human being to one or multiple parts of your Sales and Marketing funnel.
Below is the funnel. On the left, you’ll see a traditional B2B SaaS funnel, with Marketing driving leads and Sales handling it from there. On the right, you’ll see more of a self-serve/freemium model where Marketing and Product take on a more significant portion of the funnel.
source: https://stevepatrizi.com/2012/10/23/the-new-marketing-sales-funnel/
There are as many versions of this model as there are companies. Many Orgs have Sales run the whole funnel, including initial awareness being driven through outbound sales (with Marketing supporting the Sales team’s efforts).
As a Founder, first, define and understand your ICP (ideal customer profile) and have a rough sense of the number of prospects you have at each stage of the funnel and your conversion rates through the funnel.
If you don’t have any leads coming in and do not have a successful method for going from 0 (cold lead) to 1 (initial conversation), be very careful investing in a sales team.
Red flag - “We need to hire a sales team to help us talk to more prospects.”
Green flag - “We have X and Y methods for driving leads/sales conversations, and we know if we had someone focused on X and Y full-time, we could drive much more leads/sales conversations.”
If you don’t know what X and Y are for your startup, it’s your job as the Founder to figure that out. You can’t outsource that, and you can’t expect a new employee to figure it out for you, even if they are a great salesperson.
Once you have a rough baseline of your funnel, you can determine where inserting a human being (a dedicated salesperson) can dramatically impact growth.
Example 1: SaaS
Let’s say you, as the Founder, has been able to generate 20 demos of your product in the past two months. The calls seem to be going well, and you are getting a few signed, but there are many “maybes” sitting around that you are unsure what to do with.
As it turns out, managing a sales cycle and follow-up process can be critical to getting a deal done. As a Founder, you should be able to close deals on your own, but if you suspect that inserting a person at this part of the funnel would significantly increase results, you may be right. It’s also easy to test because you already have leads and conversations happening.
Let’s look at the numbers. Let’s say this startup, in theory, is closing 15% of its demos, 3 out of 20, but the feedback from prospects is strong, and the P/M fit looks much higher. Could they bring in a dedicated salesperson to work these leads, take some of the load off the Founder’s plate, and increase the conversion rate to 30%? If so, that would lead to 3 more deals. If the ACV is $10K, that is $30K in additional monthly sales, $360K per year + all the other benefits of having more customers (more product feedback, testimonials, referrals, and social proof).
If the salesperson’s total comp is $120K, $360K in additional sales is a 3X return on investment, perhaps more if the salesperson can generate more demos.
In summary, your startup has a funnel— hiring a salesperson(s) should increase A) the conversion of prospects or B) the number of prospects within one or multiple parts of the funnel.
Before hiring a sales team, be specific in identifying and quantifying the opportunity and impact.
Example 2: Marketplace
Most marketplace companies would prefer not to have a Sales team. “Airbnb and eBay didn’t need one!” — but in practice, many do. This is most common when a marketplace has a business (instead of a consumer) on one side of the Marketplace (Yelp, DoorDash, OpenTable, Instacart, Faire, etc.)
Not only can “inserting a human being” lead to better conversion and economics at specific points on the funnel, but many marketplace businesses require onboarding or operations to activate a business. In this case, you may be already inserting a human being, so in the early days of a startup, you can test having them do both (acquisition & onboarding).
I covered this topic in a recent interview with Mike from Everything Marketplaces (3 min. clip).
Framework #2 - Back of the Napkin
Another framework for evaluating if your startup should have a sales team is to run a couple back of napkin exercises.
How much incremental revenue can they generate (X), and how much do I need to pay to hire someone who can do X?
Depending on key metrics (your profit margins, the value of a new customer, customer retention, your cash flow, etc.), your company will benefit from having a sales team if a salesperson can generate 2-4X their compensation in revenue. You have to have some wiggle room in there. So if a salesperson is paid $10K monthly, they must generate $20-$40K in incremental monthly sales.
If the revenue hits immediately, that’s ideal, but many SaaS and Marketplace startups may recognize that revenue over the next year ($1.6-$3.3K per month for the next 12 months) …or longer. This is why retention and your cash flows matter.
This doesn’t have to be a complicated calculation. Here is an example from a recent conversation I had on Twitter.
Some key metrics to consider for SaaS and Marketplace businesses
Sales teams can be a significant growth driver if the numbers make sense. Invest $1 and get $3 back. But there is some nuance to SaaS and marketplace models and other costs to consider.
In SaaS, you have to think about marketing costs to acquire leads. This could be paid marketing, content marketing, event marketing, or a BDR team. This can get expensive. You can’t pay 25% to the salesperson if it costs $500 to acquire a lead that converts to a $1,000 customer. That only leaves 25% of revenue after factoring in your blended Sales and Marketing costs.
In the go-go days of 2020/2021, many SaaS companies targeted a combined CAC (customer acquisition cost) of 100% or less of year one revenue. This works if your retention is greater than 100% and you have a lot of cash to burn.
Today, even SaaS companies with great retention target 50% or less blended Sales and Marketing CAC. You have to start making money at some point, and there are many other line items on the income statement beyond sales and marketing.
For Marketplace businesses, you have to factor in all the costs associated with the other side of the Marketplace. At a company like DoorDash, they had to invest money to acquire merchants (this included a big Sales team). On the other side, they had to invest money to acquire consumers to transact with those merchants. If you have high costs associated with acquiring demand, you can only spend so much to acquire supply… and visa versa.
On the flip side, if acquiring demand is cheap and acquiring supply helps you capture more demand, then you can justify investing more in supply acquisition. This was the case with Uber and its drivers. They spent hundreds of millions of dollars acquiring drivers, knowing A) they had to and B) more drivers led to lower acquisition costs for riders.
I hope these frameworks are helpful. The bottom line is that you want to build a sales team from a place of strength and opportunity, not weakness, and you want to define success and ROI upfront.
Pete Hancock is the Principal of Hancock Consulting, where he partners with Seed-Series B startups to accelerate revenue, develop go-to-market strategy, and build & scale sales teams. For more info: petehancock.me