Do you know the ROI of your sales development process? And, more importantly, can it be any better?
In one of our milestone articles, our Chief Marketing Officer, Eric Quanstrom, specifies the average price of a lead generated by a sales development team, and how the figure was obtained. This information is important for any business to understand whether its outbound prospecting activity is the best option to drive ROI. And for many CIENCE clients, it’s helped shift their opinion on the extent of outsourcing opportunities we can provide.
In this post, we’ll look at sales development ROI for SaaS companies and other subscription-based B2B from a different perspective.
How much should SaaS companies and subscription-based B2B firms spend on one appointment to remain profitable?
Outbound Prospecting – Important Metrics
From what we’ve learned from our clients, it became obvious that most companies are focused on the number of set appointments and price. These two metrics are overwhelmingly considered to be the key criteria of outbound prospecting success.
While we also believe that the number and cost are important, our own experience proves that there are more crucial stats to review and prioritize when planning your sales development initiatives. Many of which are less obvious.
Most would agree that quality is more important than quantity when it comes to meetings (the right people from the right companies with pain points that can be addressed). With regards to price, reducing it still doesn’t guarantee the profitability of your sales development efforts.
Therefore, some SaaS startups and other subscription-based B2B companies don’t have the necessary tools to check if they’ve chosen the right strategy to help their business increase profit.
Being a provider of outbound prospecting services, we’ve learned the hard way that what matters most for SaaS and subscription-based businesses is the Minimum Profitable Price of Appointment. And luckily enough, there are ways to calculate it.
Minimum Profitable Price per Appointment
The easiest way to calculate the cost of one meeting set by an outbound prospecting team is to divide the total sales development expenses by the number of appointments set.
In the article mentioned above, Eric explains what to include in these expenses and why. His formula is as follows:
In the very same article, the average annual SDE totals $131,158 or $10,930 per month. This figure is divided by the average number of appointments achieved each month across all industries (6.8, rounded up to 7) to calculate the price of one meeting – $1,561.
Although it can vary across industries, you have a general sense of how much money you’re going to spend with an in-house sales development team. Furthermore, you can calculate your own SDE and meeting cost using this formula.
However, there’s a more important issue regarding subscription-based business including SaaS companies.
Are these expenditures bringing profit? Or are you spending too much on acquiring your client? For one-time transactions, the expenditures vs. the cost of the appointment are obvious.
For example, let’s say you set up 7 appointments and close one. You subtract all the costs (including SDE) from the deal’s revenue and see if your business is profitable.
This is not the case for the subscription-based B2B. The revenues you gain from one customer in one month are usually smaller than the acquisition expenditures. On the other hand, you’ll be charging your client for several months in a row– depending on what your Lifetime Value (LTV) calculations indicate.
At some point, these two figures may equal and then the revenues might even exceed. They may, and they may not. It depends. However, the cost of acquisition surmounting the income you get doesn’t necessarily mean that your business is profitable (because it doesn’t take into account other costs).
Which is why you need to calculate the “golden ratio” of a subscription-based company:
Customer Lifetime Value vs. Cost of Customer Acquisition Based on SaaS Model
In his 4,000-word article, David Skok explains how SaaS startups (which are usually subscription-based, so we can use these calculations for our purposes) struggle with expenses that exceed revenues at the beginning of their lifecycle. Under these circumstances, there’s uncertainty about the future of the business. Will it eventually grow and succeed or will it fail?
To that end, David Skok offered to calculate the ratio of two important metrics: Customer Lifetime Value (CLV) and Cost of Customer Acquisition (CAC). He studied multiple SaaS companies and proved that the successful startups had a ratio of 3+.
That is to say, the net profit you gain from an average customer over the period of their subscription (CLV) should be at least 3 times more than the cost of acquisition (CAC).
This is fairly well-known in Venture Capital circles as a leading indicator for high-growth companies. Having a CLTV-to-CAC ratio greater than 3 indicates your business is not only viable but high-growth and potentially worthy of investment.
For outbound prospecting, this means that you can calculate the maximum cost of one appointment that will guarantee the profitability of a subscription-based business.
There’s no consensus on how to calculate the CAC and CLV. David Skok and his partner Stan Reiss have done incredible work to create the complex formula for Customer Lifetime Value, which considers discount rate, gross margin, the growth rate of remaining customers, and churn.
However, the equation for Customer Acquisition Cost is somewhat simpler:
There is plenty of criticism online regarding this formula, as well as common misunderstandings about determining sales/marketing expenses. For example, Brian Balfour suggests to include:
- Salaries of the respective employees
- Overhead related to the marketing and sales team
- The cost of software and tools
For the outbound prospecting model, however, there’s another reasonable question:
How to calculate Marketing Share in the expenses associated with CAC?
Let’s use our company as an example. At CIENCE, we have a marketing team that generates inbound leads through a number of techniques (e.g., social networks, company website, SEO, this very blog, etc.). We also have SDRs who reach out to our potential clients, communicate with them, and set appointments.
It might seem logical to not include marketing expenses into appointments generated by the sales development team.
However, this isn’t right, and here’s why.
Would you trust a company that doesn’t have any online presence? Who prepares informational materials to support sales efforts? Isn’t a corporate blog the manifestation of the methods and principles of the company’s work?
As marketers, we support sales at every stage of the funnel. Which is why we suggest including up to one-third of your marketing expenses in the acquisition cost of customer brought by outbound.
Is Your Price of Appointment Profitable?
To get a better idea of the profitable appointment price needed to distinguish the sales development expenses from other sales expenses, your formula will be as follows:
Now, you can easily calculate if the cost of one appointment is actually profitable.
By substituting SDE with the (⅓ CLV*Number of New Customers – Remaining Sales Expenses – ⅓ Marketing Expenses) from above, you can answer the following equation:
If the values of these two expressions are equal, your business is doing well. If your actual PoA is bigger than your MPPoA, let us congratulate you! You might think that it’s high time to stop reading this article and enjoy the amazing business model you’ve built. Or you can read further on to learn how to make your CAC-CLV ratio even better.
If the Price of Appointment is significantly smaller than the right side of the above equation, your business has a problem and you need to fix it immediately.
Some important notes to remember:
The equations provided are the combination of descriptive (CAC, SDE, PoA, Number of Customers, etc.) and predictive (CLV) analytics. That is to say, we interpreted the past expenses—set appointments, customers won, churn rate, growth rate—and predicted future revenues.
If you have an established sales process, the figure you gain on the right side of the above equation will be accurate (more or less).
When it comes to sales and marketing expenses, the values are usually fixed (as budgeting is established for a period of one year in most companies and it’s unlikely the respective teams will spend less).
However, the CLV, the number of appointments set, and the number new customers might change significantly over the year (e.g., seasonality). While it creates some uncertainty for your predictions, it also provides a chance for a business to improve the minimum profitable PoA.
How to Make the Price of Appointment Profitable for Subscription-Based B2B?
Let’s take a quick look at the formula once again:
There are two types of variables: directly and inversely proportional to the minimum profitable price of appointment. In other words, the growth of the former will increase PoA, and the rise of the latter will decrease it.
|Direct – Increase MPPoA||Inverse – Decrease MPPoA|
|Customer Lifetime Value||Remaining Sales Expenses|
|Number of New Customers||Marketing Expenses and their share|
|Number of Appointments|
One important note: Remaining Sales Expenses (RSE) are variable to a certain extent. As we mentioned, the annual budgets for sales teams are fixed. And there’s only one way to actually change them – by decreasing Sales Development Expenses and investing this money into RSE.
As a result, the increase in remaining sales expenses won’t impact the price of an appointment because the total SE stay the same. In this case, we suggest replacing RSE with the following expression: Sales Expenses – Sales Development Expenses.
Correspondingly, the table of variables will look as follows:
|Direct – Increase MPPoA & Poa||Inverse – Decrease MPPoA & Poa|
|Customer Lifetime Value||Sales Expenses|
|Number of New Customers||Marketing Expenses and their share|
|Sales Development Expenses||Number of Appointments|
The goal of any business is to increase the Minimum Profitable Price of Appointment and decrease the actual Price of Appointment. The gap between them will give your business the “space” for inevitable mistakes and amortize the losses.
To that end, calculate the current MPPoA and PoA. Then you need to change the respective variables. Obviously, you need to decrease the SDE and/or increase Number of Appointments. In this case, your Price Meeting will go down.
When it comes to MPPoA, you need to raise the CLV and Number of New Customers, while trying to spend less on Sales and Marketing.
For MPPoA calculations we didn’t take into account the Sales Development Expenses and Number of Appointments. The reason is obvious: we don’t want to increase the former, and to decrease the latter because it’ll negatively influence our actual price of the lead.
How to Change the Variables in PoA and MPPoA
In summary, here are your two basic goals:
- Spend less on outbound prospecting while making more high-value appointments
- Increase the number of customers and their lifetime value.
It seems like four easy tasks, at least on paper (or rather, screen). However, each of the variables is a complex metric.
CLV depends on multiple aspects, including the period of customers’ retention (which correlates with the quality and type of your service, market fit, competitors), their churn rate, the expansion of accounts, and the price of your services.
The number of customers and appointments – these two figures are interesting, especially when combined together. Here’s a simple example:
What’s better, setting up 100 appointments and gain 10 customers, or 45 appointments and 9 customers?
While it might seem that 10 customers can bring you more money than 9, the sales expenses on 100 appointments are 2x greater than 45. And that’s why increasing the number of appointments decreases the Minimal Profitable Price of Appointment.
So, while it’s important to make more customers for a better MPPoA and more appointments for a better PoA, it’s even more critical to keep a good ratio between them. Spend less on appointments while gaining better conversions.
Sales Development Expenses for in-house teams depend on the OTEs of SDRs and management, the prices of software and tools, and many of them are increasing. If you want to dig deeper into the current state of Sales Development in the US, you can check our analysis of The Bridge Group Report (a bi-annual survey known as the ‘Gold Standard’ in the Sales Development space).
There are not so many ways to decrease the SDE:
- Hire SDRs with less experience – you’ll have a longer ramp time and higher risk to hire the wrong person for the position.
- Buy cheaper tools (or use freemiums) – this will make the work of SDRs longer, more tedious, and difficult.
- Spend less time training – this will influence the proficiency of your rep.
- Save the time of your managers on sales development – this will get your process less controllable and thus predictable.
- Spend less on overhead – this will probably make all your employees less happy.
A more apt strategy might be to simply outsource your sales development. In this case, you will have more experienced SDRs, and at the same time, you won’t have to spend money on tools, Managerial Allocation, overheads, training, and hiring.
If you want to learn more about saving costs for sales development, check out our article on Lead Generation Companies for how to select a company.
We at CIENCE can also work with you to provide a straightforward walkthrough of the calculations above. Our sales team members have been trained in analyzing your business to determine your own MPPoA. It’s often illuminating, as customers tell us it helps them shape their own thinking and calibrate strategy around their go-to-market.