Author: David Cummings

Earlier today an entrepreneur reached out seeking help. His company has recently cleared the $1 million in annual recurring revenue milestone and he’s working on the strategy to build out a sales team.

Here are his eight questions and my answers in the Pardot context:

1. At what stage in the company did you hire your first salesperson (headcount, years since founding, revenue level)?
   Pardot was started March 1, 2007. Our beta (minimum respectable product) was ready at the end of the summer and we hired our first two sales people, while still be pre-revenue, at the same time on September 1, 2007 (always hire sales people in pairs, if possible).
2. Was your initial sales team functioning as ‘explorers’ or were they repeating a process that you had already defined?
   The initial sales team functioned as explorers and worked to figure out the best places to hunt. One of the salespeople didn’t work out and was let go of quickly while the other sales person worked out incredibly well.
3. How long before that person became profitable?
   The sales person that worked out was profitable by their second quarter with us.
4. How long before you hired subsequent salespeople?
   Our next sales person was brought on in Q1 2008 as it was clear the first sales person was doing great. As a simplistic rule of thumb, I like the ratio of $1 in sales rep expense to $3 of new annual recurring revenue.
5. Did you use the predictable revenue model of one SDR to three Account Execs?
   We implemented Predictable Revenue at Pardot and used the 1:3 SDR to AE ratio (we implemented an appointment setting team before the book was published). In some cases, I’ve seen a 1:1 ratio of SDR to AE.
6. If so, did you consider other methods?
   We didn’t use a different methodology but have always liked the idea of one team to set appointments and one team to close deals.
7. What are the biggest things that you would do differently in building a sales team knowing what you know now?
   I’d invest more aggressive in sales people once the model was proven (we could have hired many more sales people) and I’d use more modern sales acceleration tools like SalesLoft and WideAngle.
8. How narrowly did you focus on verticals at the beginning of your sales process i.e. did your initial team sell across verticals or not?
   Early on, we realized the companies that received the most value from marketing automation were technology companies as they had more tech-savvy marketing teams and good budgets. We didn’t divide the team up by vertical but most of the proactive sales efforts were to other tech companies.

I appreciate the entrepreneur sending me the questions and I look forward to providing more information about what worked well, and didn’t work well, over our five year journey.

What else? What are some other sales questions for a seed or early stage startup?

Whenever I talk with Software-as-a-Service (SaaS) entrepreneurs, the topic of growth rates, and corresponding churn rates, always come up (see Quantifying the SaaS Valuation Growth Rate Multiplier). After talking about churn rates, I like to ask the following question: how long do customers have to stay with you to know they’re in it for the long haul?

For the first few years of Pardot, most customers were month-to-month without an annual contract. At first, we paid commissions out to our sales reps at a rate of roughly 12% of the first year’s revenue. Quickly, we realized that if customers weren’t a good fit, they’d leave within the first four months. Customers that stayed longer than four months would be customers indefinitely. To make things more aligned, we changed our commission with sales reps to be 50% of the first four months of customer revenue, paid monthly as revenue came in, so that the sales reps would sign good-fit customers.

Now, there’s a debate in the SaaS metrics world about calculating churn. Do you count all new customers signed or do you only count new customers that have made it past the critical starting period (e.g. the first four months in the early Pardot example)? As a course of business, it’s easier to count all new customers as that makes it easy to track and measure the critical SaaS metrics. For the health and long-term view into the business, I prefer not counting customers that churn in the critical starting period. Cost of customer acquisition, renewal/churn rates, lifetime value of the customer, etc all have to take into account not counting early churn customers, if that’s the route the entrepreneur chooses to take regarding metrics.

Some variances of this practice include analyzing cohorts on a weekly/monthly/quarterly basis as well as only counting customers if they meet certain size requirements (e.g. it’s usually the smallest of businesses that have the highest churn rates, so if you exclude any customers below a designated size when tallying the metrics, they don’t negatively affects the startup’s real numbers). Put another way, don’t assume that all new customers should be tracked the same way from a metrics perspective.

What else? What are some more thoughts on measuring customers that churn early as part of the overall customer metrics?