Understanding Unit Economics for the Enterprise SaaS “Go-To-Market” Strategy

By Eric Mersch

Executive Summary

The direct field-sales “go-to-market” strategy dominates in Enterprise SaaS companies serving large corporations with high value-add products requiring extensive integrations and high-touch customer service. This article discusses the unit economics of the direct field sales model and shows how it leads us to the LTV/CAC ratio.

Enterprise SaaS “Go-To-Market” Strategy

According to the 2019 Key Banc SaaS Survey, SaaS companies with a product priced at an average contract value above $50,000 typically require direct field sales. At this price point, the software product’s complexity and the challenges of selling into the enterprise likely require an in-person sale. Direct sales representatives, typically titled Account Executives (AEs), will identify the decision-makers inside the enterprise and develop strategies to gain their attention. AEs provide critical customer education, especially when your company seeks to create a new category or operates in a highly fragmented marketplace.

SaaS Account Executive Economics

To understand why the $50,000 contract price point is important, you will need to understand the unit economics for the Account Executive.

As an example, let’s assume that we work at an enterprise SaaS company with a subscription product priced at an average Annual Contract Value (ACV) of $100,000. For our business, we need each AE to generate annual new subscription bookings of $1,500,000. AEs are compensated with a combination of base salary and commissions on new subscription bookings, typically with a 50%/50% split. The sum of these two components is referred to as On-Target-Earnings (OTE). The OTE is established using a ratio of sales quota to OTE of 4x – 6x. Using the middle of this range in our example, our Account Executive OTE will be $300,000, with $150,000 for base and $150,000 for commission if the AE signs $1,500,000 in new subscription bookings.

Another way to look at this is to use the average sales commission rate, called the Base Commission Rate (BCR) for direct sales. Industry benchmarks coalesce around 10%. So, for annual bookings of $1,500,000, we would expect to pay AEs $150,000 in sales commissions. This is half of the AE’s compensation, so we would pay an annual base salary of $150,000.

Sales and Marketing Expense

Account executives are supported by a sales organization involved in lead generation, technical support, sales operations, and leadership. Enterprise SaaS companies may also have indirect channel sales. Many of these employees will earn a commission on new subscription bookings. The commission rate for the combined team averages 2%. So, the Fully Loaded Sales Commission Rate would be 12%.

The sales organization salary and wage expense can be calculated based upon the support & management required for an individual AE. One head of sales can directly manage 5 -10 AEs and each AE will be supported by 0.5 Sales Development Representatives[1] (SDRs) and by 0.5 Solution Consultants[2] (SCs). A Director of Sales Operations (DSO) supports AEs in functions such as sales workflow, CRM management, training and enablement, reporting and forecasting.  So, each AE is directly supported by three Full-Time-Equivalent employees, the combined compensation for which would be $200,000 per AE, excluding overhead commission.

In Enterprise SaaS companies, 80% of the Sales department expense is people and 20% is discretionary, which is the phrase we use for travel and facilities expense. Using this ratio, we would add $125,000 per AE for these expenses.

In a direct field sales model, Sales expense makes up 75% of total Sales & Marketing expense. In our example, Sales department expense is $745,000 per AE. So, a marketing spend of $225,000 per AE completes our total Sales and Marketing expense equation for a specific AE, bringing the total to $1.0M.

Calculating the Magic Number: Sales Efficiency

Now that we have unit numbers for both Subscription Bookings and Sales and Marketing expense, we can calculate the average Magic Number for a single Account Executive in a field sales model. For enterprise SaaS companies, it’s common practice to apply current year’s S&M to the current year’s New Bookings because long sales cycles make correlating the two inherently difficult. Therefore, this comparison is valid for field sales models.

In our example, the Magic Number for one account executive in a field sales model is 1.5x and, thus, the field sales model would be an effective “go-to-market” strategy for a SaaS business with an ACV of $100,000.

Calculating the Lifetime-Value-to-Customer-Acquisition-Cost Ratio: LTV/CAC

We can take this analysis one step further by estimating the Customer Lifetime Value (LTV) and, from there, LTV/CAC. LTV is the present value of all cash flows from the average customer. For this calculation, we need to estimate the average customer lifetime, adjust the cash flow for gross margin and account for expansion.

Enterprise SaaS companies typically need years of operations to have enough data to calculate lifetime and expansion rates. Companies with $50M in Annual Recurring Revenue (ARR) or less will likely be in this situation. For such cases, common industry estimates for enterprise SaaS customer lifetime range from 3 to 5 years. This long period of time reflects the customer’s commitment to the solution based upon the high price point. Complex implementation creates a stickier solution, and this leads to longer customer tenures. Time to Value is longer because the solution typically requires a lot of operating experience to demonstrate the value-add. Therefore, we can use a lifetime in that range.

Enterprise SaaS companies typically employ a “Land and Expand” strategy in which a sale is made into one department with the intention of expanding usage to users in departments throughout the company. We engineer the company’s Go-To-Market strategy to drive post-sale expansion. Therefore, we can include an annual expansion factor in our calculation. In this case, we’ll use 10%, which is a decent annual expansion rate for an enterprise SaaS company.

SaaS companies operate at high gross margins. The incremental cost of delivering the solution is low because cloud computing costs, i.e., processing power, storage, and bandwidth, are minimal for an individual customer. The only other expense in Cost of Revenue is customer support, which consists of call center representatives offering Level 1, i.e., basic support. According to the 2019 Key Banc SaaS Survey, subscription gross margin averages 77% for survey respondents (see chart). Benchmarking tool OPEXEngine shows enterprise subscription gross margin at 78%. So, we’ll use 78% for gross margin in our calculation.

We can use the above variables in the Customer Lifetime Value (LTV) equation shown below:

Lifetime Value = ARR * GM * Lifetime * Expansion Rate

Assuming one Account Executive (AE) generates $1.5M in subscription bookings, we can calculate the average LTV as $1.5M ARR * 78% * 3 years * 110% to get $3,861,000. We divide this by the $1.0M Sales and Marketing cost of one AE, we get 3.9x. Any LTV/CAC ratio above 3.0x represents above average performance. Therefore, the field sales model, based upon current industry benchmarks, results in a very efficient Go-To-Market strategy if the company has achieved product-market fit and the sales and marketing organization is properly staffed and managed.

In Summary

Enterprise SaaS companies serve the largest corporations with high value add solutions that command low six-figure annual subscription prices. Subscription deals with Annual Contract Values of $100,000 or higher coupled with gross margins in the high 70%’s enable these companies to support expensive field sales teams. Managing such a business is a lot of hard work, but we have shown here that a field-sales Go-To-Market strategy can operate with a high degree of efficiency.

For SaaS metrics referenced in this article, please refer to FLG’s Glossary of SaaS Metrics and Benchmarks.

[1] SDRs are also called Business Development Representatives (BDRs)

[2] SCs are also called Sales Engineers (SEs)