Capacity Planning 101: Building a Sales Plan

Robert McLaws
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Building a sales capacity plan can be a real challenge, especially if you’re doing it in Excel. According to Lightspeed Venture Partners, 1 out of every 3 companies doesn’t even have a capacity plan. In this post, I’ll dive into the math behind capacity modeling, and show you how easily doing it wrong could tank your entire company.

Understanding Sales Capacity

Sales Capacity is the maximum amount of revenue your reps can bring in at any given point. Let’s take a look at an example.

Let’s say you have two sales reps, and at $10k per month quota. What’s your sales capacity?

2 reps x $10k quota = $20k capacity

Seems simple, right? Many spreadsheets assume that it is. But if you consider that the typical ramp-up time to full quota should be equal to the length of your sales cycle, and that every rep in the company is at a different point in that cycle, it can be quite difficult to calculate properly.

So let’s take that same example, and say that it takes 5 months to ramp up to full quota (that’s not going to happen on a $10k/month quota, but just bear with me). Your first rep you’ve had for a year, but the second rep just came on board two months ago. What is your capacity this month?

($10k x 1.0) + ($10k x 0.4) = $14k capacity
1 rep @ full quota + 1 rep @ 2 months

Let’s take that one step farther. Let’s say from here, you hire a new rep each month. What will your capacity be two months from now?

($10k x 1.0) + ($10k x 0.8) + ($10k x 0.4) + ($10k x 0.2) = $24k capacity
1 rep @ full quota + 1 rep @ 4 months + 1 rep @ 2 months + 1 rep @ 1 month

As you can see, this stuff gets pretty complicated pretty quickly. Out of all the spreadsheets I’ve reviewed, there is not a single one that accounts for quota ramp-up properly across an entire team. So if you want to calculate the capacity of 30 sales reps ramping to 47 by the end of the year, you definitely need an algorithm.

I would explain how our algorithm works, but that’s our secret sauce. Suffice it to say, we build the team in such a way that lets us calculate much more than just quotas…. It’s actually the foundation for everything we’re able to model.

At this point, you’re probably asking yourself how do you figure out how many reps you actually need? By figuring out how much New Customer ARR you need to add to the books.

Understanding Revenue Growth

Calculating revenue growth is actually quite simple. Linear recurring revenue growth simply multiplies last month’s revenue by 1 + a monthly growth rate. But what should that growth rate be?

Neeraj Agrawal first coined the term T2D3 in an article back in 2015. It said, to become a billion dollar SaaS company, you must first get to $2M in ARR, and then plan to triple your ARR the next two years, and then double each year for the following three years (triple-triple-double-double-double).

In order to double, you need to be posting a roughly 5.9% month-over-month (MoM) growth.
In order to triple, you need to be posting a roughly 9.6% MoM growth.

So if you’re starting at $1M in revenue, the calculation for next month’s target would look like this:

$1,000,000 x 1.0958 = $1,095,800 Target ARR

Now that you know the total ARR you need next month, figuring out how much revenue you need to add is simple: just subtract next month from this month:

$1,095,800 - $1,000,000 = $95,800 New Customer ARR

That means you only need to add $96k next month to hit your target for the month, right? Well, it turns our that churn can have a dramatic impact on the final number.

Understanding How Churn Affects Capacity

Churn is the measure of how many customers cancel their subscriptions in any given time period. This is typically expressed as a percentage (3% of our customers left last month). So in this case:

$1,000,000 x 0.03 = $30,000 Churn

So, while 3% of the whole is not necessarily a big number, it is nearly 1/3rd of the revenue you have to bring in for the month! That’s asking your team to swim upstream against a pretty tough current.

What do I mean by that? Well, when churn is positive, you have to add that total onto the number we calculated for your New Customer ARR in the previous step:

$95,800 + $30,000 = $125,800 New Customer ARR

This is why most SaaS business put considerable effort into achieving net negative churn. This is when you add more seats from existing customers than you lose, and often happens when a company’s use of your product expands from Sales to, let’s say, Customer Success.

This time around, let’s say you have a 3% net negative churn. Since the math on calculating the dollar value is the same, we plug these numbers into the calculation above:

$95,800 + -$30,000 = $65,800 New Customer ARR

Wow! That’s almost half the ARR target for the month as under a 3% positive churn. I should point out that this is a simple example, so the difference is not always as dramatic as in other months… but now you can see why customer success + land and expand are such powerful concepts for SaaS businesses. It can take significant burdens off the sales teams… which can be especially important in situations like we’re facing right now.

How Capacity Affects Sales Leaders

As a sales leader, you have to balance two major and equally important tasks: keep your team hitting quota, and maintain the proper balance of sales reps. You maintain the proper balance by keeping the result of subtracting total sales capacity from the new customer revenue as small as possible.

$100,000 Quota Capacity - $65,800 New Customer ARR = $34,200 Capacity Delta

If your Capacity Delta is ever larger than your Quota, then you did something wrong, and didn’t hire enough reps. If it’s negative, then you hired too many.

It’s very much a tightrope walk, except with every step you take, weights are added to alternating sides of the pole. If keeping reps hitting quota is your forward motion, then the added weights are the new reps coming onboard.

If you’re using capacity calculations that are too simplistic, you could hire more reps than you actually need, and throw the entire company out of balance in a way it might not recover from. If you don’t factor in the right quotas, set the wrong ramping expectations, or churn too many customers… you might lose your footing from lack of forward revenue motion.

How BurnRate Makes This Easy

We know this stuff is a hassle. Most of the spreadsheets floating around are either too simple and don’t get detailed enough to be accurate, or too complicated, making them easy to screw up.

BurnRate is designed to understand the dependencies between job roles, so we’re able to know when crossing a given threshold with one role can trigger a hire in another. That goes for management, within teams, or even across teams. For example, crossing 50 employees total could trigger a new HR hire.

When building capacity models, we can also take time-to-hire details into account and change how long it takes to fill a role on a per-role basis. Most spreadsheets will tell you, for example, that an AE needs start at 25% of quota in May. But no spreadsheet we’ve ever seen will tell you, based on how long it takes to fill the role, that you actually need to put the job offer out by March 17th.

Oh, and you don’t have to worry about the formulas themselves. We take care of all of that for you, so there’s nothing to accidentally screw up!

Wrapping It Up

Hopefully that helps you understand a bit more about how growth, churn, quotas, and ramp-up can affect capacity. If you have any more questions, feel free to click the button below, and we'll schedule a 1:1 to help you learn more.

Onward! 👊

Robert McLaws
CEO, BurnRate

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