Don’t price your product at $10K ACV. This is the dead zone. The path to the graveyard. You may have heard this before, the no man’s land mantra.
Reality is not so black and white. The TLDR is that for Sales-led distribution models ACV, OTE, and close rate need to work in harmony to create a sustainable AE activity requirement level.
ACV = annual contract value. OTE = on-target earnings. AE = account executive.
Product pricing falls on a spectrum. The primary mode of distribution for lower price points (<$1K ACV) is internet or product-led. At the lower middle of the spectrum ($1 – 25K ACV), companies distribute with an inside sales motion. And finally, field sales teams distribute higher price point ACVs ($25K+ ACV). KBCM’s SaaS survey illustrates this point.
The no man’s land theory is that $10K ACV is too expensive for internet sales. And not expensive enough to sustain the cost of a sales team. As you can see, most companies abandon an internet-led distribution approach north of $1K ACV. Yet many of the companies selling $1 – 15K ACV deals use an inside sales model. Are those companies in the dead zone?
Let’s break down the theory behind no man’s land.
The OTE of a sales rep at quota should be 50% base and 50% variable. That creates the right incentive structure for AEs to perform. And also the right return on sales investment for the company. At a standard 10% of ACV commission rate, 50/50% split results in an ACV:OTE ratio of 5:1.
Bridge Group’s recent survey of ~300 SaaS companies found that the OTE of a sales rep selling $5 – 25K ACV deals is $120K. So $60K base, $60K variable.
What does a $60K variable component mean? Assuming 10% commission rate, the following:
- $600K ACV closed during the year
- $50K ACV per month
- At $10K ACV per deal, 5 deals per month
- At 20% close rate, AEs need to actively manage 25 opportunities every month
And here we see the potential problem with $10K ACVs. 25 opportunities is a lot to be working at the same time. And may lead to deals being under-worked and falling through the cracks. But that depends on how complex your deals are. If transactional in nature (or include a good mix of expand deals), 25 deals at once may be do-able. If they’re more complex, 25 may be too many.
The inputs of ACV, OTE, and close rate create a spectrum of required AE activity. The complexity of your deals informs whether this activity is doable. If not doable, you need to optimize – pricing, salary (via location of your sales team), or close rate.
To conclude, SaaS no man’s land exists where the combination of ACV, OTE, and close rate result in impractical and unsustainable AE activity levels. On average $10K ACV requires a lot of AE activity. For San Francisco (or other high salary locations) based companies with non-transactional deals, this price point may create friction in your go-to-market motion.