In this post we will discuss how to determine if you are undersized. Many organizations add heads based on gut feel and budget. This isn’t a sustainable approach. To hit your number, you need the right amount of reps in the field. If you’re undersized three things will happen:
- You’ll miss your number.
- Your reps, feeling overworked and undercompensated, will leave.
- Your customers will feel neglected.
Let’s look at a common scenario:
Bob receives his quota number for the year. It went up substantially, but the total sales heads did not go up. Bob asks the CEO how he expects to grow revenue without adding resources The CEO says he thinks you can get more out of your current team. Bob disagrees. The CEO asks if Bob has evidence to support the need for more heads.
Bob is fairly certain he needs more heads, but lacks quantitative evidence. Bob has two choices.
- He can try to squeeze more juice out of the orange. Keep in mind this orange has been squeezed already.
- Bob can prove that he needs more heads.
Bob needs to prove the sales force is in the red circle on the graphic below. The red circle represents the point where adding additional heads equates to additional profit. After that point, additional heads produce diminishing returns. Outside of the red circle, adding heads will be tough to sell to the CEO.
Bob decides to prove he needs more heads. He looks at three different methods for determining sales force size.
1. Territory Potential – Top Down
The goal here is to match headcount to market demand. If you don’t have enough resources to meet demand you are leaving revenue on the table. This revenue is being captured by your competitors.
- Revenue potential by territory
- # of prospects
- Ideal Customer Profile (Firmographics)
- Average calls required per prospect
This model is used to determine the workload capacity your team has. Do you have enough heads to hit the number based on the activity requirements? If not, you won’t hit the number. Hiring heads is a must.
- Number of Target Accounts
- Call frequency
- Annual Call Volume
- Selling time %
(Use this tool to calculate how many reps you need based on the Activity Model)
3. Financial – The CEO’s Favorite
The financial model will calculate the time to break even for each new hire. This is done by calculating the breakeven cost and impact a sales rep has on revenue in a territory.
- Sales per head – Average revenue generated per sales rep
- Sales expense per sales head – Average cost per sales rep
- Ramp-time-to-productivity – Average time it takes to get new hires to full productivity
- Ramp failure rate – Average number of reps who never make quota
- Sales cycle length
- Average deal size
- Carryover % – Percentage of recurring revenue generated in the following year from previous year’s activities
- Profit per sales head – Average Sales per head less Sales Expense per head
Bob currently has 54 quota carrying sales reps. The Territory Potential Model says he needs 64. The Activity Model says 60. The Financial Model says somewhere between 62 and 67 is the sweet spot. Based on this information Bob builds his case for the CEO. He takes the average of the models and brings a conservative recommendation to the CEO. He asks to increase from 54 to 60 heads over the next 6 months. With all this quantitative data, the CEO agrees.
Most of the revenue from these new hires won’t be realized until 2014. But Bob is now in a position to hit the ground running next year. He also has a process that can be applied each year as the metrics change. The CEO has a new found respect for Bob and his use of analytics. Bob gains more autonomy by focusing on what is best for the organization.