Open territories – territories without a dedicated Sales Rep – can eat up large chunks of revenue from the bottom line as ravenously as you’ll chow on turkey today.
Your 2012 plan was built on the assumption that your team would be fully staffed. Your goals are based on the fact that all your territories are staffed and your Sales Reps are ramped to full productivity. Did you ask yourself the following questions during the planning stage and adjust your plan accordingly?
- How long does it take for a new hire to “ramp to full productivity”?
- How many of my total territories were open at some point in the prior year?
- How many months did each open territory go without a Sales Rep?
If you can answer these 3 questions, you are now able to determine the actual average loss of quota by month for open territories.
First, we have to factor into the equation the new hire “ramp to productivity” measure. Ramp to productivity is the measurement used to calculate the time it takes from the first day your new Sales Rep starts until the point they are achieving 100% of sales quota.
Calculating the “ramp to productivity” is the first step to understanding the full cost of open territories. Let’s make the following assumptions:
New Hire starts January 1st – Quota for territory is $200,000 per month. The chart below illustrates how this process can affect revenue.
MONTH QUOTA AMOUNT ACHIEVED DELTA January $200,000 $0 $-200,000 February $200,000 $0 $-200,000 March (new hire starts) $200,000 $0 $-200,000 April $200,000 $60,000 $-140,000 May $200,000 $105,000 $-95,000 June $200,000 $160,000 $-40,000 July $200,000 $200,000 $0 TOTALS 1,400,000 525,000 -875,000
What we now know is:
Question #1 – How long does it take for a new hire to “ramp to productivity?”
“The time needed to recruit and hire a new player from start to finish is 60 days. Ramp to Productivity for my company is 5 months.”
Question #2 – How many of my total territories were open at some point in the prior year?
“I had 5 territories open.”
Question #3 – How many months did each open territory go without a Sales Rep?
“4 months was the average.”
Revenue lost during the time the territory is open is $875,000. No small chunk of change. Now we need to extrapolate this to include all open territories and figure the total lost revenue due to open territories.
Total Number of Months with Open Territories= 5 territories * 4 months open = 20 total months
Average Revenue Loss per Month= $875,000 / 6 = $145,833
Cost of Open Territories = 20 months * $145,833 = $2,916M
Now that you can clearly see the cost and revenue loss to open territories, be sure to factor it into your plan.
But more importantly, think about what’s causing the open territories.
• Unrealistically set quotas?
• Territory that is not capable of achieving quota?
• Compensation that is not competitive, rewarding or motivating?
• Lack of leadership?
Open territories are always going to be a factor in your overall planning. Adjust your plan accordingly for the revenue impact it will have. Dig deeper to find the root cause for the other issues that result in open territories. If you solve this problem, you won’t have to account for that ~3M dollars due to open territories. This won’t only help with projections and planning, but will increase revenue numbers each year. I assume you like the way that sounds.
When planning and creating a successful Sales Strategy, it is essential to account for all potential factors that could add or detract from revenue numbers. Planning around (and working to eliminate) open territories is a great way to do this.