If you haven’t read it already, first read Part 1 of this blog post, where we go over the simple method of measuring ROI from an SDR team.
Measuring True ROI
In Part 1, we talked about how to use the ACV generated by an SDR to determine whether outbound SDRs are a good investment. But, for companies that sell a sticky product with a high Customer Lifetime Value, ACV alone doesn’t take this into account! Even so, future years’ cash is not as valuable as this year’s cash.
So, to solve these issues, we’ll change the ROI formula a bit:
Outbound Customer Lifetime Value $ / Total Associated SDR Costs
Here are a couple tricky things to be aware of:
- Especially if you have negative net churn (but even if you don’t), apply a discount to future-years’ cash flow so that your LTV is realistic, and not infinite. More on this here. Simply put, cash flow in year 2 of the customer’s lifetime is worth 90% of what it is in year 1. Year 3 cash flow is worth 81% of what it is today, and so forth. A typical discount rate to use is 10% per year.
- Lifetime Value (LTV) includes gross margins, so make sure you bake in the cost of service here.
True LTV per Customer
Here’s an example of how to figure your true LTV:
- Annual Revenue Per Account (ARPA) = $15,000
- Gross Margin = 85%, so annual Gross Profit Per Account = $12,750
- Churn = 4.16%/mo & average customer lifetime = 2 years
- Actual LTV = $12,750 + [ (1–10%) x $12,750 ] = $24,225
Productivity Funnel with LTV
Let’s assume that our fully-loaded cost per SDR is still $82k/yr like we worked out in Part 1. Now we know what a deal is worth long term; let’s refresh the Productivity Funnel!
Here again is the funnel we’re expecting from a decent SDR pulling in 18 meetings per month:
216 Meetings > 130 Opportunities > 39 Deals
So now, at $24,225 per customer of LTV, that’s $944,775 of value each SDR is generating, each year they are productive. Their financial productivity is thus 944k LTV / 82k Cost = 11.5x ROI. Very decent!
So, should you build an SDR team after all?
With this level of modeling, you should be able to accurately compare investing in an outbound SDR team with the opportunity cost of not doing so. If you’re above 8x ROI on demand generation when using LTV in the calculation, then you’re good to go!
If the numbers make sense — GO FOR IT!
Remember: data is your religion. Good luck out there!