“When planning for a year, plant corn. When planning for a decade, plant trees. When planning for life, train and educate people.” - Chinese Proverb
Early in my career, I supported the technology for sales teams and marketing departments.
In one company, the turnover rate for one of the sales team roles was very high. I watched 12 salespeople cycle through the role. Finally, a new sales person came onboard who sold more in one month than everyone else combined.
The management became more enthusiastic and chose to add a second sales person hoping to double sales... but the plan failed. The second salesperson provided less than 10% more sales per year compared to the top salesperson.
This introduces us to the problem of how to calculate sales capacity.
Traditional Sales Capacity Calculations
“There are two kinds of forecasters: those who do not know, and those who don’t know they don’t know.” ― John Kenneth Galbraith
The following is a quick review of some of the variables used by a sales departments to measure and track sales and sales capacity. Traditional sales capacity planning variables include:
- Number of sales representatives (SR)
- Hours the sales rep works/week (H)
- Weeks worked per year (W)
- Closing Ratio (CR)
- Selling time as a percentage of total hours worked (ST)
At its simplest, the formula for traditional Sales Capacity Planning = SR * H * W * CR * ST
As an example, a sales team with seven reps, working 45 weeks per year, with a 30% closing rate and a 40% selling time, the formula would be:
Sales Capacity = SR (7) * H (40) * W (45 weeks / year) * CR (28%) * ST (40%).
This results in a total sales capacity of 1081 sales/year for the team.
The assumption is that each team member makes 215 average sales (1081/7 = 215 sales/sales person) per year. If we agree with this, it follows we could also say that:
- Adding a single sales person would increase overall sales by 215 sales/year.
- Doubling total organizational sales to 2,162 sales per year means adding seven sales people.
The Problem With the Traditional Method
The problem with the math in the traditional method is that reality does not work that way.
Looking at the example above,
We see that of the 12 previous sales people, only one top producer was able to sell enough to stay on the job.
We also saw that adding a second sales person to the team increased total sales by 10%, not 50%.
From this, we know that the assumption of doubling the sales team to double sales is not realistic. The reality is a little different, especially for smaller sales teams.
Carrying Capacity and Sales Capacity Planning
In biology, there is a principle called Carrying Capacity. The first capacity planners were farmers and ranchers. Farmers estimated optimal plot sizes for crops or estimated pasture land for milk production. They observed that when the population of cows passed an optimal point, milk production did not increase. For a given number of acres the same amount of milk was produced, even though there were more cows. The same results are seen in crop and orchard production.
When calculating sales capacity, we can use equivalent business variables and apply a business version of the Carrying Capacity formula. Rather than talking about food consumption, lets translate the biological variables into their business equivalents.
- Population (P) – Total # of potential target buyers in the organization's sphere of influence.
- Affluence (A) – Present consumption of product per capita for the population.
- Technology (T) – The technology factor, amplifies organizations sales influence as a %.
- Marketing Channels (M) – Defines # of mature marketing channels (can be in salespeople, online systems or a combination of both. The key is the maturity level.)
The formula for Sales Capacity = P * A * T * M
This formula gives us the maximum potential sales for the organization based on the number of marketing channels. With this information, Sales Capacity Planning provides the potential sales to a realistic number of a targeted population of buyers. With this understanding, we base Sales Capacity on the number of sales channels (Online or offline), the maximum number of sales. Then multiply that by a measurement of our organizations technical capacity and effectiveness.
When a variable has changed, we can see a much more immediate and quantifiable change:
- By increasing the sales channels, we can increase our sphere of influence and so increase sales.
- Another change we could make is to improve our technology factor. By improving the technology factor, we can increase sales by improving sales efficiency, improving customer information and expansion of influence into delineated digital markets.
Understanding each Carrying Capacity variable gives a more accurate understanding when planning sales capacity.
Obviously, there is a more to consider about Sales Capacity planning.
Traditional sales capacity planning calculations were created over 100 years ago during a time of abundance. The assumption has always been an abundance of production and an infinite number of buyers. This formula stops working in an economy of scarcity.
Today we are in a buyers’ market with more products and product choices than ever before. For the producer, customers are finite, and competition is high. In nature, animals adapt a competitive advantage to a specific niche. In business, the organization must adapt in the same way. Organizations are now changing the way they think about target populations to develop a more effect strategy for sales capacity planning.
Vision 2.0 Sales Capacity Planning develops an understanding of this new perspective. To learn more about Vision 2.0 Sales Capacity Planning, contact us here for a free consultation.