As someone who’s built or helped build multiple Sales Development teams, I wanted to pass along the formula that I use to roughly estimate whether an SDR team will be a good investment for a company.
If you’re coming into this from outside of the SaaS world, SDR stands for Sales Development Representative. They’re also sometimes called ISRs, BDRs, ADRs, MDRs, and all other sorts of nonsense. An SDR is an inside salesperson focused solely on prospecting and setting up opportunities for an Account Executive to close business.
Simple Way to Measure ROI
Achieving Return on Investment means you’re getting back the cost of your investment, and then some. For now, we’re going to leave out calculating the NPV/LTV, and just focus on cash we get from the SDR’s first year.
To do this, we’ll use the following formula:
Total Annual Contract Value from SDR / Total Associated SDR Costs
Loaded Costs Per SDR
Remember, the total costs associated with an SDR are more than their annual OTE. Bake in payroll taxes, allocated Salesforce/lead gen/healthcare costs, plus management overhead of 10–15%. So first, here’s an example of what an SDR’s fully-loaded annual cost would look like:
- Total Compensation: $65,000
- Payroll Taxes (10% of comp): $6,500
- Healthcare/Salesforce/Nova/Slack/Gmail/Food/Coffee: $750
- Management overhead (15% of comp): $9,750
- Total associated costs per SDR: $82,000
Revenue Productivity Funnel
Now, we know what an SDR costs, but now we need to figure out how much revenue we can expect per SDR!
A decent quota of meetings per month per SDR would be somewhere in the 18/mo range in order to earn an OTE of $65k/yr; let’s assume 60% of those meetings turn into Opportunities, and 30% of those Opportunities turn into customers, who on average pay $15,000/yr.
With those numbers, here’s our Meetings conversion funnel, per year:
216 Meetings > 130 Opportunities > 39 Deals
At $15k per customer of ACV, that’s $585k of ACV each SDR is generating in their first year.
Great! So now we roughly know their ROI: 585k ACV / 82k Cost = 7.1x ROI. Not bad at all.
IS THIS DEFINITIVE? WHAT DOES THAT NUMBER EVEN MEAN, ALEX?
First, put in your company’s own funnel metrics into my formulas above. If you can already get more than 7.1x ROI (or whatever your personal result was) from your existing demand generation initiatives, then hold off on building that SDR team.
Most companies in this deal size range see 2–5x ROI on demand generation until their marketing is SUPER dialed-in, so in this case, outbound is definitely a good strategy to consider.
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?
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!