'Reps times quota' equals revenue
Never challenge irrefutable laws, like gravity and the speed of light.
Sizing, forecasting, selling
Oh, January, how do I love thee? You are the month of new beginnings, unbridled optimism, product growth projections, territory assignments, and sales forecasts. Though your sunlight is dim, the opportunity you hold is bright. January, you enthrall us, the planners, schemers, and roadmappers. You unleash us into a new year armed with our resolutions, intentions, and declarations– “Hope is not a strategy!”
January is the time to recognize that nothing much is happening to move the business forward until February. It takes until early March to conclude the haggling over quotas and account ownership. Spring is industry conference season. Depending on where you sell, companies lose August and September to endless vacations. Late November and most of December are a wash. Most companies achieve six fully productive months of selling. Oh, the anxiety!
Not every company suffers such inefficiency. It took me years to recognize when mine did and plan accordingly.
Many, many Januarys ago, I stood in a room before a whiteboard attempting to forecast my product’s growth for the coming year. I was, um, a bit green in those days, making amateur mistakes, saying things like “I think we will do $20M this year”, a nice round number based on a simple calculation–twenty deals per quarter and an ASP of roughly $250K. In a very abstract way, the math worked. Over the product's life, we’d managed an average deal size of about $250K. Our business unit had twenty salespeople. Everyone can close a deal per quarter, right?
Later, I presented the growth projections to the executive team, and they said, “OK.”
We didn’t come close to that number.
The product team owns product growth, with many factors contributing to growth utterly out of their control. As a product leader, I’ve rarely been consulted about compensation plans or territory and account assignments, even though successfully selling relies on correlating how you deploy your team to market analysis and subsequent development of an ideal customer profile. (The disconnection between product and sales is endemic and largely due to the fact that people–especially salespeople–do exactly and only what they are compensated to do. More on this topic later.)
Sizing your market
Sizing a market is basically voodoo. There are ways to estimate how much a broad segment of customers will spend on a particular product category. Some pundits estimate the cybersecurity market spending in 2024 will be about $220B. Product management folks building security software interpret that number as the total addressable market or TAM. The number expresses something like my growth projection. If a particular customer demographic spends a percentage of their budget on cybersecurity software (and, well, they HAVE to, don’t they?), you can forecast nice round numbers that add up to that very respectable $200B+ market size.
There are 25,000 companies in the United States with more than 1,000 employees. If those companies spent, on average, a little over $9M on security software to keep themselves safe from persistent, malicious adversaries, then Bob’s your uncle; you’ve got a $220B market.
TAM is interesting but not actionable.
Luckily, we have a slightly less abstract calculation of the market’s size called the Serviceable Addressable Market, or SAM.
Most of us look at that $220B number and say prudently, “How much of that TAM can we really capture?” Surely not all 25,000 companies! No, of course not.
SAM narrows the playing field a bit. The metric acknowledges the limitations of our business model, for example, that we only sell security software to companies in the animal food production business. A substantial number of companies, albeit far less than our 25,000, make animal food. Our founder used to be a vet who knows those companies and has a ton of connections, so of course, we can sell to them!
Let’s say your SAM turns out to be roughly 15% of the total market. Congratulations, you are competing for a $33B market! That sounds pretty great, even if you have three or four very strong competitors.
To obtain, or not to obtain
We dig deep and pull a number that suggests what portion of that SAM is actually obtainable.
Here, we call the Ideal Customer Profile (ICP) onto the field of play. The theory of the ICP states that some number of those 25,000 companies will respond to an email or click on an ad if we can adequately describe their key attributes: companies in the animal food manufacturing and distribution business occupying at least one floor of a highrise building located somewhere in the midwestern US and with at least 250 employees working at fourteen-sided standup desks.
Or something like that.
Your ideal customer profile narrows the field down to about 375 customers. Their size distribution means they will spend far less than that round industry average of $9M. If each company spends between $750K and $3M annually, the market is somewhere between $280-375M.
We’ve arrived at our SOM!
Reps times quota
There are certain irrefutable laws in the universe. Light travels at just under 300M meters per second. The gravitational force acting on two objects is predictable. And you’ll never make more money than the number of salespeople times their quota.
If the top five competitors capture two-thirds of the market, each has the potential to generate between $35-50M in new revenue. The figure assumes each vendor will share the pie equally, which never happens. But we are still treading the waters of top-down market analysis.
The rubber finally meets the road when you compare the opportunity to the number of sales reps you have and multiply by their assigned quotas. You have twelve reps. Each rep has a $1M quota. Some will underperform, others will overperform. Averaging across their attainment, you’ll come close to the $1M per rep. That means your best case for new product revenue is $12M. That number is likely still optimistic. Your twelve reps manage to close between thirty and forty deals, but the price your ICP is willing to spend hovers around $250K, which puts you in the $7.5-10M range. Ten million in revenue is a strong business for most early-stage software companies, even when you’ve captured only a tiny percentage of your SOM.
All those Januarys ago, the fatal mistake of my growth projections, going from $10M to $20M (which I later further abstracted as “100% growth year over year”), was ignoring the reps times quota calculation. Yes, our team had twenty salespeople focused exclusively on selling the product. But each rep carried only $750K of quota, meaning our best case was $15M.
My optimism displaced other factors, things like the average length of our sales cycle, which often spread over twelve to eighteen months (I know, right!?), and the macroeconomic conditions of the market. I ignored competitive pressures and the difficulty of expanding our share of wallet. I never factored in the evolving needs of the market and our ability to deliver new product capabilities in a timely fashion.
I’ve learned a lot since then.
Start with your reality
I recommend always starting your growth projections here, at the ‘reps times quota’ figure, because, barring miracles, that represents your upper bound. Maybe you’ve got resellers or other market channels that perform far better than your direct sales team, and that pushes the number. Perhaps you’ve deployed a self-service, product-led motion that doesn’t rely on direct sales, in which case you have other upper bounds with which to contend.
May your TAM be eye-watering, your SAM massive, and your SOM equal to ‘reps times quota’.