What is Sales Capacity Planning?
Sales Capacity Planning is a type of predictive model wherein management attempts to optimize a company’s revenue growth (the “top line”) while making efficient hiring decisions based on the estimated sales performance of sales representatives.
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Sales Capacity Planning for SaaS Companies
By determining the sales capacity, management can effectively set a “ceiling” on the potential revenue brought in by their sales team.
Sales capacity planning refers to a company’s attempts to match the number of sales hires (i.e. supply) with its revenue potential (i.e. demand) as close as possible to maximize the efficiency at which it operates.
Capacity planning is often associated with manufacturing and operations management but has nowadays become a critical part of budgeting by early-stage SaaS companies.
For SaaS companies, the sales and marketing team is arguably one of the most important factors that determine the success (or failure) of the company, only trailing behind the product itself.
In order words, a company in possession of a high-quality product with unmatched technical capabilities and intellectual property (IP) relative to its closest competitors could still run out of business in the absence of an effective “go-to-market” sales strategy.
From the perspective of management, some of the most influential decisions to make are the following:
- Which specific sales roles should we recruit for and hire?
- Who should we hire to pitch our product to prospective customers and rely on to maintain relationships?
- When should the hiring of those sales team members occur?
- Which KPIs should we track and base our growth targets on to make sure we’re headed in the right direction?
These sorts of decisions are often mistakenly dismissed because unexpected factors can appear, such as hiring delays, longer than anticipated ramp times, and employee churn.
In addition, unexpected external risks can also emerge such as new entrants in the market (i.e. forcing the company to reinvest more) and seasonality/cyclicality that negatively affects performance.
Sales Capacity Planning Factors
Before we delve into our model, we’ll start by reviewing some key terminology.
- Sales Productivity: The effectiveness of the sales team on an individual basis; should consider their track record, skills at selling, etc.
- Ramped %: The time required for a sales rep to reach close to full productivity (and yield what an experienced rep could consistently produce). The time required is a function of numerous factors such as the type of client, the onboarding/training system in place, and capabilities of the product being sold.
- Churn: The churn, or “attrition” of employees – which can be either voluntary or involuntary (i.e. left for a different role elsewhere or was fired by the employer).
- Annual Recurring Revenue (ARR): In this particular context, represents the expected ARR a sales rep can generate once fully onboarded and is “prepared” to execute.
Understanding Employee Churn and Sales Capacity
The term “churn” often refers to customers and revenue, but here, churn actually measures the rate at which employees are leaving and are no longer employed by the company.
In short, top-performing sales employees are difficult to come across and hire (and even more difficult to replace in a timely manner).
For example, let’s say that a handful of a company’s employees decided to quit at the beginning of the month.
Initially, the lost employees might not seem to be that significant of a blow to the company, but the real concern is that future revenue placed at risk (or missed out on) from those employees churning.
Having employees leave is particularly concerning if they are fully-ramped employees that help generate most of the company’s sales.
Hence, startups often pay employees with stock-based compensation – not just to conserve cash – but also to serve as an additional incentive for them to remain with the company.
Sales Capacity Planning Calculator – Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Sales Capacity Planning Example Calculation
Suppose a SaaS company offers enterprise software solutions to small-to-medium sized businesses (SMBs) and is attempting to estimate its potential ARR in the upcoming four quarters.
At the beginning of Q-1, the company expects to have ten account executives (AEs) responsible for selling its products to SMBs.
However, two of the company’s AE reps have expressed their desire to leave the company, creating the need for two new replacement hires.
The roll-forward schedule for forecasting the ending number of SMB AE reps is as follows:
Ending SMB AE Reps Formula
- Ending SMB AE Reps = Beginning SMB AE Reps + New – Churn
In the formula, “New” refers to new hires while “Churn” represents the opposite, i.e. lost employees.
However, the two new hires cannot be expected to perform at the same level as their predecessors, which affects the potential revenue upside, as we’ll soon see.
To fill in the rest of the SMB AEs roll-forward, management anticipates no additional employee attrition for the rest of the year, one new hire each in Q-2 and Q-3, and two new hires in Q-4.
From Q-1 to Q-4, the ending SMB AEs expanded from 10 to 14, equal to a net increase of 4 sales employees.
In the next step, we’ll count the number of AEs that are classified as either:
- 100% Fully Ramped
- 50% Fully Ramped
Our model assumes that it takes half of a year – i.e. 50% of a full year, or two quarters – before a SMB AE performs at their “full potential”.
Using the “SUMPRODUCT” function, perform the following steps:
- Multiply the number of fully ramped employees by 100%, i.e. these employees are performing at their peak performance.
- Multiply the number of newly onboarded employees by 50%, i.e. these employees are performing at half-capacity and are not as effective as their fully ramped peers.
- Add the two products together to arrive at 9, 11, 12, and 13 total ramped employees, representing that the new hires are treated like partial employees with regards to sales performance.
We’ve now arrived at our final step, which involves calculating the new annual recurring revenue from the SMB segment.
There are two assumptions necessary to calculate the new ARR.
- Quota per SMB AE = $80,000
- Sales Productivity = 60%
If we multiply those three figures – the total number of ramped SMB AEs, quota per SMB AE, and the sales productivity, we’re left with the new ARR from the SMB sales reps.
- Q-1 = $432k
- Q-2 = $504k
- Q-3 = $552k
- Q-4 = $624k