How Do SaaS Companies Decide to Hire More Reps? An inside look at the conversation between the CEO and CRO.
Here’s a scenario you may have seen before:
It’s the middle of Q4 and the CEO is putting together plans for the next fiscal year. It’s been a challenging year. Two years ago,the company blew out their revenue goals. Based on that strength they were able to raise a $50M fundraising round at the beginning of last year at more than double the valuation of their last round, and they came out of last year with a clear mandate: grow revenue.
There were some successes, but this year didn’t go as planned. They had to revise forecasts down — twice. They fired their Chief Revenue Officer in Q2 and hired a new one to lead the sales org in September. Only 28% of the team hit quota in the most recent quarter. Morale is down across the org.
Then the plan for the next year comes out and shows a net increase of 10 quota-bearing sales reps (QBSRs). The new CRO is already expecting and planning for turnover of at least 15–20 heads, so the net add of 10 means that they will have to hire 25–30 new reps.
So, the CRO asks for a meeting with the CEO to discuss. Here’s how the conversation goes (edited for brevity):
CRO: “Nobody’s hitting quota. Why are we bringing on 10 more reps?”
CEO: “Each one we hire adds $294,000 in annual productivity. We’re behind on revenue and need to close the gap.”
1. This is what the board wants to hear.
I know it seems crazy, but here’s the CEO’s thought process:
And there’s pressure on the CEO to tell the board what they want to hear.
2. Spreadsheets are more trusted than listening to the people on the ground.
There’s an operating model that the CEO uses to drive the forecast. That model has a cell that represents the number of sales reps. In many of these models, the revenue calculation is based on X reps each bringing in $Y.
So if you need to hit a revenue target in the model, one way to do that is to change the cell that represents the number or reps. Unfortunately, there are rarely formulas in the model to reflect the effects of hiring more reps on quota attainment of the team — which will also lead to more attrition, and costs associated with empty seats, hiring replacement reps, and ramp time.
As a sales rep, your failure is built into the model. In other words, if less than 50% of the team is hitting quota now and the company hires more reps, what percentage of the new expanded team will likely hit quota in the future?
3. Total addressable market (TAM) size isn’t factored into the equation.
Can the territories support more reps? How thin can we slice the pie before there’s not enough to go around? The formula in the CEO’s spreadsheet probably isn’t accounting these questions.
A good CRO will push back and try to help the CEO understand the flaw in their logic. Even then, they won’t always be able to change the CEO’s plan. And in those cases, if you’re a sales rep, sticking around almost guarantees you’ll close fewer deals and make less money next year.
When researching a new org (or evaluating your current one), make sure you have a detailed understanding of not only the total addressable market but also the reachable or serviceable addressable market (SAM).
Be sure to ask questions like:
- How many prospect accounts exist?
- How are they distributed out to the team?
- How do they translate into specific territories?
- How big of a team can the current market support?
- Where is the org in terms of getting to that team size?
- What product features are being added to increase the TAM?
This “inflection point” is something every org will hit. It’s all going to be going really well as the org grows into the market. But once that’s inverted, things become tough. You can ride the wave pretty well on the way up, but don’t get caught past the peak!
(P.S. On the other end of the spectrum, there are a lot of sales orgs where top performers earn over $1 million.)