Even with late stage VC capital now very hard to obtain, and the IPO market still frozen, I see many people on my LinkedIn feed saying that sales and customer success pay less. are doing. And that they are paid less. That they add so much value, they should be paid more.
That’s right, and at SaaStr, we and I have been strong supporters of some of this. The power of paying your sales team well, not limiting sales commissions, keeping customer success on a variable plan, and second-order revenue. We and I are still strong advocates of paying your revenue team well. But they have to deliver.
And this is where things got a bit corrupt in late 2020 and 2021. Late-stage venture capital was so free-flowing, that it made sense to invest in sales, customer success (and to a lesser extent marketing) at a much higher level than before.
what do i mean? Well, most of the time, about 10% of the “profit” on a deal has gone to the sale, and about 5% of the refurbishment has gone to the customer’s success. There’s a bit of mix and match here, but let me explain:
In nearly every type of sale, even auto sales, 10% of the profit usually goes to the sales rep. SaaS originally shortened it to 10% of the entire deal, as the traditional software margin was 90%+. With around 10% of your quota in base pay, and 10% in bonus, it will achieve a comp: 5x ratio of bookings. So for most of the time in SaaS, you basically had to put off $500k to make a $100k OTE, $800k to make a $160k OTE, $1m to make a $200k OTE. In SaaS until recently, roughly 5% was set aside for each upgrade for customer success. While this may not sound like a lot, it is actually a big part of all your revenue. This led to the classic $2m Man/Woman, where a classic CSM would earn $100k or so by handling a $2m renovation.
Now, as SaaS got bigger and we grew faster, we pushed these metrics up a bit. That’s what venture capital is for, really, to some extent. So sales reps started taking home 25% or even 30% of what they put off, and CSMs often only covered $1m-$1.5m of renovations, and made $120k+ or more. It’s over 5% – more like 10%.
These investments make sense because you’re scalping, the sale is taking home 25%+ of the deal, and the CS is being paid up to 10% of the total renovation. Even if you may not be able to retain them after the IPO.
But then in 2020 and 2021, things just fell apart. Inflation set it off, and competition intensified, and everyone just wanted more. more money. And importantly… not for performance. Depending on where you look, comp grew another 20% in SaaS leaders in late 2020 and 2021 — without any increase in quotas, bookings, or coverage.
Now we’re back in more normal times, and it doesn’t work. You can ask for more money, but you have to come from somewhere. That $1 of revenue only goes to so many places. So we are seeing it in higher quotas and lower realizations for sales. And we’re seeing that eventually CSM is being asked to cover more to earn more comp.
The massive amount of later-stage venture capital in SaaS resulted in a major drop in sales and success efficiency. Startups that used to burn say $200k a month started burning $600k. Those burning $500k a month started burning $1m. And a lot of it went into increased comp, without much realization, for sales and success.
It just can’t last anymore. At least – understand the math. In the end, it’s hard to take home for sale in total comp more than 20%-25% of what they close. And it’s tough for CS to take home more than 5%-6% of the revenue it manages. At least at some point, math has to land here.
xkcd chart from here
Published on 11 October 2022