Sales leaders at companies always strive to identify the sweet spot where the sales targets perfectly sync with the capacity of sales teams. But sometimes, sales leaders push their teams too hard without fully understanding what the team is capable of realistically achieving.
This mismatch between planning and performance makes it essential for sales leaders to have an in-depth understanding of sales capacity planning. Read on to learn more.
What is Sales Capacity Planning?
Experts have defined sales capacity as the maximum revenue that sales teams have the ability to bring in at any given point in time, ranging from monthly to quarterly. In hyper-competitive markets, growing businesses have ambitious targets, and sales leaders create a roadmap to achieve those targets through sales capacity planning.
Sales capacity planning is a crucial function performed by sales leaders across companies. Leaders lay down the revenue plans for the company, where they map resources with the targets and analyze the number of FTEs essential to achieve the revenue targets.
Executive leadership leverages sales capacity planning as a forecasting model to optimize revenue growth for the business. Company leaders use these insights to make suitable hiring decisions on the basis of the sales performance of individual sales representatives.
Traditionally, sales capacity planning has been linked with operations management and manufacturing. As the markets are evolving quickly, many SaaS businesses are now undertaking capacity planning as an essential part of their budgeting. SaaS Companies invest heavily in their sales and marketing teams as the success or failure of the venture depends largely on the performance of salespersons.
Understanding Employee Churn and Sales Capacity
The term “churn” is normally associated with revenue and customers, but can also refer to employees. In this instance, churn measures the rate at which employees resign from their positions in the company and move elsewhere - also referred to commonly as turnover. Employee churn across departments is a major cause of concern for management, but it becomes even more worrisome when it comes to sales.
Companies in the US experience attrition rates going up to 27% when it comes to salespersons, which is almost twice the overall churn rate. Moreover, while the average tenure for employees in the age group of 55 to 64 is around 10 years, it is just 2.8 years for those in the age group of 28 to 34. As a result, companies are always grappling with the issue of employee turnover.
Some attrition is normal, but when a high-performing sales rep leaves, a company not only loses the return on costs incurred on employee training, but also potential sales. The loss of sales is quite significant in such cases as the time taken to hire, train, and deploy new salespersons is considerable. These developments have a considerable impact on the sales planning processes as well.
Hence, sales leaders need to keep a close eye on their best performers and take steps to retain them if there is a risk of them quitting, as high-performing salespersons are tough to come across and hire.
Initially, the loss of certain employees might not appear to cause too much damage. However, the sales capacity planning process increases in complexity when fully ramped employees leave, to be replaced by new employees training from scratch. Therefore, sales leaders must offer sustainable incentives, including stock options, to encourage employees to continue with the company.
Need for Sales Capacity Planning
Sales capacity planning is an extremely crucial function for every organization as it has a direct impact on future sales projections. Here’s why:
- Quantify Sales Performance: Sales capacity planning enables sales leadership to effectively quantify the projected sales performance of sales teams. If the present team cannot generate maximum revenue to meet the specified goals, the company needs to identify strategies to boost its capacity. This can be achieved by hiring more employees or through sales enablement.
- Transparent Team Practices: Sales capacity planning requires an in-depth study of the capabilities of individual team members. This study allows sales leaders to enjoy transparency in the skills, availability, and performance of salespersons. Hence, the leaders can ensure that the sales teams are performing as per the specified targets.
- Data-Driven Insights: Sales capacity planning offers data-driven insights to sales leaders on crucial aspects. Hence, they can take timely decisions on whom to hire, where to hire, and how to train the new hire, thereby helping fill the gaps in the talent pool effectively.
- Optimal use of resources: Through sales capacity planning, leadership can ascertain different cost-efficient strategies to fulfil the resource requirements. The company is, therefore, able to hire skilled individuals cost-effectively.
Factors Affecting Sales Capacity Planning
Sales capacity planning is a comprehensive process during which sales leaders must consider several important factors. Some of the most important factors that affect sales capacity planning are as follows:
- Average Sale: Average sale, or average deal size, helps in understanding if the salespersons can close enough sales to help fulfil the specified sales targets.
- Close Ratio: The close ratio is a KPI that measures the sales opportunities a salesperson needs to maintain in the pipeline to fulfil the given targets.
- Sales Cycle: The average sales cycle helps the sales leaders understand the total time to close an account. They can then determine the last date by which the lead must enter the pipeline.
- Target Market: The target market for a company should be sizeable enough for enough leads with the desired ticket size to be available. This factor helps understand if the sales targets are achievable or not.
- Sales tools and process: Sales tools and processes must be in place for the salespeople to handle new leads. Not having a defined sales process can slow down the conversion process.
- Sales team size: Under sales capacity planning, it is important to have a thorough understanding of the number of sales team members required to meet quarterly revenue targets and year-over-year revenue growth targets.
Executing the optimal sales capacity plan for maximized revenue
Here’s a step-by-step guide to executing the optimal sales capacity plan for maximized revenue:
Comprehend the team structure
Different members of the sales team will have varied roles based on the requirements. Therefore, the sales leader must clearly define every role and associated responsibilities under sales capacity planning.
While undertaking an analysis of the structure of the present sales team, if any gaps are identified in terms of the number of personnel required, it becomes essential to determine and quantify the deal size for every role. This will offer a clear understanding of the number of prospects to be converted to achieve the revenue targets by every team member.
Make FTE Assumptions
FTE describes the hours an employee works if hired full-time. This calculation is often used to convert hours put in by part-time workers to those put-in by full-time workers. Generally, an FTE is defined as 2,080 hours annually, i.e., 52 weeks with 5 working days with 8 working hours.
This assumption helps define the number of part-time employees required to compensate for any shortfall in the number of full-time employees. The FTE concept is often used to compare the number of employees across companies within any given industry.
Define average deal size
This is perhaps one of the most crucial steps in executing sales capacity planning. It is vital to define the average deal size for every role in the sales team, as there can be no comparison between deals closed by a sales assistant and a sales manager. This will inculcate a heightened sense of value and responsibility in every team member, encouraging them to be more productive. Another important calculation here is the number of deals required to meet the revenue goals for every role.
Quota Planning and Ramp Time
After determining the present number of salespersons and historical sales data, create a financial plan to achieve the revenue targets. Firstly, you need to determine the quota that will define the projected revenue for the sales team. As different salespersons will have varied roles, the sales capacity plan must make assumptions about their performance. While determining the quota, it is vital to have a comparison with future revenue targets to understand if new employees must be hired.
Next, calculate ramp time which specifies the time required by new employees to begin fulfilling their revenue targets. During this calculation, it is assumed that new hires cannot be as efficient at closing deals as their more tenured counterparts. When ramp time is incorporated in capacity planning, sales leaders can better comprehend the steps required to fulfil the targets.
By following these steps, sales leaders can take the guesswork out of the sales capacity planning process. Leadership can formulate a suitable hiring plan to achieve the top-line targets based on data analysis. To further improve the efficacy of the sales capacity planning process, leverage the functionality of an integrated planning platform like Pigment.