The funding winter brought on by the current market slowdown has resulted in startups pivoting towards efficiency. To do this, companies need to identify the right set of efficiency metrics to take an actionable approach to managing cash flows and setting targets.
A great place to start would be areas directly impacting the company’s operations and top line, such as the sales team.
To unlock capital efficient growth, a sales team needs to:
- Set optimum quotas, and
- Estimate and track the right efficiency metrics
The current process, however, uses a top-down approach, where quotas flow from revenue targets and are projected from historical data. This method falls short on two accounts: the inability to quantify efficiency levels between reps and sales teams, and ensuring cost control while growing the top line.
Consider leveraging the ROI of each sales rep to define efficient yet attainable targets, provide equitable compensation, and build a like-for-like comparison across your sales teams.
Q factor enables you to achieve this.
What is the Q factor?
The Q factor is a projection metric that can help boost your sales teams’ efficiency by taking an ROI-driven approach to setting quotas.
Its baseline value is your sales team’s current ROI (ARR/Payroll).
A baseline Q factor of 2 means a sales rep is expected to bring in $2 of business for every dollar they receive as compensation.
See how to calculate the Q factor and leverage it for different use cases
Using Q Factor to arrive at the optimum quota for your sales team
Start by calculating each sales team’s historical ROI (baseline Q factor) over the last year. This serves as the baseline for your future ROI or Q factor.
Learn more about base rate forecasting
Next, set a value for your Q factor. You can take the median, average, or multiple of your historical ROI or baseline Q factor. This is a purely subjective call as it needs to factor in both the historical performance and any potential to improve business efficiency.
- For example, assume your sales team’s baseline Q factor for the last year is two. If you want to grow your top line and also improve efficiency to keep costs in control, you can set the Q factor to a higher value, say three, for this year. To arrive at the sales quota for each sales rep, multiply the Q factor (three) with their On Target Earnings (OTE).
The above approach works well for completely ramped-up sales reps. For new reps, you can define the quota assuming they are fully ramped up and deduct the quota for the months spent ramping up.
For example, a new sales rep is expected to generate $200,000 in new business each month with a three-month ramp-up schedule as follows: 0% (or $0) in the first month, 25% (or $5,000) in the second month 50% (or $10,000) in the third month and 100% ($20,000) for the rest of the months.
Why is the Q Factor approach better?
Using this ROI-first approach to set quotas enables you to benchmark each rep and team’s efficiency against their Q factors. This promotes:
- A like-for-like comparison across reps and between teams
- More equitable management of OTE variation across reps: Instead of simply ranking reps by their attainment %, the Q factor provides a standardized measure of efficiency which works irrespective of an individual’s base salary, seniority or other factors.
- More efficient resource allocation between teams: measuring each rep and team’s performance against their Q factor helps you determine optimal team sizes for various product lines, territories and market segments and reallocate resources more efficiently.
The Q factor directly impacts the sales efficiency of your GTM teams and, therefore, the company’s top line. The increased operational efficiency improves other board-level KPIs, including burn multiple, cash conversion score, and magic number.
How Drivetrain helps you implement the Q factor
The Q factor is a simple yet impactful metric. However, implementing it can be daunting.
Your cost and payroll data are stored in your ERP, accounting and HRIS systems which are isolated from your sales (revenue) and customer data in your CRM. Thus, manually computing the Q factor requires:
- Spending hours consolidating and validating data from multiple systems, and
- Tedious back and forth over several emails and spreadsheets
Moreover, this exercise needs to be repeated for every planning cycle and for each sales team.
Drivetrain integrates with all your business systems to provide a single source of truth for all your data, making it easier to calculate your ROI, set Q factors, and project quotas in a collaborative way.
Reach out to us for a free, no obligation demo to know more!