- Challenging marketing conditions have made achieving efficiency in capital and resource allocation important.
- SaaS companies need quick insight into their efficiency. The Q factor is a simple and intuitive KPI that simplifies sales quota management, ensures equitable compensation, and drives resource allocation decisions.
- You can extend the Q factor to other GTM teams too. The result is a well-rounded look at GTM efficiency.
Recent macroeconomic changes are impacting companies' ability to access capital. In July 2022, Crunchbase reported that global VC funding in Q2 2022 was $120 billion, the lowest this number has been since Q1 2021.
In short, purses are tightening. Investors are demanding high growth SaaS companies shift their focus from growth at all costs to ROI through greater capital efficiency. Moving away from tracking growth-based KPIs and defining efficiency-based ones can be challenging.
What should your new KPIs track and which goals should they help you achieve?
At a minimum, efficiency KPIs must help you:
- Benchmark and measure sales rep performance
- Determine quotas that balance growth and cost efficiency
- Calculate fair compensation
- Inform resource reallocation decisions
From a company's perspective, boosting efficiency in sales functions has significant and direct bottom-line impact. It is a great place to measure the impact of new efficiency-based processes and Key Performance Indicators (KPIs.)
The Q factor is one such metric.
What is the Q Factor?
The Q factor links your results to the expenses incurred when producing those results. From a sales perspective, the Q factor is the ratio between ARR and sales payroll. A Q factor of 2 indicates that a rep generates $2 in revenue for every dollar you pay them. You can calculate the baseline Q factor using the formula below:
Q factor (baseline) = (Previous FY’s ARR) / (Total compensation)
- Note (i): Consider only completely ramped individual contributors for this calculation
- Note (ii) Total compensation include base salary, benefits paid, and ancillary costs related to sales including commissions and bonuses
You can use the Q factor to measure a team's efficiency or an individual's. These calculations are as follows:
Individual sales rep: Quota achieved / OTE
Sales team: Total quota achieved / Total OTE
The Q factor is easy to calculate and offers a quick measure of a team and individual's efficiency. While baseline Q-factor calculations rely on historical data, you can also use it to build efficiency into your projections.
How to use the Q factor to increase sales ROI
The Q factor helps you build like-for-like comparisons across your sales team, project quotas for maximum efficiency, and align stakeholder incentives. Here are the different ways of using the Q factor to achieve these goals.
Calculating forward ARR quotas per sales team
Setting forward ARR targets can become a dart-throwing exercise if you're not careful. How can you ensure quotas are challenging yet achievable? More importantly, how can you increase or keep sales ROI consistent?
Here's an example of how the Q factor simplifies this situation. Assume your US Enterprise Field Sales Team achieved an ARR of $35.2 million in FY 21, with team payroll costing you $10.5 million. This team's baseline Q factor is:
- Q Factor (FY 21) = $35.2M / $10.5M = 3.33
When planning the following fiscal year's ARR (team quota,) assume you want to increase ARR targets while increasing efficiency. Increasing the Q factor while estimating FY 22 payroll helps you achieve both goals.
- Q factor (FY 22) = 4
- Payroll (FY 22 projected) = $12.8 million
- Projected ARR (FY 22 quota) = Q factor * payroll = 4 * 12.8 = $51.2 million
Discuss revising your Q factor targets with your teams and stakeholders during the planning phase. You can easily maintain payroll efficiency while targeting top line growth.
Identify and compensate top performers fairly
Sales rep compensation can be a minefield for executives to navigate. While setting sales quotas is relatively simple, measuring performance is challenging. Quota attainment percentages are easy to calculate but do not measure efficiency from a resource allocation perspective.
For instance, if rep A achieved 80% of a $1 million quota while rep B achieved 50%, A appears to have done a better job. However, what if A's compensation was double their quota while B's OTE was half the $1 million target? The need for efficiency changes the way you measure and reward performance.
Here's how the Q factor aligns efficiency with rep compensation. In the example below, we have rep OTEs ranging from $160,000 to $300,000, and a $2.4 million team quota divided equally between them.
The table below lists each rep's quota attainment, the attainment percentage, and individual Q factors.
If these reps were ranked solely by attainment percentages, seller B out performs their colleagues. However, the Q factor paints a different picture.
Seller C is the best performer when accounting for OTEs, bringing $4 in revenue for every dollar you paid them.
Thus, the Q factor aligns compensation with performance. Executives can define OTE policies based on performance more accurately, leading to higher employee satisfaction.
Ensuring equitable compensation
How can the Q factor help you justify sales rep salaries while ensuring compensation terms are fair to all members? Let's add the following assumptions and changes to the previous example to see how this works:
- We break down compensation into base salary and bonus compensation per rep. Bonus payouts are calculated as (Base pay * percentage of quota attained.)
- We divide quotas equally between all sellers and do not use Q factors to project them.
As the following year unfolds, let's assume that sellers A, B, and C achieved sales of $500,000, $960,000, and $640,000 respectively. The table below lists their quota attainment percentages, their bonus payouts, and the Q factors they achieved.
- Seller B's compensation is far more than sellers A and C despite middling efficiency.
- Seller C offers their company the highest ROI but receives the lowest pay.
While the dollar amount of sales achieved plays a role in compensation amounts, is there a better way to compensate C in this scenario? What if we use the Q factor to fix quotas during the planning phase?
Instead of equally dividing the team's quota across all sellers, we assume a planned Q factor of 4 and use that to calculate individual targets. We calculate compensation based on the sales numbers achieved in the last example. The table below summarizes these assumptions.
Comparing both tables is instructive.
Notice the differences between rep compensation. The graph below summarizes the differences in the compensation each rep receives from their company.
At the team level:
- Compensation reduces 8.4% - From $669,000 to $612,500.
- The gap between A and C's compensation reduces. OTEs accurately take sales amounts and ROI into account.
- B is more efficient than A, justifying higher compensation and expense.
Thus, the Q factor aligns compensation to sales rep ROI. The metric also highlights which rep justifies their compensation given the ROI they generate.
Driving resource reallocation decisions
The Q factor helps you adopt a data-driven approach to resource reallocation. Whether at the sales team, region, or product level, the Q factor highlights sales ROI, leading to better reallocation choices.
Consider the example below that lists field sales teams' performance across territories. Each team fails to match their baseline Q factor, with some further off than others.
Let's assume we have individual sales rep data per team. The table below lists how many sellers per cohort (based on company tenure) achieved their Q factors.
The data from this analysis helps you arrive at several resource allocation implications. For instance you can:
- Calculate optimal team sizes in every market segment and resize teams.
- Choose between implementing a hiring freeze versus layoffs.
- Decide whether backfilling positions in underperforming teams is justified.
- Allocate resources efficiently to teams depending on their pipeline status and needs.
And so on.
The Q factor doesn't clarify the reasons behind underperformance. However, it offers better context when measuring team and individual efficiency.
Extending the Q factor to GTM teams
We've explored how the Q factor works when measuring sales teams performance. You can extend the metric to all GTM teams. For example:
- Measure customer success teams' efficiency by dividing their book of business by earnings.
- Divide onboardings by earnings to measure professional services' efficiency.
The examples we highlighted extend to all GTM teams. You can use the Q factor to calculate team member compensation and make resource reallocation decisions.
How Drivetrain simplifies Q factor usage in GTM analysis
Drivetrain makes it easy for you to incorporate the Q factor when planning quotas, budgeting, and modeling GTM scenarios.
Set accurate quotas
Drivetrain integrates with all your data sources and centralizes data on a single platform. Whether it's CRM, BI platforms, data warehouses, invoicing systems, HRIS platforms, ERP solutions, or even Google sheets, Drivetrain eliminates data silos.
The result is a fast quota-setting process that accounts for all of your data.
Seamless collaboration for accurate planning
Seek stakeholder input, make ad-hoc changes, and model quota impact using dynamic data. You can create quota plans to account for new hires, promotions, ramp-up times, and territory transfers. Drivetrain centralizes all these sales quota planning tasks.
View territory planning, sales capacity planning, ARR buildup planning, and sales funnel planning on a single platform seamlessly. The result is a well-rounded view of your GTM strategy.
Model scenarios easily
Easily project different Q factors and model the impact on revenues. RCA and What-if scenario modeling functions within Drivetrain make it easy for you to stress-test your projections in challenging markets.
You can model quota adjustments and visualize revenue impact before committing resources.
Track team performance
Thanks to seamless integration and advanced analysis capabilities, Drivetrain helps you track and measure team efficiency. Track Q factors at the team, region, product, or team member level to receive a complete view of business efficiency.
You can also incorporate the Q factor into GTM KPIs to build a well-rounded picture of your business.
Navigate challenging markets through better planning
The Q factor is a simple yet powerful metric that helps you mitigate business risks. It is a useful metric when you’re looking to improve your planning processes in challenging markets.
While the Q factor is not a cure-all for tough market conditions, it helps you boost efficiency and maximize resource utilization.
Curious about how Drivetrain simplifies FP&A and RevOps, and boosts ROI in your GTM teams? Reach out to us to schedule a free demonstration.