Before the start of 2014 you’re going to have that meeting.
You know the one, where the CEO hands you your new revenue goal for the year. As usual, you’re going to have to calculate the costs associated with this new target, and how you plan on hitting it. A key sales management best practice is to then determine if you have enough reps to hit your quota, or if you will need to hire more.
Let’s first take a look at the breakdown of a commonly used approach to determine the right number of sales reps:
You would start by taking the new bookings goal and dividing it by the ideal average quota per rep. This will produce the number of fully on-boarded sales reps needed to achieve the goal.
You would then take sales reps needed and multiply it times all the costs associated with each rep (commissions, overhead, salary, etc.). This produces your supposed cost of sale as a percentage of revenue.
This is why the standard formula fails. Instead of producing an even distribution of quota attainment, the results are skewed. Some reps will only reach 10% of their quotas while others will exceed theirs by 20% – the distribution isn’t balanced and the reps on the bottom are costing your business money. Now instead of keeping the CEO off your back, the CEO and CFO are in your office demanding you fire the reps that aren’t producing. You know however, that if you fire them, there’s no way your team is going to make their number.
Instead of using this generic method, let’s save ourselves the headache and implement the following two approaches to keep everyone happy and on track.
Top-Down: Market Potential
The first of the two techniques requires focusing on your untapped potential. The steps for executing the Top-Down Approach are as follows:
Identify the number of opportunities currently available in your market based on your ideal customer profile
Calculate the potential revenue earnings by analyzing the average spend of other customers that mirror the behavior of your desired buyer
Segment this further by territories to determine the more profitable areas (often a common cause of unequal quota attainment)
You now have a pretty good idea of the potential in your market.
Bottom-Up: Assessing Workload
The Bottom-Up Approach on the other hand, is centered on determining the workload for your reps. The breakdown is as follows:
Start by finding the total number of existing target accounts
Drill down into each of these accounts to uncover certain key sales metrics such as average calls per meeting scheduled and average meetings booked per rep
You then take the average call per meeting value and multiply it by the overall number of accounts
The result is an accurate prediction of annual call volume based on historical benchmarks
Now you take the other key sales metric, average meetings per rep and multiply it by the number of working weeks in a year
The final output is the total number of reps you will need to satisfy your revenue goal.
Let’s simplify this with an example.
Say we’ve determined that we have about 2,500 potential buyers in the market and it takes, on average, 2 calls a month per buyer to schedule a meeting.
- 2 calls per deal x 12 months = 24 calls
- 24 calls x 2,500 potential buyers = 60,000 total calls in a year
Now that we’ve calculated total calls that need to be made for the upcoming year, we must determine how many reps we need to satisfy that volume.
Once again we turn to historical data to uncover that on average, a rep books about 10 meetings a week.
- 10 meetings a week x 47 working weeks in a year = 470 total appointments in a year
We’ve now reached our final determining step – how many reps do we need. We take the total annual calls and divide it by total annual appointments:
- 60,000/470 = ~ 128 reps
And there it is – the total number of reps needed to optimize your sales process.
When you implement both approaches, you will have not only determined the magic number of reps to run your sales operation smoothly, but you will have also ended up with an even distribution of quota amongst all your reps. Now, instead of having a random pattern, approximately 60-75% of your reps will either hit or surpass their number. The final result: you will have kept your reps on track, satisfied your revenue goal, and looked really, really good in front of your boss.
What do you think about these approaches? Sound off with your comments below!