The Wrong Way To Build A SaaS Business

The most common mistake I see new SaaS companies make is thinking that hiring sales reps equals growth. But in fact, this is totally backward.  

And this is actually a very common mistake.  

Consider a SaaS company that quickly got to $500k in ARR through organic methods. Maybe they recently raised a Series A round that’s based on that initial growth rate and now want to spend some of that money hiring a bunch of sales people to keep the growth rate up.   

But this is a fundamental mistake.

The mistake is that their math is based on a direct correlation of SDR’s being the key input to revenue growth. 

The issue here is the model is based on growth as a function of sales people, not on demand. 

Instead, it should be based on the ability to generate demand and build pipeline. 

SaaS companies do not drive growth just by hiring more sales people. Sales people are the vehicle to convert channelled demand into new customers and revenue growth. Growth is created by a great SaaS product with good product-market fit and experienced marketers who know how to predictably channel and scale demand. 

Too few SaaS companies are building their growth model with a clear understanding of marketing unit economics. Instead, they’re trying to build their companies and revenue plan by simply hiring more sales people and hoping they’ll keep bringing in the business. 

The right way to do it, is to first get good at attracting high value leads at the awareness stage. THEN hire the sales people to engage those leads and move them from consideration to decision.

In too many SaaS companies, what happens is new reps are hired based on an artificial and unrealistic quota and sales plan. Because there are no new leads, these new reps have no one to sell to and therefore can’t achieve the sales plan. 

Morale tanks, the business misses projections, investors lose faith and the culture becomes toxic.

The situation is one where something was working before, but now it’s not because more sales people are basically trying to sell to the same amount of leads. In other words, there are more mouths to feed with the same amount of food. 

The answer to this problem is actually very straightforward.  

Instead of hiring more sales people and hoping they will drive your revenue plan, build a marketing funnel that will bring in more leads than your existing sales capacity can handle.

The solution here is to exceed capacity with demand.

Once your existing capacity is tapped out (whether it’s a single founder doing the selling, or a team doing the selling), work backward from your capacity data point to figure out how much demand each person can handle. Then, increase demand to the point where it makes sense to bring on another sales person. 

For example, if the calendars are empty and you, or your sales team aren’t doing at least 3-5 demos a day, then DO NOT HIRE ANY MORE SALES PEOPLE. Understanding the utilization rate of a fully ramped sales rep is critical here. 

Before hiring any more sales people, you have to develop the ability to get more leads. 

Let’s say you want to do 4 deals per month, per sales person. If the closing rate benchmark from a qualified demo to a booked customer is 15%, that means each reps needs to do about 27 demos month to hit quota, or roughly demo 1-2 per day (assuming a bit of margin for error and ramp time). 

This means marketing needs to first create the ability to get 27 demos on the calendar.

Now, you’ve got an easy way to eyeball when it’s time to hire a new rep - and that’s when they’re doing more than 3-4 demos per day (double their normal capacity). 

So if your SaaS business doesn’t know how to get more leads, PLEASE DO NOT HIRE MORE SALES PEOPLE. 

You must first generate the demand. 

Only once you’ve got that problem solved can you then hire more sales people, not before.