Is your headcount where it needs to be, or is it off? If so, by how much?
Many CFOs base their sales force size calculation on faulty assumptions or a narrow view. So they err on the low side and miss opportunities. Or they overshoot and drain profits. You can’t afford either mistake. Your sales revenue goal hangs in the balance.
Today, we’ll explain how to calculate sales force size correctly (starting with common pitfalls to avoid). Is your sales headcount where it needs to be? Or is it off? A set of questions that can help you assess your territory alignment starts on page 299 of the annual workbook.
3 Things Many CFOs Get Wrong:
Avoid these unfortunate missteps. They’ll lead you astray.
1) Betting It All on Sales Revenue Per Head
Adding or subtracting people to achieve a certain revenue per head doesn’t work. Revenue per head could go up or down; it’s a lagging indicator. It isn’t, nor should it be, the sole determinant of force size.
Additionally, not all revenue per head is created equal. Cost per head may be higher or lower depending on your sales model. (More about that later). The same is true for corresponding deal sizes.
2) Ignoring Team Ratios/Spans of Control
You can’t calculate force size without scrutinizing your ratios.
Suppose you have one rep for five solutions engineers (which hinders sales). Or a one-to-one ratio (which is too expensive). On the management side, are you top heavy? Or are your sales managers spread too thin?
If these ratios are off, you’re either losing sales or drowning in overhead. Either way, it’s costing you revenue.
3) Robbing Peter to Pay Paul
Many CFOs look at their sales and marketing spend in the aggregate. But it’s not a zero-sum game. Shrinking marketing to grow sales means fewer new leads in the pipeline.
In some instances, shifting resources makes sense. But only if it’s carefully considered and strategically sound.
To Calculate Wisely, Consider These Carefully:
All of these questions, and more, should factor in your equation.
a. Your Market: What accounts reside within your market? How much market share are you trying to obtain?
b. Your Buyers: Who are they? How do they prefer to buy? If your customers buy over the phone, you’ll need more inside sales reps. Otherwise, a field-heavy sales team makes more sense.
c. Your Sales Model: The size of your sales organization is largely determined by its structure. More than one model many apply.
- Stratification—field sales, inside sales, and strategic accounts
- Hunter-Farmer—prospects versus customers
- Geography—sales territories
- Industry—selling by way of vertical expertise
- Product-Specific—multiple products, each with a dedicated sales team
- Buying Roles—selling exclusively to the CEO, CIO, etc.
- Hybrid—a mix of two or more
Costs will vary across models. The geography model is an efficiency play; the industry model is an effectiveness play. Experts in a given vertical may cost more. But they also bring higher sales prices and conversion rates.
d. Your Roles: You need a headcount plan by role. You’ll want to do a pro-forma revenue and cost level to ensure your mix is accurate.
Then comes the hard part: deciding how to execute. Do you roll all of them out at once? Rapid build? Safety build, six months from now? Or pay as you go (new reps generating revenue that pays for successive hires)? The revenue impact of this decision can make or break your year-end goal.
Time to Do the Two-Step (Analysis):
The path to your ideal headcount isn’t a straight line from A to B. It’s more of an intersection between two analyses.
a. Top-Down Analysis:
This is the easier of the two analyses. Say your goal in 2016 is $100 million in revenue. You know your average revenue per head is $10 million. Simple division tells you you need 10 reps.
b. Bottom-Up Analysis:
This one is tougher. Particularly if you don’t know your sales cycle length. Or how many touches are needed to close sales.
You’re planning for capacity here. Say each rep can handle 10 accounts. Half of those accounts, or five per rep, will convert to actual revenue. Average deal size is $1 million. So each rep will likely close $5 million. To get to $100 million, you’ll need 20 reps.
In the end, the results of these two analyses may not align. But taken together, they will point to an appropriate sales force size.
We’ve created a spreadsheet that makes it simple to calculate how many reps you need to make the number. Just plug in your numbers. Go ahead and download the tool here.
The Broader Your View, the Greater Your Precision:
You’ve identified your structure. You know your ideal headcount based on top-down and bottom-up analyses. You’ve determined the right mix of people. And you have a plan for execution you know you can afford.
With these pieces in place, you’re ideally equipped to plan your sales budget. And achieve your sales revenue goal with optimal efficiency and effectiveness. As a guide to go deeper, download our 10th annual workbook, How to Make Your Number in 2017 and turn to the Territory Alignment phase on pages 299 to 303 of the PDF workbook.