Why does my boss wants me to sell 10 times my own salary?
This discussion often comes up in our “cost of sales” workshops, and we believe it is a great idea for any manager or director to thought through these cases so that you can provide a simple and straight forward answer to the question when it comes.
Why is it that companies ask their teams to sell for so much more money than their own salaries. One could think it would be enough just to sell to cover your own cost, couldn’t you?
Let us take the Software example: You are working for a great start up B2B SaaS company, the team is great, you believe in both the company and the idea, but … they ask you to sell for a million, but your on-taget-pay is less than 100k. How can this be, seriously??
As you will see, there are many obvious and hidden costs to consider, and by being transparent with your team about where the money goes, you will save yourself potential problems. In this article we will take you through two different examples, one SaaS company and one traditional industrial equipment manufacturer, and compare.
You may also want to download our excel calculator that you can plug your own numbers into the two scenarios.
Cash is king. Let us consider two different cases:
- Software have very high gross margins, but cash comes in slow nowadays with subscription and pay-as-you-go schemes.
- Traditional things, such as industrial machinery are often paid at delivery buton the other hand the internal margins– gross margin– after costs of goods are much lower.
Many recent companies, startups and scaleups, don’t have California-style financing and unlimited resources (you are in Europe). Your company need to be profitable or close to profitable – EBIT wise. This means that your sales need to carry both your own cost and part of the rest of the company’s cost. What is your reasonable quota?
Profitable companies cover costs – a rule of thumb
A rule of thumb that often is used to keep a SaaS company profitable is to at least let the value of new contracts cover the sales cost. Or in SaaS terms, the new annual subscription revenue rate (first year ARR), should be higher than the customer acquisition cost (CAC) – (new ARR > Cost of Sales, CAC).
This means for the company any new customer must be paid for already during the first year contract (from signing). Otherwise, the company will need external financing to cover while waiting for the second and future years payments.
If first year contracts cover CoS, the company can grow with limited external financing, and not be restrained by a systematic cash flow problem for its growth.
A software example
So, what is the reasonable quota, or sales target you should carry? Lets look at the cost of sales and the money we can expect initially.
For those of you who were in business in the 2000´s – Subscription software – SaaS, has completely changed the game plan. What used to be a 100.000 € initial deal, with annual maintenance of 20.000€ has now become a 3-4.000€ monthly subscription. Over time this is great, but Saas companies struggle to become profitable as payments are pushed int the future. How do you cover costs with subscriptions only?
Looking at the cost of sales – CAC
In a software company most cost is personnel related. To sell your product you are using company resources to close your deals .. such as techsales, new features/development, management and admin. We don’t include some parts – The customer retention or “customer success” team manages customer service and support, and drive usage of your product so they carry their own cost.
Without going into any great detail on what may the case in your company, it will probably be a good rule of thumb to think that you carry yourself and 3 – 4 more people in the company – so If you sell for about 4-5 times the average employee cost you are all right.
The real cost for any of us employees, is around 1,5 – 2 times our salary, we end up with a reasonable quota at roughly 10x the base salary. This includes social security fees, indirect taxes, the office space you use up, medical insurance, meal tickets etc.
Let’s have a look at the following example, if your salary is 60kEUR, your total cost is around 100kEUR, and the reasonable quota is 450kEUR-600kEUR . If your salary is 100kEUR, you should not be surprised if your quota is 800-1.000kEUR. Why?
Why is 4-5 times your cost, (or 10 times your salary) a good rule of thumb?
- One (1x) is to cover your own cost to the company (100k)
- One (1x) is to cover other direct new sales costs, Presales activities, free Consultancy, proofs of concept, development adaptations etc
- One (1x)is to cover other overhead and indirect sales costs, your sales director, your marketing personnel, a part of admin, all more or less involved in new sales.
- The final (1x to 2x) is to ensure some margin for the Company and to cover risk. (the risk that not all colleagues make their quota)
Needless to say, we are oversimplifying the matter. In the companies I have worked it made sense for me and my team, under the circumstances I described above. The ratios can vary.
For example, if the company is investing heavily in sales and marketing quotas are higher. If the company is spending you job gets a lot easier, but at the same time your sales need to cover a higher cost.
In your company the logical figure may be anything from 3,5 times to 9 times cost, or 7 to 18 times your salary. It is normally stable, so when you figure out what the logical ratio is for your company, then you can use that as a benchmark for the future.
An example for Industrial Products
In our traditional B2B example, we apply exactly the same reasoning. In this case the product has an internal margin that can vary, and this margin is what need to cover the CoS plus any extras.
You sell industrial equipment that is produced elsewhere. The cost when delivered to your warehouse is 65% of List Price, leaving you with 35% to pay for your team’s cost of sales.
Let us assume that the sales effort is the same, which means that for every sales person you need one Presales engineer, and on average one Backoffice position. To this we add one for management Overheadand office etc. Finally, we add one to cover for the internal margin, and risk that any territory fails.
In this example your pay remains 60k€/year – that give a total cost 100k€ per person. That makes 300k€, plus internal extra of 1-200k€.
- This 500k€ must be covered by the internal margin after cost of Goods.
- Total cost/internal margins from factory = 400k€/0,35 = quota of 1.143 k€
- The pure cost is 300k€, so if you sell for less than 300k€/0,35 = 857k€ your local unit will present losses!
This means that you probably should have some mechanism that starts paying at 850k€, and pays full On Target Earning at 100%.
You have seen two examples, with similar input, but with sales expectation that become different due to the cost structure that supports sales.
When you look at the minimum quota it is helpful to use the cost perspective to discuss around when and why the company would lose money from selling, to avoid this from happening. In buoyant markets, and when you have strong financial backing your criteria and therefore the calculator may be completely different.
We have developed the two examples in the simplified calculator you are free to download here. It is provided as is, and with no guarantees, but use it and inspiration froryour own calculations and methods.
Let us know if you want help building a similar case for your own company and we will be happy to create a customized tool for you.