There are two types of mathematical measurements for SDRs: ROI and activity metrics. They are both important and interrelated. Both must be considered carefully before building or scaling a sales development team.
Finances: the ROI of an SDR program
The success of an SDR program, like any other investment, boils down to ROI—how much you spend and how much you get back. The expenses are fairly easy to estimate, but the returns can be challenging.
Here are a few common expenses associated with SDRs:
- SDR fixed compensation – This includes both salary, and non-salary compensation.
- SDR variable compensation – Properly motivating your SDR team requires providing financial incentives for bringing in lots of new business. Don’t even think about skipping this one!
- Equipment – Your new team needs more than a computer. Think about office space, phones, desks, chairs, etc.
- Tools – Properly equipping your team with high quality sales development tools and software is key to your success.
- Data – At a minimum, your reps need lists of people to contact. Quality data isn’t cheap, but it’s often worth the price.
- Training – Preparing your team with product knowledge and sales skills is a vital part of building a successful team.
- Miscellaneous – I suggest adding an additional 20% for miscellaneous expenses. Rest assured, there will be plenty of unexpected additions to this list.
Now for the hard part—estimating how much pipeline and revenue you can reasonably expect your SDR team to create. This requires taking a look at some of your current sales numbers. Here’s what you’ll need to know:
- Average deal size – How much is the average contract worth?
- Close rate – What percentage of new opportunities result in new customers?
- Sales cycle length – How long does it take, on average, for an Account Executive to close new business after an opportunity is created?
In my experience, many young companies don’t know these numbers. If you have never calculated them, or aren’t confident in your calculations, take some time to figure them out before moving forward. Trash in, trash out!
If you are deciding whether to hire inbound reps, then you can take these numbers at face-value. Outbound, on the other hand, requires some adjustments. For PandaDoc, I added 50% to the average sales cycle length and reduced the close rate by 25% to estimate outbound numbers. Because the outbound team was planning to target much larger clients than our average inbound lead, I added 50% to the average deal size.
The final piece of the outbound puzzle is the quota to which you will hold new outbound SDRs once they are ramped. All you can do here is make an educated guess.
In my experience, SDR quotas can range from 4 to 25 per month. When estimating the number of QSOs (qualified sales opportunity) an outbound team can create, there are many factors to consider:
- Market size
- Average prospect size
- Difficulty of sale
- Deal size
My initial estimate for PandaDoc’s outbound reps was 25 QSOs per month. After the first month, we adjusted the quota to 20, which is aggressive but attainable. In my experience, most SDR quotas are between 4 and 25 QSOs per month.
Once all of the financial math is in place, you can estimate ROI from outbound activities. I can’t tell you the minimum ROI necessary to start an outbound team. I suggest asking around and finding benchmarks in your industry.
To give you a point of reference, Marketo, a company that has built a successful sales development program, expects ROI of 20x an SDR’s salary. Because of our lower ACV, PandaDoc expects 10x.
It is easy to get excited and make liberal estimates about your future outbound team, but this is a mistake. If you can’t make the math work with conservative numbers, then your team isn’t ready for outbound sales development.
Activity metrics: predict and track performance
Activity metrics are the calculations that help you confidently project performance. If you understand the math associated with your team’s activities, you can avoid some of the most common problems that SDR teams face:
- Too few QSOs to feed your closers
- Too many SDRs for your closers’ needs
- Lack of insight into your activity funnel
To understand your team’s activity metrics, you need to know three things:
- Activities per SDR. How many activities (calls, emails, etc.) does the average rep complete per month? At PandaDoc, we average 100 activities per rep per day. That means 2,000 activities per month.
- Activities per prospect. If your team completed 8,000 activities last month and had 1,600 prospects, then you average 5 activities per prospect.
- Prospects per QSO. Take the number of prospects (1,600) and divide that by the number of QSOs (80). In this case, your ratio is 20 prospects per QSO.
Using these metrics, you can do the math to determine both the number of leads and the number of reps required to hit your goals. Remember that the metrics are always different for inbound and outbound reps. Do not use your inbound team’s activity metrics to make strategic decisions about SDRs.
Once I understand my activity funnel metrics, I can provide data-driven answers to tough questions from my boss.
Boss: “Taft, what do you need in order to bring in 120 outbound QSOs per month next quarter?”
Me: “Well, last month four SDRs created 80 QSOs from 1,600 prospects and 8,000 activities. Next month I’ll need 2,400 prospects. Outbound SDRs are averaging 100 activities per day, and that is aggressive, so I will need two more reps as well.”
Boss: “Ok, do the economics work out for two more reps?”
Me: “Yep. As long as the AE team can maintain their current close rate, we can scale the team. We have a huge total addressable market, so once the new reps are ramped, I can confidently project at least 8x ROI.”