Build a capacity planning growth model

Your sales growth model shouldn’t look like mine

Every sales team’s growth model spreadsheet tends to look different because it should reflect the unique dynamics of the business. The more specific to the business, the better. That said, effective ones tend to have:

• Measurable predictive power—it doesn’t just describe the past.
• Formulas that reflect real-world relationships—data that’s inputted from actual call conversions, pipeline movement, etc.
• Inputs and outputs—you should be able to alter the inputs (activities, deals) to observe the outputs (revenue, headcount needed).
• Inputs should be leading rather than lagging indicators—otherwise, it’ll only tell you what happened, not what’s going to happen.

By far the most common way to build that model is in a spreadsheet, which begins simple, but evolves into greater complexity and accuracy over time.

The model should help with capacity planning

The model should summarize data that you know to help you peer into the future. It should help you forecast beyond the present quarter and team, and to run simulations to help sales managers answer leadership’s questions like whether they’ll need more headcount to hit their number.

“One helpful part of this analysis is that it helps identify key bottlenecks. If your plan to generate 2x in revenue requires you to have 5x the sales team headcount when it’s been hard to find even one or two good people, you know it’s not realistic. If your SEO-driven lead generation model assumes that Google is going to index your fresh content faster and with higher rank than it’s ever done, then that’s a red flag.”
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Andrew Chen, General Partner, Andreesen Horowitz

50% of high-performing sales organizations have well-documented sales processes that are explicitly structured, compared to 28% of underperforming organizations.

Hubspot

It should reflect reality, not your wishes

One of the biggest errors people make with models is creating a model where the growth rate is inputted, not derived. What we mean by that is if you are inputting a percentage growth rate, that’s just a wish. Because, where is that number coming from? Instead, your equations should end in the growth rate. It should be derived, not inputted.

You’ll know something is off about your growth model if you pull the data into a chart and the growth is just a smooth, straight line. That’s a linear growth rate, and that is now how growth really happens. True-to-reality growth rates flex and weave.

Comp plans should be obvious and enticing

The goal of your compensation (comp) plan is not to lay out a gloriously complex constitution for a new state. It’s to inspire salespeople to sell more. It’s an incentive tool, not a court mandate. As such, the simpler, the friendlier, and the easier to understand it is, the better.

The way you’ll arrive at the compensation plan is by asking how much the sales team needs to produce, and then it’s a negotiation between quota size and headcount. Higher quotas mean fewer reps, but impossibly high targets may mean your managers’ reps don’t get paid—which, as we’ll learn in Chapter 7, is how you arrive at high turnover.

Good comp plans keep reps at the brink of maximum productivity and always trying, and sometimes succeeding, to overachieve.

A good comp plan should be:

• Fair
• Simple
• Clear
• Proven to inspire the right behavior

Elements of an effective comp plan:

• Pay, which varies by seniority, territory, and possibly, rep geography
• On-target earnings (OTE) is directly correlated with product price point
• The base/at-risk split is attractive, whether 40/60, 50/50, 60/40, or 90/10
• Don’t call commission a “bonus,” even though that’s how it’s taxed (Bonuses are generally guaranteed. At-risk is not.)
• It features clear definitions for:
• How territories are determined, are divided, and can be changed
• How to resolve territorial disputes, as with multinational corporations with multiple primary offices, companies that recently moved, or companies with unclear headcounts or revenue
• The earnings cap (if any)
• Whether new business reps retain accounts or hand them off after post-sale.
• When payouts occur (sooner is better for morale, but less accurate than paying against actuals)
• When and how clawbacks can occur
• There are clear incentives to overachieve
• Multi-year or multi-product multipliers
• Accelerators
• Budget set aside for periodic spiffs

The mythical sales rep month

“Everyone’s obsessed with sales capacity. They say, ‘To increase capacity, we’re going to hire more salespeople.’ Because theoretically, you can put $100,000 above everyone’s head and you input that into a Google Sheet and suddenly it looks like you’re at capacity. But the idea that adding people increases revenue is a myth. You need to look at sales capacity alongside sales efficiency. You need to look at win rates, ramp rates, and prospecting efficacy. You should be tracking sales efficiency and using that as a leading indicator that it’s time to grow your team—do it because you’ve got everything right and it’s working, not because it’s not working and you’re hoping more hands will help. They won’t.”

Rachel Ha’o, Global Sales Enablement at Iterable

Factor in time-in-seat and your internal talent pipeline

Truly great capacity growth models also account for how well you’re retaining talent. If there’s an effective SDR to account executive pipeline, and you’re retaining lots of that knowledge as people advance, you’re going to have higher sales efficiency. Whereas if your turnover rate is high, and you tend to hire more outside than inside, you’re going to have lower efficiency, and you’ll need more headcount to hit the same number.

“In smaller companies, when you have a sales leader, who’s managing account executives and SDRs, the SDRs always take a backseat. They’re not directly closing revenue. But they’re the ones who need more of your focus because they’re building the pipeline that’s going to make the revenue closers efficient. Good SDRs source good deals that are easier to close. They also benefit more from better ops and tools because they’re more volume-based, and smaller changes there can have a greater effect.”
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Mollie Bodensteiner, Global Revenue Operations Leader at Deel