Will an SDR Bring Value to Your Company?

Sales specialization has increased the importance of sales development reps, but does not mean your startup would benefit

Posted by Tejus Parikh on February 1, 2016

Scaling sales is an important function of every B2B startup. Some of the best products have failed simply because the companies could not convince anyone to buy it. It is no wonder that methodologies and approaches for running a sales team have received more rigor for SaaS companies with one of the biggest trends being the increased specialization of the salesforce. Of course, specialization is a luxury of scale. The real question for a small but growing startup is when the specialization will make sense. I created a calculator to help me and others make sense of the numbers. Read on for the details behind the application.

Despite hiding behind a veneer of junkets and golf course outings, sales is governed by mathematics. A sales rep has a quota that is determined by a business reality and the sales rep will be looking for new employment should they consistently fail to hit it. Which means that there are formulas that can be applied to the situation. One example is Insight Squared’s formula for determining the number of SDRs to hire. Another is a breakdown of breakeven costs brought up by Tomasz Tunguz.

What I needed were formulas that could tell me two things given the total compensation for an SDR: the number of leads our marketing and prospecting were generating and the number of deals closed. Merging the two formulas above, I derived the following for the number of required leads.

LeadsRequired = TotalCompensation GrossMargin * AnnualContractedValue * SalesProfitability WinRate * ConversionRate

Removing the Win and Conversion rates leaves the equation for the number of additional deals that have to be closed to support the SDR.

OpportunitiesClosed = TotalCompensation GrossMargin * AnnualContractedValue * SalesProfitability

The numbers suggest to me that sales specialization can be helpful but it requires a marketing engine and account executives to be in place to get the desired ROI. Consider an SDR making $60k a year in an organization with $3,000 ACV and industry standard margins and win rates. That person will require 294 leads and 29 additional opportunities closed just to break even. The numbers get worse with a lower ACV.

Take the calculator for a spin and see how it would work out for your company.

Tejus Parikh

I'm a software engineer that writes occasionally about building software, software culture, and tech adjacent hobbies. If you want to get in touch, send me an email at [my_first_name]@tejusparikh.com.