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How to Build a Sales Capacity Model and Sales Plan
Every established sales leader should have a firm grasp of sales capacity planning. Once you’re confidently executing the Sales Foundations, it’s time to build your sales capacity plan.
What is Sales Capacity?
Sales Capacity is a way of measuring a sales team’s ability to deliver revenue targets based on expected sales productivity per head. However, life is never that simple, but you’ve got to start somewhere. So, let’s make some assumptions and start to build a Sales Capacity model.
Calculating Your Sales Capacity
Let’s use an example to illustrate the calculation:
Step 1: How many Sales Qualified Leads (SQLs) can your average sales person manage per month: Let’s assume it’s 10.
Step 2: What is the average conversion rate from SQL to win: Let’s assume a 30% win-rate.
Step 3: Now we can calculate the average number of won deals pm per sales person:
Average number of Opportunities pm x Average Conversion Ratio = Average number of Won Deals per Month
Step 4: What is the average deal value (ADV)? Let’s assume that the average won deal value is $50k. Have a look here for more on increasing the ADV.
Step 5: Multiply the $50k by the average number of won deals per month (3) to get the average revenue per month per sales person:
Average Deal Value x Average Won Deals per Month = Average Monthly Sales Capacity (in the example above, it’s $150,000 pm)
Step 5: Now work out how many sales people you need, on average, to hit your total sales target. Let’s assume your annual sales target is $10m. Therefore, the calculation is:
Total Annual Sales Target/(Average Monthly Sales Capacity per salesperson * 12) = Sales Capacity Requirement (in this example, it’s 5.5 sales people)
This is your starting point – now it gets more complicated! As with revenue forecasts, the capacity projection has a lot of variability associated with it and opportunities for increasing Sales Efficiency. For example:
- Average sales cycle length (closed-won and closed-lost)
- Size of territory
- Customer segmentation
- Product/service range and Average Deal Value
- Salesperson experience
- Salesperson staff turnover rate
- Ability to consistently generate the required number of leads and hit the sales targets
Step 6: Now, start to add in the above variables to your sales capacity model and re-run the scenarios. You’ll likely end up needing at least 25% more sales capacity to hit the sales target, i.e. in our example, you’ll need 7 sales people not 5.5.
Note: You also need to look realistically at the lead-gen process; the above example requires 660 unique SQLs pa which is probably equivalent to >5,000 Marketing Qualified Leads (MQLs) pa!
How To Build A Sales Plan
Now you’ve got a Sales Capacity model, you need to build a Sales Plan. Here’s our step-by-step guide:
Do Your Homework
Gather as much information from past sales trends to try and predict the future. For example:
- Were sales healthy in the previous year? The last two years? Five years?
- How have your competitors performed?
- Have buying habits changed?
- What are your core segments?
- Who are your star performers and why?
- And …..
Having this core information and analysis will allow you to become familiar with trends within your business and your industry as a whole. Using this method enables you to build a strong foundation for a sales planning process.
Define Your Objectives
You cannot measure success without goals. Defining goals and objectives is one of the crucial first steps in the sales planning process. Establishing them early allows the team to have a firm understanding of the direction the business is heading in.
Be Clear About Success Metrics
If you can’t measure success, how will you know when you’ve achieved it? Performance indicators (KPIs) are vital when it comes to determining success. Traditionally, KPIs would include Closed Won Deals, Sales Velocity, gross profit margins, conversion rates and a whole raft of other sales metrics.
Forecast Your Sales
Now, take your Sales Capacity model, your assumptions and objectives and start forecasting. Include as many assumptions as you can think of (including skill and experience gaps) and use them as variables in the Sales Forecast model. Then, run different scenarios until you end up with a realistic, stretching, but achievable forecast.
Involving stakeholders once your sales planning process is coming to an end is essential, as it will allow all key areas of the business to be included. This inclusion will hopefully ensure that all stakeholders feel responsible for their part in the plan. The more engaged that different departments become, the better the outcome.
Create Engaging Initiatives
Now work with marketing to build campaigns (by month) that will generate leads in order to hit your targets. Measure what matters and build sales dashboards to keep on top of your lead and lag indicators of success.
Three Common Sales Capacity and Sales Planning Pitfalls And How To Avoid Them
- Lack of Alignment With Business Strategy
There can be a slight disconnect between the sales plan and the long-term business strategy. Specifically, target geographic territories, customer segments, product/service line mix, pricing/margin strategy, etc. Resolve this by having a regular slot at the quarterly strategy sessions to present updates on sales plans. Additionally, regular 1:1 Exec meetings is a way of building alignment in between strategy sessions.
- Under Estimating Attrition Rates
Being aware of previous years’ attrition rates and trying to plan for this in the current year is important when rolling out your plan. If you estimate that, based on last year, 10% of salespeople may leave this year and it’s actually 20%, it will hinder your chances of hitting financial targets. Monitor this closely so that the multi-month ripple effect can be avoided, or at least minimised.
- Underestimated Ramp-Up Time
Just like attrition rates, sales capacity plans can underestimate the ramping-up process for new sales team members. When a new staff member is hired, they’ll need time to get to grips with how the business operates. This ramping-up process takes time and almost guarantees that a newly hired salesperson won’t be at full productivity for several months.
Sales capacity planning is a lot harder than it looks, but by making assumptions about factors that could become an issue, it becomes much easier to provide more accurate plans/forecasts. Use the principles above to establish your sales capacity plan and get in-front of the complexity that is natural in this type of iterative exercise.
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