Understanding Sales Contribution
If you’ve worked inside of a revenue organization you know how much attention is paid to the relationship between sales & other departments. This most typically manifests in the relationship between sales & marketing as the handoff between the two can be most pronounced. Salespeople will often dig in here during their interview processes to understand lead quantity & quality efforts as they believe it will be a predictor of future success. Although true, if you are looking to predict what will happen to your compensation over time there is a better place to look - the finance team.
Every company has a financial model they attempt to adhere to. It’s a way to track & manage expenses but also predicts what happens to cash on hand as the business grows (or doesn’t). In this model, Salespeople are referred to as “variable cost”, a cost that will change based on the number of outputs produced. This is different than “fixed costs” which remain the same regardless of what happens. This small accounting difference is actually quite a big deal and provides a lens into how sales compensation might change over time.
You see, the same way sales teams are incentivized to close deals, finance teams are incentivized to manage variable costs inside of a certain range. Meaning, there is a target number above the spend on variable costs that a company wants to hit, usually referred to as total contribution margin. For example, if a company wants a 60% contribution margin & their deal price is $100, they will be targeting a $40 spend per customer. This $40 has to account for marketing, sales, & implementation costs.
Wrapped inside of total contribution margin is sales contribution margin, defined as the amount of money returned after sales cost. These costs include sales reps & manager’s base salaries, commission payments, tooling, & benefits. A company with an outbound sales process will be targeting sales costs to be 18-22% of revenue. A company with an inbound sales process will be targeting less, usually around 12-15% (there is more spent on marketing in inbound organizations).
So, all this to say, you can use these numbers to predict what stage in the “margin journey” your company is on. For example, if you join an outbound team with a 150k OTE & reps average 450k annually in revenue, you are 33% of cost & probably out of range from where your finance team will eventually want to get you. This is often OK in early-stage companies as they go to market but becomes less OK over time as the business grows. In this instance, over time one of four things will happen:
1) Quota will go up, and if you can’t sell more…
2) Prices will go up, and if customers don’t bite…
3) Resources will be removed (goodbye my sweet SDR), and eventually…
4) Lower cost employees and/or automation will show up
Not all of these bad, options 1 & 2 are normalization exercises for sustainable growth & if your company executes these will be good for you in the long term. Options 3 & 4 will be more fundamental shifts to the role and you’ll have to decide if the company provides the same long-term trajectory for you as it once did.
Change is par for the course if you join an early-stage company, but the next time you’re evaluating a sales role, ask what the average annual revenue produced per rep is & compare that to your OTE. That will give you the most accurate lens into how much turbulence is on the horizon, much more than “how many leads is marketing generating?”.