When talking to seed stage SaaS entrepreneurs, a common question is “should we do inside sales?” Naturally, it’s important to take into account factors like average sale price (e.g. new committed monthly recurring revenue), average sales cycle, complexity of sale (e.g. can junior inside sales reps sell it or does it need more specialized expertise), and more. Here’s the quick math to determine if inside sales makes sense:
- Take the gross margin of the product (SaaS is typically 70-80%)
- Use the average deal size in the first year (e.g. $5,000 in new annual recurring revenue)
- Decide on the cost of salary and commission for the desired type of sales person (e.g. $35k base and $75k on target earnings)
- Run the math for the example above:
$75,000 + taxes for the sales rep = $85,000
70% gross margin times $5,000 per deal times X number of deals = $85,000
24 deals at $5,000 per deal = $120,000 times 70% gross margin = $85,000
24 deals are required for the sales rep to make sense.
With 12 months per year, the rep needs to sell two deals per month. - Note: this assumes the rep does all the work and doesn’t require leads from marketing. When you add in heavy marketing costs, the number of deals the sales rep has to sell often doubles.
Inside sales makes sense when the average ticket price and deal volume are high enough to warrant the expense.
What else? What are some factors to determine if inside sales makes sense?
David Cummings on Startups 