Better Sales Plans

Better Sales Plans

How big should next year's revenue goal be?

What kind of risks are you willing to take to achieve it?

Building a sales plan in an aggressively growing company is a battle between inspiration and perspiration. You already have feedback from the market and your existing customers on your product's value, features, and competitiveness. You also know what you were able to sell last year with your existing sales team.

To make things more challenging, different members of your senior management team have their own views of how much growth is reasonable and at what cost. Furthermore, there always seems to be unlimited demand for corporate resources. A better way is needed to build sales plans - a way that balances the availability of corporate resources with realistic assumptions and the rate of growth desired.

Why is the sales plan so important?  It spells out the company’s major sales assumptions regarding  revenue, expenses, hiring, compensation, and the financial contribution that revenue and gross margin will make to fund the company’s activities.  The sales/revenue plan also drives the timing and amount of investment that can be made sales and other functions.  It drives how much external investment, if any, will be needed.  Given its importance, it is surprising how little precision and how much wishful thinking is used in the creation of many sales plans.  The consequence of a weak sales plan is that a company comes close to its expense numbers but falls short of its revenue goal.

A comprehensive sales plan should incorporate the following elements:





Expected Sales Productivity

Examine how much you believe your existing sales team can sell in the coming year.  How much did your top sales performer generate last year? What about your lowest performer?  What is the median achievement of your sales force?  It is important that you don’t calculate an average, but look at the actual median performance of the team..  Why?  This gives you the best estimate of per person performance.  There is usually a wide variation between top sales performers (sometimes 2X or more) and the rest of the organization so an average will skew your estimate upwards.  Ideally, you would be able to categorize your sales performers and model future performance based upon their individual levels of accomplishment.

What is the tenure of your existing sales team and where are they in their climb up the sales productivity curve?  As we will discuss shortly, all sales hires take time before they reach maximum sales productivity.  The lag time to maximum productivity is a based on the length of your company’s sales cycle and your company’s effective sales yield (close rate of new opportunities). The length of a company’s sales cycle is directly related to the strategic importance of the product/service being sold, the number of people in the customer organization who must give their approval, the presence of competition, and the price of the product or service.   Productivity and yield measures will typically be different for field sales people than they will be for inside sales people or channel partners.

Let’s take a top-level look at a sales plan:


2008 Sales Plan with Headcount Estimates


In the example above, a company is planning to generate $100m in revenue with 50 existing head count and 20 new head count.  Median sales performance is $2.0m and 33 of the existing 50 sales head count were hired in 2007 and are in varying stages of reaching full sales productivity.   New head count are being added throughout the year.  The company’s plan calls for $24.8m in sales expenses (including salary, commissions, travel, occupancy) and $75m in Contribution Margin.  Contribution Margin is often confused with Gross Margin.  Contribution Margin measures the net difference between revenues and sales expenses; it is an operating indication of sales efficiency and leverage.  Gross Margin is the net difference between all revenues and the company’s total cost of the items that make up those revenues (e.g. customer support costs).  It is used as a measure of overall company financial efficiency and potential operating leverage.

To examine this sales plan example in more detail, let’s look at the expected productivity of the existing head count:


2008 Sales Plan showing Existing Headcount Productivity


This illustration shows that $94m in Revenue, $21m of expense, and $72m of contribution out of the $100m sales plan comes from existing head count.  This includes the 27 people who have been with the company longer than one year and the 33 people who were hired last year and are finishing their climb up the sales productivity curve in 2008.  Existing head count provides the vast majority of this year’s revenue growth.  As we will see below, new hires contribute far less this year but help the company grow further in 2009.




New Hires

How many new hires are you going to add to your sales organization and when are you going to hire them?  Depending on the markets you serve and your business model, you will need to invest in direct (inside, outside), indirect, partnership salespeople to drive top-line growth.  As discussed above, new hires will take time before they reach full sales productivity.  Ramp time to full productivity can be as short as 1 month or longer than 12 months, as discussed above.  As a result, each sales resource will cost the company money before it begins to contribute to the business.  The aggregate investment required to pay for new hires to fuel growth  is under-appreciated (and not adequately planned for) by many companies.   As a result, many organizations overestimate the impact new hires will have on revenue and underestimate their expense.  Additionally, the risk of the sales organization’s ability to hire, train, deploy, and manage new personnel has a dramatic impact on the result so early warning is needed to take remedial action before it is too late.

Let’s take a look at the company’s expected investment and return in new hires for 2008:


2008 Sales Plan showing New Hire Productivity


This example shows the sales productivity of the 20 new hires.  Note that they generate $6.5m of revenue and $3.2m contribution margin in their first year.  Moreover, you can see that the investment the company is making in hiring, training, and other expenses does not generate a sustainable contribution until November of the 2008 sales year.  This group of 20 new hires will generate over $35m in Revenue for the 2009 sales year.  The monthly deficit in contribution vs. expenses highlights the importance of balancing the investment in new hires with the company’s cash position and desired rate of growth.  The investment risk in new hires also points to the importance of early warning for sales performance issues in execution.  It also underlines the organizational practices needed to drive new hire sales effectiveness including training, coaching, mentoring, and management.

To better understand these economics, let’s examine one individual new hire for the 2008 sales year:


2008 Sales Productivity for One New Hire in January of 2008


In this example, the company has an average 6 month sales cycle, an average sales yield (close rate) of 28%, and an average sale amount of $110,000.  You can see from the diagram that this new hire does not product sustainable positive contribution margin until September of the first sales year.  Furthermore, the company is investing a total of $80,000 in expenses before the salesperson’s contribution margin passes break-even.  This sales person’s contribution margin is a fraction of its potential when the sales person is fully productive.

Here is a picture of this sales person’s economics when they reach full productivity (in this case, the 2009 sales year)


2009 Sales Productivity for One New Hire in January of 2008


After a full year of building a pipeline and gaining sales experience with the company’s products, this sales person now delivers the full economic benefit of a tenured member of the sales team.




The Cost of Attrition

The cost of sales attrition is another area frequently overlooked and underestimated by growing companies.  The cost of one salesperson leaving includes their lost revenue potential plus the expense to hire another salesperson and pay them until they become fully productive.  For example, consider a salesperson who had a $2.0m quota and takes a year to reach full sales productivity due to the company’s 9 month sales cycle and customer’s strategic buying process.  First year sales are likely to be approximately $600k compared to $2.0m in the second year.  After deducting direct expenses, that salesperson’s contribution margin to the company rises from $250k in the first year to over $1.5m in the second year depending on the sales team composition and travel expenses.  As a result, the opportunity cost of losing a fully productive salesperson in the example is approximately $1.25m.  To put this in perspective, In a sales team of 100 people, 5% of sales attrition costs the company $6.0m in expected contribution and $7.5m in expected revenue in the year it occurs.

It is important to distinguish between voluntary and involuntary attrition.  Involuntary attrition is part of the performance management process and is a necessary fact of sales management life.  Voluntary attrition occurs when a fully productive sales person decides to leave for a better opportunity.





Almost every marketplace experiences seasonal variation in demand yet very few sales plans take this into account.  If a company takes its annual sales objective and divides it by 4 to get a quarterly sales goal, it is unlikely to materialize and the company will base its performance (and expenses) on a flawed plan.  Monthly ASP pricing agreements and other recurring-revenue pricing models go a long way to even out seasonality but do not eliminate it.  A sales plan should acknowledge seasonality by distributing more of the sales goal in the higher intensity quarters (typically April-June and October-December) and less in the lower intensity quarters of January-March and July-September.  Some markets (Education for example) have different seasonality patterns that need to be addressed.  Furthermore, there is usually a great variation in buying demand between the first month of a quarter and the last month of a quarter.  Why?  Buyers have been conditioned to wait until the end of a quarter to make a purchase in order to get the best deal.  The impact of seasonality will also be diminished for smaller companies who are aggressively growing quarter-to-quarter sales from a smaller revenue base.  One size does not fit all.  The main message: build a sales plan that acknowledges the reality of seasonality and balances the entire company’s expenses to it rather than ignore it.




Sales Compensation

There are two interlocking issues at work here.  First, what kind of compensation plan is needed to motivate performance and what should its pay-out be for a specific degree of difficulty?  Second, what is the aggregate cost to the company at various levels of performance?  This is a large topic (an expanded section will be added shortly).  There are a few key principles to keep in mind.

Keep it simple.  The compensation plan should reward performance and be simple enough that a sales person (or sales team) can instinctively understand what they will earn when they achieve certain milestones.  Many compensation plans become so complicated that their motivational value is diminished.

Accelerate the pay-out.  A sales person (or sales team) should earn more when a company’s marginal economics improve because of their performance.  High gross-margin businesses (, internet services) earn much more every revenue dollar above plan than they do for every revenue dollar at plan or below it.  Pass some of this value on to the sales team by increasing the rate of commission as they hit certain performance thresholds.

Set a realistic Quota.  Various surveys and studies have shown that many sales organizations get this wrong.  Why?  It is difficult to balance the company’s need for sales productivity with the resources, sales execution, and market conditions needed to achieve it.  Surveys have verified that in today’s market, it is not uncommon for 50% of sales people make quota.  Unfortunately, a classic response to this performance shortfall is to raise quotas the following year without addressing the root cause of the underlying performance problems (e.g. sales execution, product advantages, product pricing, competition, market timing, economic conditions).  What is an appropriate degree of difficulty for setting a quota?  Many sales executives agree that 65% to 75% of a sales team should achieve quota in typical economic conditions.  The numbers and their application are different for small sales organizations as compared to large ones.

Contact us to be notified when this section is expanded.




Territory Creation and Opportunity Allocation

What is the size of each person’s territory?  Does everyone have comparable opportunity to sell into?  If not, what are the significant differences?  A company needs to analyze the size of the opportunity each sales person or team has to sell into.  The goal is to create a comparable degree of difficulty for each sales resource in the organization.  Even in an organization with indirect and internet-drive demand generation, this is an important topic.  It can drive dissatisfaction, cause unwanted turnover, cause a company to pay too much or too little for sales performance.  A company needs to calculate the potential of each territory taking into account existing customers, follow-on sales potential, future territory division.  Too many organizations use a simple geographical division to create sales territories

Let’s take a look at some sample market data:


Sample Market Data Analysis

There is an abundance of detailed demographic data available today and many powerful tools on hand to manipulate it.  The above example shows 10,000 site locations in the United States and categorizes them by industry, SIC code, State, Area Code, Site Revenue, and Zip Code.  In this case, the company’s product pricing has been modeled as license and service revenue streams by the size of the site location.  This view shows  territory definition based on area code.  Depending the product/service you sell and the strength of your sales and channel partner team, you could allocate territories by any attribute (industry, SIC, # employees, etc.).  When a sales team is small, this is level of analysis is less important (though it is still very important for marketing and product planning reasons).  However, as a team starts to grow this becomes a critical task for getting the maximum leverage from your company’s sales efforts.

Now let’s take a look at territory valuation:


Territory Valuation Example

The territory valuation shown above illustrates several concepts.  Here, you can see the composition of 5 sales territories within a sales region and their relative value compared to quota.  The territory composition breaks down the number of sites in each territory by size and value based on the company’s current pricing model.  Each territory’s value is then compared to the sales quota to arrive at an opportunity density measurement relative to quota .  All territories are not created equal; however, you should strive to design and implement territories that have a comparable amount of opportunity.  This provides a broad-based ability to manage performance with firmness and fairness.





How does your expected level of performance compare to your peers?  It can be very helpful to compare your sales productivity assumptions to members of your peer group.  It can highlight areas of additional risk in the sales plan that warrant extra attention or identify areas where there may be opportunity for improvement.

What constitutes a peer group?  There are many attributes that can be used:

  • Size (Revenue)
  • Markets Served
  • Dominant Customer Types Served
  • Business to Business or Business to Consumer Business Model
  • Distribution Channel
  • Product Category

You will typically need to combine several attributes to get a good peer group for comparison.  If you would like to participate in our benchmarking survey please contact us. We will send you an email when the survey is live on our website.

Let’s look at a benchmarking example:


2008 Sales Plan Compared to Peer Group Sales Productivity Benchmarks

In this benchmark example, we have compared the assumptions of the company’s sales plan to its peer group benchmark.  Specifically, we modeled benchmarks for seasonality, median sales productivity, regional sales expenses, median and accelerated sales compensation, and new hire productivity.  We calculated what the company’s revenue, expense, and contribution would be if the peer group assumptions were used instead of the company’s assumptions.


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