Reimagining the Sales Function at Enterprise Software Companies in A New Era of Profitable Growth

By Marina Nekrasova, Greg Emerson, Stephen D’Angelo, Ricard Vila, Andrew Burton, and Ted Wiles

Enterprise B2B software companies are in the midst of a radical change that could not have been easily imagined just a year ago. After years of being rewarded for “growth at all costs” — often at the expense of profits — software firms are being told by public and private investors to change course or watch their valuations plunge. As capital becomes more expensive and real returns from leapfrogging gains in technology are harder to come by, investors are seeking “profitable growth” and stronger business fundamentals.

What does this mean for software investors and management teams? How can software companies shift to profitable growth, maintaining a higher sales trajectory while realizing efficiencies? Many software companies have attempted to tackle these issues through reactionary across-the-board cost-cutting, with 100k+ tech job cuts in 2022 and ~80k+ already in the first two months of 2023 as of February, only to find that these scatter-shot measures have softened top-line revenue while failing to propel true productivity gains.

With the go-to-market (GTM) function making up 40%+ of revenue at high-growth cloud software companies, understanding what drives effectiveness and productivity of spend is critical to thriving in this new era. To benchmark GTM strategies and results, BCG surveyed more than 90 executives at mid-sized B2B software companies with revenue from $50 million to $1 billion. Our goal was to identify systematic differences in GTM approaches between high-performing organizations and trailing companies, ultimately to help determine which GTM models could produce the best results in this period of uncertainty.

What we learned was eye-opening: GTM budgets do not correlate with performance. Our survey found that, contrary to popular wisdom, companies spending more on the sales function did not necessarily enjoy higher customer growth than those that were more tightfisted. In actuality, the situation is much more nuanced. While sales investment may drive growth, other aspects of the business’ GTM activities and organizational structure may be even more critical in determining whether changes in sales budgets will impact revenue or sales efficiency. Companies must ask themselves:

· Does the company’s products dovetail with its market and customer base?

· Does the company have enough quality leads for additional reps to convert on?

· Is the right team in place, and has the sales organization effectively identified your unique “A player” profile?

· Does the company have the right ratio of sales support to account executives?

· Are sales reps set up to target sales leads with the highest potential?

· Does the company understand, develop, and incentivize the best set of sales behaviors for reps to be successful in the market with its products?

· Have you refined your GTM playbook in light of current market conditions & buying processes?

If the answer to any of these questions is no, the sales investment will likely not alter a poor growth trajectory. Looking at publicly traded SaaS companies, among top quartile growth companies (i.e., those growing 55% or higher), GTM expenditures as a percentage of revenue varied by around 60 points between low- and high-spending organizations — suggesting that there is significant difference in how effective GTM spending can be.

In line with this wide variance in GTM effectiveness, we found that merely spending more on sales did not in fact result in higher new customer growth — whereas spend on marketing did (see Figure 1). Of course, this raises the question of what the precise elements of the most effective sales approaches are. Using a 2x2 matrix, we segregated companies by their sales efficiency (the magic number, which measures the output of a year’s worth of revenue growth for every dollar spent on sales and marketing) and sales cost as percent of revenue. The result is shown in Figure 2. Out of the 43 enterprise software companies that made the cut for this analysis, 12 landed in the best performing category, with a median of 3.2 magic number and $2.3 million in sales per salesperson.

Figure 1: Companies that spend more on sales do not necessarily see higher ARR growth from new customers, but those who spend more on marketing do

Figure 2: Breakdown of companies in terms of growth performance and cost of sales, and associated key efficiency metrics

Looking more closely at the companies in the high-performance quadrant, we found that they had three critical GTM aspects in common:

1. A high number of Sales Development Reps (SDR) compared to Account Executives (AE) and lean, digitized sales support. As shown in Figure 3, the best performing sales organizations had an AE:SDR ratio of 1:3 vs. >1:5 within the other groups and an AE:Sales Support ratio of 1:4.6 vs. 1:3.

This suggests that during the “growth at all costs” heyday, software companies hired too many AEs and sales support staff — including sales engineers to help in the selling process and functional support to undergird revenue operations — while neglecting SDR positions needed to generate the leads for these reps. In so doing, they overspent for an effective sales function. Successful sales organizations provide AEs with the right types of assistance — particularly in new business development — that can directly result in additional leads, while investing in tools and best practices to streamline the sales process and reduce the sales support headcount.

Figure 3: Company headcount ratios by sales efficiency category

1. A deliberate strategy for channel partners. Use of channel partners as an ancillary sales organization with the right strategy can be pivotal in balancing growth with profits, because this can be an efficient route to market that reaches a wide range of potential customers more quickly than internal sales reps. In the software landscape, channel partner opportunities cover a broad range of possibilities — ranging from installers selling residential access control software to systems integrators implementing ERP solutions. Channel partners can be the sole sellers of software or execute the sales process alongside internal reps.

Our analysis found that a clear strategy is essential for getting the most out of channel partnerships. As shown in Figure 4, companies that held a firm position of barely using partners (<10% of sales) and companies that chose to drive significant sales through partners (35%+ of sales) had higher magic numbers than software outfits that have adopted the middling, halfway in/halfway out approach. The best approaches to channel partnerships carefully consider adjusting costs of sales with returns, making value capture a priority as margins can be hurt if sales incentives and agreements are misaligned or poorly managed.

Figure 4: High growth and efficient companies more likely to either make little use or very substantial use of channel partners

3. Ramp up time for new sales staff is lower. Getting AEs up to speed quickly is essential to go to market with an efficient sales team faster at lower cost. As shown in Figure 5, high-performing sales organizations ramped up their sales teams in 3.7 months while high-growth, high-spend companies took as long as 5.8 months. Such performance is likely achieved using a well-defined profiling model to hire the right AEs and to onboard successfully.

This demonstrates the importance of having a replicable, well-defined sales process and priorities as well as clear systems in place to train new hires. Particularly when pursuing large growth initiatives — such as, reaching out to a new customer base or moving into a vertical market — software companies need to able to quickly drive sales organization alignment with the overall strategy. Interestingly, the high-performing sales organizations also were able to identify lesser performing AEs more readily, supporting more aggressive turnover to keep the sales team fresh and comprised of the best talent available.

Figure 5: In efficient growth orgs, AEs ramp more quickly and have higher non-regrettable attrition, suggesting more proactive talent management

Reaching profitable growth is imperative now for software companies — and a big shift that will take careful strategic preparation to successfully navigate. Our survey data provides valuable insight into the features of sales teams in companies that have already achieved this goal. For investors, this offers helpful context identifying potential value creation opportunities and the path towards realizing efficiency gains. For management teams at software companies, reimagining their GTM functions for a vastly different environment will be challenging — and leveraging learnings from other high-performing companies is critical to do so successfully.