"We are at $500k in ARR... do we hire an SDR or an AE?"
This is a fairly common question.
I'm always happy to hear it, because the founders are at a revenue point where bringing in a salesperson makes sense.
The answer in 95% of cases, the smartest move is to hire an Account Executive.
First, two definitions:
A Sales Development Representative (sometimes called a Business Development Representative) is someone whose job is to set meetings with qualified prospects.
An Account Executive is responsible for managing the entire sales process, end-to-end.
If we were to think about the responsibilities of the two roles, it would look like this:
Why you hire SDRs
- To book meetings
- To exist as a future talent pipeline for your sales team (this becomes VERY important as your sales team grows in size, but is not a problem yet)
What you are getting for your money
Let’s assume you set a quota of 12 meetings per month, and have a 2 month ramp quota. For simplicity's sake, we’re assuming that the SDR books zero meetings during their ramp.
At the one year mark you’re planning on promoting your SDRs into being Account Executives.
We're going to assume this SDR has hit quota 100% every month after they come off their ramp.
Over the course of a year, you have received 120 meetings. Each meeting has cost you a little over $1000. These meetings may or may not have contributed to any deals closing.
More bad news: the real world cost to actually hire an SDR is higher than my numbers, because I didn't add an SDR manager. An SDR manager costs upwards of $160k, which spread across 4 SDRs brings your individual SDR cost to $165k. SDRs require more management than Account Executives. It's a combination of the tools they use (they're playing with a lot of data), and the fact they are junior professionals.
Cost of an Account Executive
Note: Most of these expenses aren’t that flexible. You might be able to trim this number by 5-10%, but you aren’t cutting these numbers by 50%.
What you are getting for your money
We're going to assume this rep has a 3 month ramp, where they're expected to close nothing.
After that they get a full quota for the remaining 3 quarters.
We're going to go with standard 1:4 OTE:Quota ratio, which means that if we're paying this rep $200k a year, we expect them to bring in $800k.
Following this logic, assuming our Account Executive has hit 100% to quota, they have cost us $280k, but also bought in $600k in net new revenue.
We also need to think about the timing of payments through the lens of cashflow.
Variable compensation for an Account Executive is only paid out once new revenue comes back in.
By comparison, SDR compensation is not explicitly tied to new revenue coming in.
Because of this, it almost always makes sense to hire your first 2 (maybe even your first 4) AEs before you even start thinking about adding SDRs.
The bottom line:
An Account Executive is the person you want to hire. They cost about 30% more than an SDR, but they're much more effective.
SDRs are a medium term investment, with a 2-4 year payback period.
The odds are, you're probably going to break even in the first 12 months.
Outsourcing your lead gen MIGHT be the cheaper move.
The downside to that, is the agency you work with won't be ready to work as Account Executives for your team in 12 months.
Also, SDRs who get promoted stay a while.