Revenue efficiency (without underinvesting) is the name of the game in 2023.
I was speaking with a customer CRO recently, considering her 2023 annual plan.
As we discussed the stark contrast between the frothy environment of 2021 and the subdued one of 2022, she shared with me how she’s thinking about 2023:
“It’s not about hitting a number at all costs anymore,” she said.
“But it’s also not about efficiency at all costs. All that means is you’re underinvesting and leaving your market open for competitors to take,” she added.
“The name of the game is about growing the business with the right balance between market aggression and revenue efficiency.”
She was right.
There’s a delicate pendulum that has swung to two extremes over the last 15 months.
In 2021, it was solely about market aggression:
Win the market. Grow at all costs. Figure out how to throw off cash later. Don’t. Let. Up.
As 2022 came to a close, the pendulum had swung to the other extreme:
Profitability and efficiency are king. Underinvestment, layoffs, and cost cutting measures.
As we meet 2023, the top revenue leaders will be the ones that are able to strike the right balance between these two extremes, striving for revenue efficiency, and investing in growth.
But “balance” doesn’t do justice to that challenge we face in the year ahead. “Balancing” those two priorities implies you’re capable of doing both well and just need to tweak the dial.
Even if you strike that balance, you could still fail at both.
How is that possible? What if I told you that your most commonly used lever for investing in growth only has a 60% effectiveness rate AND could significantly damage your revenue efficiency?
Sound like a worst-case, lose-lose scenario? It’s actually incredibly common.
What investment could possibly be so high risk? Your revenue hiring.
40% of B2B salespeople are costly hiring mistakes.
That means that one of the best ways to invest in growth, hiring a strong sales team, can actually wreak havoc on your revenue efficiency.
Talk about a lose-lose.
Here are five ways inconsistent revenue hiring devastates your revenue efficiency.
1. Wasted Leads, MQLs, and Sales Opportunities.
Creating and maintaining an effective sales funnel is the MOST important thing when addressing revenue efficiency. Even if your marketing team is world class and is dumping large quantities of leads into the top of the funnel, it’s still on your sales team to close those leads.
If you’re hiring bad sales reps onto your team, that funnel starts to break down well before you get anywhere near the bottom.
As your company invests in growth, a large portion of the top of the sales funnel should be coming from your marketing team. These marketing qualified leads are often expensive to generate, but they’ve also been identified as having a higher likelihood of becoming paying customers.
When you have sales reps closing MQLs regularly it can be a thing of beauty. The sales and marketing alignment dream realized. Hallelujah.
But when you have bad reps with low close rates burning through your MQLs, it can be painful to watch. And it can be brutal for the efficiency of your sales funnel.
Let’s say your marketing team is providing each sales rep with 100 MQLs each month. If your ‘good’ reps convert 50% of their MQLs into qualified opportunities, they’re feeding the rest of the funnel and giving themselves more opportunities to close. With an industry standard SQL close rate of 20%, that could mean 10 closed deals for each rep from MQLs each month.
If your weaker reps are only converting half that (25%) into opportunities, and have below average close rates (10%), their results are dramatically different, closing only 2-3 deals from THE SAME MQLs each month.
They may be converting and closing half as much, but their pipeline from MQLs is 80% less efficient.
2. Longer ramp time (higher cash burn with less return)
As we’ve covered before, the earliest sign you’ve hired a bad sales rep will be their significantly longer ramp time when compared to your average reps.
It will take them much longer to get up to speed, while still burning the same amount of cash. Onboarding, enablement, and draws against commission are all expenses you sink into these underperforming reps, while getting less return than even your average reps.
Here’s an example of how painful slow ramp times can be:
Let’s say AEs at your company have an $800k/year quota – a typical mid market SaaS AE number.
Of course, during their first year, they’re spending their first few months ramping. So they have a first-year prorated quota of closer to $500k.
If you hired the RIGHT sales rep, their ARR generation ramp would look like this:
A good rep will close no business for the first few months as they ramp, but get up to speed to eventually hit or exceed their ramp quota of $500k.
What does a MIS-HIRE look like?
Compared side by side to the ‘good’ hire, it looks like this:
If the ‘weak’ AE ramps just a fraction slower, they would close $100K less in that same five month period.
And it only gets worse from there.
3. Lower ‘fully-ramped’ revenue production
Even with an extended time to ramp, sales mis-hires often never achieve quota, likely producing only 70%(ish) of what good reps produce.
Let’s look at that same example from above.
If a good rep is able to ramp in 5 months, their performance at the end of their first year would eventually hit or exceed their ramp quota of $500k. In this case, the rep overachieved against their prorated number by $86k.
Let’s play out the mishired reps year as well. As we covered before, they will ramp more slowly than our average reps, in this case taking 7 months to reach their peak performance instead of 5.
But as we know, their peak performance will only be 70% of our average reps, so the rest of their first year will look like this:
After 12 months…
That’s a $254,000 ARR gap.
$254,000 lost ARR PER mis-hire is already hugely expensive, and incredibly costly for a company looking to improve their revenue efficiency.
With a sale mishire (or many) you’re closing less business while still burning the same amount of cash on onboarding, enablement, and draws against commission.
That means that every deal you do close is more expensive.
This is the opposite effect of the revenue efficiency you’re aiming for. Your sales mishire is driving your customer acquisition costs up while dragging down your unit economics, two key indicators of how efficient your revenue organization is running.
4. Lost revenue from backfilling and ‘re-ramp’
Unfortunately, the pain of that single sales mishire isn’t over.
Let’s say you decide enough is enough with the underperforming rep. Now you’ve got to go replace that rep with a backfill.
Most likely, finding the right backfill will take a couple of months.
That’s two months where your ARR for that open role drops to $0 closed per month.
Before you even have somebody back in the seat, you’ve missed out on $130k ARR that would have been brought in by the right sales hire producing $65k per month all along.
And once your backfill is in the seat, they STILL have to ramp up. Assuming you’ve hired a winner this time, that’s another two months where your ARR for that role stays at $0.
While you put additional cost into hiring, onboarding, and ramping a new rep, you’ve created a massive “hole” in your company’s ARR. It’s this hole in ARR that shows the true cost of a sales mishire to your business.
When we initially compared our average rep with our mishired rep at the end of twelve months, it LOOKED like the difference between the two was $254,000 in ARR.
However, when you take into account fixing that mishiring mistake, the TRUE cost of that SINGLE MISHIRE over a twenty-four month period was almost twice that:
That’s a colossal impact on your company’s performance and revenue.
And let’s not forget, that is happening on average 40% OF THE TIME you hire an AE(!)
5. Unsustainable customer acquisition costs
As we mentioned above, the lost revenue from a sales mishire is only part of the story.
Because your base costs per rep are the same whether they’re a “good” hire or not, when you hire a “bad” rep, you’re spending a similar amount to get a smaller return. That’s the exact type of inefficiency you need to avoid in 2023.
Take a look at this over-simplified example:
If you have the same number of reps, that cost the same to recruit, onboard, and pay, and all you change is their effectiveness, you can wind up with near double your costs for every unit you sell or deal you close.
This inefficiency shows up in the Unit Economics of your business.
While those aren’t often metrics that make the average sales teams performance bonuses or OKRs, they’re the metrics that matter most to the people that matter most.
These are key metrics your board, investors, and executives use to review the efficiency of the business.
Wrapping it all up.
Striking a balance between revenue efficiency and investment in growth will be THE challenge facing nearly every business in the year to come.
As you strive for this balance, it’s crucial you do not ignore the importance, and risk, of sales hiring.
The companies that will succeed this year will be those who are able to staff up with the best sales reps, increasing their sales funnel efficiency, lowering their CAC and per unit cost, and avoiding costly mis-hiring.
Investment in growth and revenue efficiency in perfect balance.