article | June 24, 2011
Optimum Sales Force Sizing – Five Windows into Resource Planning
1. The Ratio of sales force size and costs face diminishing returns
Eventually sales costs from increasing sales force size will overwhelm the gain. The relationship between the size of your sales force and its impact on aggregate sales and/or gross contribution margin (sales less variable product costs) is a relatively straight-forward and represents an eventual diminishing return. Graph #1 depicts this relationship at its most basic level. It shows that, as the size of your sales force increases, so too do sales costs and product/service sales.
At some point the returns in margin diminish as the incremental return of adding another sales head begins to taper off but the incremental cost proceeds in a linear fashion. Resource planning should consider that the time to stop adding sales staff is optimized before the cost curve crosses the margin curve.
2. There is a lag between the cost of a new sales head and the net new revenue that sales head can generate.
From the first day they begin employment, a new sales representative adds expense (salary, supporting hardware assets, licensing costs, recruiting cost, training, and so on). Most companies are able to quantify these hard costs (both fixed and variable) and the time frame in which they occur. The speed with which the new sales rep generates revenue is governed by several factors, including ramp-time-to-productivity (time it takes for a new sales rep to achieve quota), ramp failure rate (number of new reps who never achieve quota), sales cycle length (length of the average transaction from lead hand-off to deal closure), and average deal size (average $ for a non-recurring revenue). Graph #2 shows this “lag” between expense and revenue that is vital to effective resource planning.
3. As sales staff is added, sales per head declines.
Graph #3 shows that new sales heads, on average, are not as productive as existing ones, even when a sales force is improving in quality as well as quantity.
In addition, unless a company has barely scratched the surface of its market space, much of the ‘best’ sales territories have probably already been allocated and covered. Therefore incremental new sales territories will be marginally less productive no matter how improved the new sales rep or how short the ramp time to productivity or how short the average sales cycle.
4. The cost of new sales reps escalate immediately impacting financial management ratios.
Many sales leaders size their sales force to show a low sales cost per salesperson. This is seen as a reflection of sales force efficiency. Graph #4 depicts the curve and the lower right end of the curve is where sales leaders instinctively lead their organizations.
A low sales force cost as a % of revenue may indicate an opportunity to expand even though sales force costs as a % of revenue will go up.
5. The relation of sales force size and maximum profitability.
Graph #5 reflects the intuitive relationship between profit and sales force size.
There is a point at the apex of the curve where sales force size is maximizing profits. This is the point where the incremental contribution of the last salesperson added equals the incremental cost of that salesperson. As resource planning is performed, it is important to note that a company will still have room to maximize profits even as it adds sales heads and the sales per salesperson declines and the sales costs as a % of revenue increases. Similarly, a company may continue to add sales heads and show profit, but the profit will not be maximized.
Collectively, the five windows of optimized Resource Planning provide sales leaders with a strategic frame of reference to ensure that the number of representatives in the field is optimized to reach current and future sales objectives.
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