Annual Planning: How to Build a Sales Capacity Model

When you start the year, you may only have a 16 gallon tank, which can take you up to 250 miles.

But if you keep hiring throughout the year, you can add additional capacity.

And the people you have on board get better and better gas mileage as they mature in their roles, build pipeline, and get to know the product they’re selling.

You want to tune your engine’s “productive capacity” to be able to hit certain mile markers along the way - otherwise known as your quota plan.

Based on their specific segment (e.g., SMB, Midmarket, Enterprise) a rep should have an annualized quota target they are expected to hit when they are fully up to speed, or ramped

You add reps to the mix throughout the year to come up with an “effective” bottoms up quota capacity.

OTE means on target earnings. It’s their salary plus their commission if they were to hit 100%.

As a rule of thumb, this starts around ~5x, and grows over time to ~7x or more as the company adds more products and enhances its brand awareness in the market

Typical ramps:

You can take a linear or curved approach to any of these

Ramp payout structures:

If you have a brand new geo (e.g., moving into Asia) you can’t expect the expansion deal volume to be high

Similarly, if you are hiring new reps off the street, unless they are inheriting accounts that someone else used to hold, they are going to need to make their quotas off of a high mix of new deals

Make sure this comes through in your modeling.

The simple way to think about this is if you added up all the individual quotas from reps on the street, it would sum to a number larger than that of the actual board plan (best of luck trying to poll them all though!)

This range is smaller at companies with less management layers, and increases as there are more mouths to feed

This provides a buffer against sales rep attrition, underperformance, big deals pushing, and macro headwinds.

Typically the Enterprise segment has the most risk, and receives the most cushion (e.g., 120% for SMB and 135% for Enterprise)

This is because the reps take longer to get up to speed, and therefore it takes longer to figure out if they are good or not. And if someone leaves part of the way through their ramp, you have to start over again. So attrition sucks more at the Enterprise level.

And you have big deals up market with longer procurement cycles and more complex approval chains that can get pushed from one quarter to the next

As a rule of thumb, typically five or six out of ten hit 100%, and seven out of ten achieve 80% or more

The percentage of reps hitting their quota goes down over time as the company gets larger, as deals become more complex, and as territories become more crowded. It may even drop into the 50% range.

Typically speaking, 60% of a software company’s business is in the second half of the year…

This means you can’t clobber a rep with an insane Q4 quota if they have only been on the job for a few months - they need to get there over time

But this is not the same for all company’s or geographies - so plan accordingly

A rep is an individual contributor, a mercenary carrying a bag and bringing in new deals.

That rep has a manager, a system engineer responsible for the technical part of the sale, and a business development rep who passes leads.

The rep’s manager may have a span of control of six to eight other reps, while the system engineers and SDRs pull single, double or triple duty, supporting multiple reps depending on what segment they cover (lower ratios for enterprise, higher ratios for SMB).

BDRs

SE’s: You can usually assume a similar ratio for SE’s to support the mid market and Enterprise.

Spans of Control: SMB Sales managers generally have higher spans of control (8:1) than Enterprise (e.g., 5:1).

I’ve been in situations before where sales reps were taking too long to ramp, or we couldn’t hire enough new people.

We had to adjust the expectations of what they would be capable of achieving. This is called having “a capacity gap”.

As a result of not hiring enough people, we didn’t have enough dollars on the street, and we couldn’t hit our plan.

This is great for morale, as it gives people who have been with the org career momentum.

And it’s great for cost, as they don’t need to come in at the midpoint or highpoint of pay for the position off the bat (they can grow into it).

Plus, they already know the product, hopefully cutting down the ramp time.

If sales managers know they can’t backfill a role due to budget constraints, they’ll keep mediocre and poor performers around

This hurts culture in the long term

I’ve seen people explain this away as “bringing on better systems” or “people being in their roles longer” or “our brand name gaining traction in the market”

It’s all wishful thinking to make mathematical ends meet. Don’t do it.

If the ratio is less than 1/3, you are probably running a bloated ship with too much supporting cast

Go back and check your ratios for BDRs, SE’s and Sales Managers

You get into trouble when you start building teams with highly paid reps holding only moderately high quotas.

This is the proverbial “no-man’s land”. The company isn’t necessarily losing money, but it’s not really making any money either.

This issue is exacerbated when you have a big chunk of new, expensive reps ramping and building pipeline, which may take up to nine or ten months in the enterprise, while bringing in zero cash flow.

Beware - it’s normal to have 20% to 30% annualized attrition on sales teams

It’s also hard to predict macro economic conditions and big deal risk

Your ACVs (Average Contract Values) should check out with the imputed volume of transactions each rep needs to close each quarter

If you need an SMB rep to close 10 deals at $8K a pop per quarter to hit their quota, ok, maybe that’s fine