How Cheap a Product Can You Have And Still Have Salespeople?

Screen Shot 2013-08-13 at 1.07.13 PMOne question I struggled with a lot in the early days was what price points supported inside sales reps.  It was clear to me that our freemium offering, priced at from $0 to $19/month, couldn’t really support a traditional inside sales team.  And it became clear to me that five-figure or larger ACV deals could clearly support an inside sales team, once I handed those off to sales.

But how low can you go?  Can you really build a sales team around a $299/mo product?  A $2000 ACV?  What about a $199 or a $99/mo price point?

Different companies will have different experiences.  But here’s what I learned.  And do it right, and you can go pretty low.

First, at the low end of the market, there are 2 types of sales:  “Real” sales with demos, leads, a sales process … and 1-Call-To-Close.  The latter is basically sophisticated customer support IMHO, but done by revenue-focused professionals.  Customer calls in, willing to buy on that call, with a few questions.  Switch out a support-focused CSR and put in an entry-level sales rep, and assuming you have enough of these 1-Calls-To-Close, this rep will become profitable.  But this is a minor case in my experience, though worth doing once you have the volume.

The more interesting question is how low a price point you can go with True Inside Sales.  I.e., the customer inbounds as a lead.  They may not be ready to buy today.  They may want a demo.  They have good questions.  They want another call to discuss, to review, to map out the landscape.  The rep will have to follow-up, and work it.

What you’ll find is you are limited by two factors: (x) the number of demos and interactions a rep can do and have, and (y) the comp the rep needs to feed him or herself and the family.

So let’s do the math:

  • At the end of the day, most inside sales reps can probably close 8-12 deals a month.  Because assuming say a 20% close rate, that’s maybe 60 demos a month, or 3 a day.  Maybe 100 phone calls that are in-depth, with real questions, and follow-up action items.  Etc. etc.  Beyond that, there just aren’t enough hours in a day.  [A 1-Call-To-Close environment as noted above is different, but let's put that aside.]
  • OK, so if the rep needs to make say $80-$100k in OTE (base + bonus) … and you need to clear say $300k in revenue from that rep to make the math work on your side … at say 100 closed deals a year, to bring in $300k to the company, each deal has to have a $3,000 ACV on average.
  • So the straight math says it’s tough to have inside sales reps working on deals < $3,000 ACV or say $299/month if monthly with churn.

And so it is.  If you survey different SaaS companies that are post-Traction, you’ll see the low-end segment of their inside sales team is often focused around this price point, with other, different reps handling higher price points, but few reps at price points lower that this, unless it’s early days and just to learn.

But, the thing is, again in SaaS, averages can deceive.  In fact, you can go a lot lower.  We discussed how CAC is a confusing metric because it’s an average metric, and no customer really is all that average in its cost to acquire.  They are generally either very cheap to acquire, or very expensive, but rarely in the middle.

I do think $3k ACV or $299/mo for modelling purposes needs to be the core low price point and segment for your Inside Sales team.

But, still, we dropped the price point for Inside Sales to $99.  And it worked.  Why? :

  • First, if you don’t service those $1k ACV leads, you are wasting them.  So maybe it’s better to close them that just lose them altogether, if it’s not too expensive.
  • Since you’d lose these prospective customers anyways, you can spend more of the ACV revenue received on the reps and not worry about the marketing costs.  Because otherwise, the marketing costs would be a write-off.  These reps don’t have to be as profitable.
  • You can use this customer segment to train the new reps.  It’s cheap training.
  • And most importantly — the really really good reps can actually kill it.  Even here.  Because they’ll get really efficient, and close a lot more than 10 deals a month.  Our best $99/month inside sales reps could triple that rate, so long as we gave them enough leads.  You do need a high volume of leads to make this work.

I’m not saying you can build a whole Inside Sales team around a $1k ACV or $99 price point.  You can’t.  The lowest you can probably go on average is $3k, based on the math above, and that’s if you are hyper-efficient.  If you aren’t, bump that up to a $5k ACV to account for overhead, waste, turn-over, etc.

But as part of a bigger picture, as a segment … I think you can make money as low as $99 down and $99 a month with your Inside Sales team.  Might as well go get it, if you ask me.  At least in the early and middle days.

27 comments

  1. Can’t tell you enough how timely this article is Jason! We’ve recently started to implement Business plans that range from $50/mo – $250/mo and of course thrown the idea around whether it’s worth to get some sales people on board.

    It seems that from your recommendation, this would be a bit early and as we are moving more up market to higher priced plans, I believe it would make more sense to look at a sales team again?

  2. If I were you guys Leo I’d get 2 sales reps going on the Corporate / Enterprise plan ASAP. You need more than 1 to learn. Just plan for them to break even in the beginning since it’s not your primary revenue stream – yet. I bet you it will be in 12 months if you do this though.

  3. Trevor Lynn

    Hi Alex – great post as always. Everything you say here is true from a numbers perspective, but I was hoping you could clarify when you’re saying “$1K AVC…$5k ACV” – is that on average? When I read the post it seemed like their was a ceiling attached to these customer segments.

    What about models that do 80/20 – $2K ACV/$18k ACV with an overall average greater than $5k ACV? Fluctuating based on number of users / usage. How does that fit into what you discuss here?

    Thanks!

    -Trevor

  4. Trevor Lynn

    Sorry Jason – was talking to my colleague Alex at the time!

  5. Andy Parkinson

    Hello Jason,

    I just spent the last few hours reading through your archives (so much great stuff!)

    In a previous post you mentioned that for a $1000-$5000 ACV deal size, you need to have a cheap quality leads and can’t do things like adwords or 1-to-1 marketing. How do/did you make the marketing side work?

    Asked another way… If all you have are the 10 customers and you hire 2 sales people, you probably don’t have enough leads or a sophisticated demand marketing program that fetches enough leads to get 3 demos a day. So, how do you keep them fed with quality leads? Do you expect them to do prospecting and still close 10ish deals a month at first?

    • Yes, the cheaper the ACV, realistically adwords and most 1-to-1 marketing is not going to perform.

      The way we made this work was in the beginning, we lost money on each customer. And that was OK. We weren’t cash-flow positive until we hit about $4m in ARR. For you that may not be OK.

      In any event, pretty quickly it became clear we had 3 segments of customers — self-service; “run rate” or say $3-$6k ACV deals, plus or minus; and bigger deals, initially say $20-$50k ACV and later $x00k ACV and then $1m+ (a few). So as soon as this spread happened (first year), we segmented our efforts and mostly put money into trying to acquire $20k+ ACV customers. Those marketing efforts also got us lower ACV customers, which was great.

      And below that, we relied mainly on word-of-mouth, mini-brand, and for us, a substantial but minority viral component.

  6. Paul

    Hi Jason

    Long time lurker, first time poster. In the UK, one of the largest B2C SaaS business’s has a monthly fee of just £7/$10. CreditExpert.co.uk is part of the Experian Group and runs an zero touch sales funnel with a light touch retention team. It relies heavily, if not solely, on apathy for its scale. It proves that the best conversions is pain relief followed by below the financial radar recurring fees.

    Love the blog, I visit weekly. Found you through Quora.
    Would enjoy seeing more of your views on B2C, dealing with competitors and secondary spin offs.
    Regards
    Paul

    • Those businesses are indeed great. I ran a sizeable one as part of EchoSign (20%) of our revenue. I love it.

      The problem is that, in most cases, you can’t Go Really Big with self-service and freemium alone. It’s very hard to build a $100m business there.

      CreditExpert.co.uk may well be an exception to that rule, but there aren’t that many for real SaaS. Most B2B SaaS, if you want to Go Big, is going to need to tilt at least a bit bigger and do it via sales of some form.

      See math at: http://saastr.com/2012/09/02/you-need-50-million-users-for-freemium-to-actually-work/

  7. Awesome post Jason, a few questions-

    1. What kind of churn are you factoring in?

    2. In your experience, how long before a new sales rep gets to the run-rate of ~10 closed contracts / month?

    3. What tactics can be used to reduce the time spent on those $1k ACV customers? We are finding ourselves servicing them a lot. But then again, we are very early on and the learning we get is very important, so for now it may be fine. But I am concerned about scaling up if we have to dedicate 5-8 hours to convert a lead.

    • 1. Churn sort of is what it is from a modelling perspective. At the very low end, it will be 3-5% a month. At the high end, it will be negative (with upsells, etc.). In the middle, it should be in the 1-3% range. You just want to drive it down. In any event, I’m assuming a $3600 customer churns down to $3k on average, but I don’t think it much matters for these purposes.

      2. How long does it take? Of course it varies but at this price point ($3-$5k ACV or much lower) … they need to be starting to hit it within 60 days, and fully in 90. Otherwise something is wrong. It’s too solution a sale, not transactional enough.

      3. Since it’s early don’t sweat the time — learn from it. It will come down as your reps get smarter and more experienced, and you get better in general, as you add collateral and training on your site, as you do webinars (which are great for prospects early in the funnel b/c they scale). Also, you need to do Lead Scoring as soon as it’s practical, and send the lower scored leads to cheaper resources, maybe even offshore to be further qualified.

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  9. Thanks for detailed answer, Jason! This question has been drilling me for about 6 months now.

  10. Great post, Jason, as always. One question: You’re saying that a $100k OTE sales person should bring in about $300k in Annual Contract Value (ACV) to make it work for the company.

    I’m wondering if this doesn’t set the bar too high. If a $100k OTE sales person brings in just $100k in ACV and you have an average customer lifetime of 3 years I think it would still be a pretty good investment – $3 in CLTV for $1 in CACs. Note that I’m leaving out marketing costs and costs of goods sold here to keep it simple.

    • It is a good investment — except it will drive you bankrupt without a ton of capital assuming you are growing quickly.

      First, you still have to pay for marketing/CAC, plus engineering, plus product development, plus hosting, plus, plus, plus. So add that all up and the CAC just with marketing costs is > 1.0, and fully-burdened will probably be 1.5-2x years.

      To fund that, you need a huge amount of capital (see e.g., Box or Yammer) or to be growing so sloooowly that last year’s renewals fund it. Or to get very large prepayments up front (e.g., 2+ years).

      Having said that, for an incremental customer — an extra customer — I do think paying a rep $100k to bring in $100k is a smart way to go. But it’s not good enough for your core business model, in most cases.

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  13. Hi Jason – this was well thought out and gives a good idea of when to hire a salesforce. I have found that in the no touch / low touch pricing points where you need to focus mostly on volume vs direct selling with a salesforce, many customers still want the individual attention with demos, etc. to convert. Do you have any thoughts or posts on this business model for the most efficient ways to scale? In my experience, simplifying the on-boarding process and iterating on the product are critical pieces.

    • They do want the demos. Videos and self-service tool don’t always cut it. We’ll write about this more. You need to find a way to give them their demos, even if at the very lowest price points, it has to be with very low cost resources, e.g. fresh college grads, or even stay-at-home parents that want a PT job … whatever it is, if you give them the human touch, I believe it will be ROI positive.

  14. Hi Jason – thank you for your advice. That’s we’re seeing as well, and it will need to be at a minimal cost like you mentioned. Also, I’ve been reading some of your posts have found them quite valuable. It’s nice to hear these things from someone that has been through it all. Looking forward to future posts – thanks!

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  16. Great stuff man, thanks for sharing!

  17. What about the life time value of the customer?

  18. Absolutely! Great work on this article. That really clarifies.

    At http://launchleads.com we have a $50-100k ACV so having the sales team is magical…

    but at http://quotadeck.com where we are just getting beta users on this “Elance for Salespeople” type site…we are trying to determine what will be the price point that makes sense. Thanks again, this was a huge help. Love to connect.

  19. Thanks for this very useful article!

    My startup is selling a SaaS product to local businesses who are not tech savvy enough to subscribe online. We sell the product for around 99€/month and our sales process requires inside sales reps to make demos (outbound and inbound leads).

    We are in a country where an inside sales reps costs around 80K/year tax included and the model works great as our CAC is around 6 month of ACV and thanks to a low churn, our CLTV is more than 5K€.

    I think companies in the US selling low price SaaS products to local businesses also managed to find a sales model that works (e.g.: SinglePlatform, Locu).

    Would be interesting to hear your feedback about that.

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