CEOs are often in the middle of a tug-o-war between sales and finance. The CSO believes the answer to solving the sales problem is increasing headcount. In contrast, the CFO looks at the cost per head, quota attainment and believes cutting heads is the answer.
This scenario plays out often as companies review budgets and do annual planning. Does the situation ring true for you? If so, you’re not alone. Oftentimes companies are looking at the wrong metrics and need to broaden the view.
Some of the data points (sales metrics) a company should track are:
- Sales per head
- Sales expense per sales head
- Ramp failure rate
- Sales cycle length
- Average deal size
- Carryover %
- Profit per sales head
A multi-dimensional approach will help ensure you are maximizing profits, tapping total market potential and maintaining reasonable costs.
Download the Benchmarking Best Practice Whitepaper Sales Force Sizing – Diminishing Returns to learn more about the proper metrics to track.
There are several key considerations when determining what your proper sales headcount should be:
- Diminishing Returns: Eventually sales costs from increasing sales force size will overwhelm the gain. Referring to the chart above, sales costs associated with each additional head is linear while the gross margin contribution of each incremental rep diminishes over time.
- Lagging Revenue: There is a lag between the cost incurred by a new-hire and the net new revenue he/she generates. A new hire has upfront costs (recruiting, training, etc.). These costs are realized before the new rep becomes fully productive.
- Tapped Territories: As sales staff is added, sales per head declines. Typically, the best territories are already covered. Therefore new territories will tend to be marginally less productive.
- Financial Impact of Variable Costs: The variable cost of adding new sales heads and the built-in time delay of revenue realization from these new sales heads impact financial management ratios. In other words, as headcount grows, the sales force costs as a percentage of sales begin to rise.
- Recurring Revenue: The degree of recurring revenue (or carryover) impacts any decision to change the sales force size.
- Optimal Profitability: There is a sales force size that maximizes profitability. This is the point where the incremental contribution of the last salesperson added equals the incremental cost of that salesperson
This multi-dimensional approach is covered in SBI’s 8th Annual Research Report. Learn how CEOs are addressing core problems around revenue generation and revenue predictability. Download the report here.
Lastly, inputs to the necessary metrics (e.g. sales cycle length) may change over time and, when they do, the calculations should be run again. This reflects the interplay between effectiveness and efficiency in determining optimum sales force size.
World class sales forces optimize their teams for maximum revenue and minimal costs. Will the size of your sales force past the test? If you’re not sure, download the whitepaper and compare your sales force metrics.