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.
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.
In particular, startups with uncertain futures must ensure their capital – i.e. the funding raised from outside investors – is spent on the areas with the highest return on investment (ROI).
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 and 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 the 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.