Growth-oriented SaaS businesses rely heavily on planning to ensure they have the resources needed to meet their targets. Sales capacity is one of the most important types of planning you can do for your business. This is because sales capacity is what produces revenue for your business. Every dollar of new ARR starts with a sale. So if you want ARR growth, you’ll need to do sales capacity planning to figure out how many AEs you’ll need to achieve it.
If you’ve never done sales capacity planning or if you have and still find the process daunting, you’re in the right place. In this step-by-step guide, we’ll show you how to do sales capacity planning and explain the factors that can affect your sales capacity. We’ll also make the case for making sales capacity planning an ongoing practice in your business.
What is sales capacity planning?
Sales capacity planning is a strategic financial modeling process that helps you predict your company’s ability to generate new revenue based on the number of account executives (AEs) you have and their productivity.
Why sales capacity planning is critical to SaaS growth
Sales capacity planning has a number of benefits for your business by helping you:
- Sales forecasting – Sales capacity planning helps you more accurately predict and model your growth based on new revenue, based on the number of AEs you currently have and their productivity.
- Setting appropriate quotas – Setting quotas unrealistically high or using a one-size-fits-all approach can lead to poor morale and AE burn-out. Sales capacity planning helps you create a high-performing sales team with optimal quotas that take current productivity and ramp-up time into consideration.
- Headcount planning – Sales capacity planning provides a strong foundation for making data-driven decisions regarding headcount, which is likely the biggest cost driver in your business. Finding and filling gaps in your sales team, will help you meet your ARR targets and ensure your hiring decisions pay off.
Another benefit of sales capacity planning (although somewhat less tangible) is that it helps to get your finance team and sales team on the same page and makes them both accountable for the goals set through the planning process.
Why you should never stop planning
Planning is by nature a proactive pursuit, and the SaaS industry is very dynamic. Some of your AEs are inevitably going to miss their quotas, and if you’re not keeping an eye on your sales capacity throughout the year, the possibility that you’ll miss your targets grows with every quarter.
Ideally, you should look at your sales capacity and the factors that might be affecting it on a quarterly basis. That way, you’ll know sooner when you’re veering off course from your targets and will have more time to adjust.
Let’s take a look at some of the factors that make routine planning a necessity for success in SaaS.
Ramp-up time
Every new AE you hire is going to need some time to get up to speed with your business, your products, and your target market in order to meet his or her quota. This is called ramp-up time, and if you find that your new AEs are taking longer than expected to ramp-up, it could have a significant impact on your sales capacity and quota attainment for the year end. The longer it is for new AEs in your business, the bigger an impact that can be. However, if you’re proactively planning, you can factor in that ramp-up time to develop a more realistic plan. Revisiting your plan quarterly will help you spot that problem early and make adjustments necessary in your training process to help them get on track.
Attrition
Attrition happens, and if you lose an experienced AE it’s going to take some time to backfill that position. In addition, any AE you fill that position with will require some ramp-up time to become productive, which will change your sales capacity (at least in the short term). By revisiting your planning effort quarterly, you’ll be able to assess more quickly what the impact of that attrition will be and respond more quickly to fill that position or reallocate resources from another team.
Interdependent decisions
There are a lot of functions in your business that are proportionate to sales capacity. For example, how many customer success managers (CSMs) should you hire? How many business development reps (BDRs) do you need?
These decisions should be based on how many AEs you hire because if you have more CSMs and/or BDRs than what you really need based on the number of AEs you have and the new accounts they can reasonably be expected to close, you’re spending more than you need to on payroll. So, if you’re not planning for sales capacity (or if you are but you’re not incorporating those decisions into your planning in other areas), you can’t effectively plan for these other positions, either.
Changing realities in your business
You may find that some of the assumptions you used in your model don’t hold true. For example, if you find your quota attainment rate is lower than you expected, you may have to hire more people to make up the shortfall in your ARR that would happen if you don’t. Or, you could find that one of your sales motions is performing better than others, which might prompt you to redeploy some of your resources to that team.
Bottlenecks (and their hefty opportunity costs)
For SaaS businesses, sales capacity is a limiting factor in revenue generation. Just like in a widget factory, the number of widgets that factory can produce is limited to the number of machines it has and the continuity of its assembly line. In a factory, an assembly line has a lot of moving parts, ideally working in perfect unison to keep production humming along. But, if one of those machines breaks down, production backs up.
Sales capacity can create a similar bottleneck in your business. Let’s say you need to generate $20M this month. Your marketing team has worked with your BDRs to put together a campaign that should generate plenty of sales qualified leads to hand off to your AEs to close. Problem is, you’ve just lost two of your AEs. Even if you could fill those positions instantly, you’re still not going to be able to take advantage of all the leads you could otherwise close because your new AEs won’t be ramped up yet. If you’re not proactively planning for sales capacity, you’re leaving money on the table.
Sales capacity planning should be data-driven (but your data doesn’t have to be perfect)
We’ll talk about the types of data you’ll need as we work through the model below. Just know that even if you don’t have all the data you need, you can still do sales capacity planning. You’ll just need to make some assumptions about what those values should be for your business.
Obviously, the more historical data you have, the more accurate your results will be. But if you’re in the early stages of your business, you might not have a lot of data to draw upon.
For example, if you’ve only been in business for a few years, the time it takes new hires to reach their allocated quotas (ramp-up time) may not be well known as your product offerings may be evolving simultaneously with your sales efforts.
Here again, you may need to make some assumptions in order to determine your sales capacity. The fact that you don’t have as much data as you might like only means that you have to recognize that the results, while still very useful for decision-making, may not be entirely accurate.
Don’t let this discourage you, though. Sales capacity planning is critical to your company’s success. As your business grows, the amount of data you have to inform your planning effort will grow right along with it, making your results ever more reliable over time.
How to do sales capacity planning in 5 steps
1. Figure out your ramp-up time
One of the most important pieces of information you’ll need is your ramp-up time. Unfortunately, this won’t reside in your CRM. But you can use the information from your CRM to calculate it. Ramp-up time can be calculated in a number of ways depending on the data you have available and what makes most sense for your unique business:
- Average Sales cycle + 90 days – This is probably the simplest formula you can use. It’s useful in situations where you don’t have much historical data on how long it takes your AEs to ramp up. So, it may require some best guesses. For example, this method doesn’t take into account key performance factors for AEs such as time spent in training or the experience a new hire brings. However, you can add some additional time to account for your onboarding and training practices. Also, 90 days is arbitrary. You can adjust the formula to any time period that’s appropriate to your business.
- Sales cycle + training + experience – This method is useful if you have a good sense of how long it takes your AEs to ramp up or historical data to tell you. It takes into account your known sales cycle plus time spent training and onboarding, which can directly contribute to success in sales. Note that it may require some iteration to figure out how to properly weigh the experience factor, and if you don’t have an established training program, you may need to make some assumptions here.
- Time to reach 100% quota – This is the best and most widely used method for calculating ramp-up time. As the name suggests, it’s calculated based on the average time it takes new AEs to reach 100% of their quota. By using an average, this method takes into account the fact that not all of your AEs are starting at the same place in terms of their previous experience. This fact can have a significant impact on your planning because it tells you not only how many AEs you will need to reach your targets but also when you need to hire them. This allows you to be more proactive in your hiring and increases the likelihood of success.
Step 2. Determine new quotas for each of your teams
This part of the sales capacity planning process is relatively straightforward. You know what your ARR target is, and you know how much in bookings you need to meet it. You probably already have some sense of which sales motions are working well for you and which ones aren’t, and you can use this information to help you figure out how to allocate across the teams responsible for them.
You’ll allocate your sales targets by team, which might be structured in any number of ways. For example, you might have sales teams organized based on:
- Geographies (e.g. AMER, AMEA, APAC)
- Sales channels (e.g. inbound, outbound, channel partners)
- Types of customers (e.g. SMBs, Mid Market, Enterprises)
When you allocate quotas across your teams, you’ll start by looking at their past performance. In the example below, let’s assume we have three sales teams organized by geographic regions (Americas, EMEA, and APAC). Each of our sales teams sell into three different markets (SMB, Mid Market, and Enterprise).
We can determine what percentage of the total new ARR each of these teams contributed in the past year (the actuals).
These contributions will serve as your baseline for setting your quotas. Once you have your baseline, it becomes easier to determine how much each team needs to contribute in order to meet your new ARR target.
So, carrying this example to the next step, let’s say your new ARR target for the new fiscal year is 200% growth or $40M. Using the information you have on how much each team is currently contributing, you can now calculate a new baseline quota for each team, that should (theoretically) get you to your target.
Assuming all your AEs continue to sell at the same level and you don’t lose any AEs, your current teams combined should be able to bring in $20M, which would leave you a gap of $20M in ARR to fill.
Neither of those assumptions are safe, though, and if you were to stop your planning there you would undoubtedly miss your ARR target. If even one of your AEs fails to meet his or her quota, your business as a whole will fail to meet its ARR target. To eliminate this possibility, you have to take a look at your quota attainment rate.
Step 3. Calculate your quota attainment rates
It is a fact of business that not every salesperson you hire will meet his or her quota, and the SaaS industry is no different. The Bridge Group has found that on average, only 66% of SaaS account executives meet their annual quotas, and it’s worth noting that this result has remained pretty consistent over the past seven years..
What this means for sales capacity planning is that no matter how you allocate your ARR target across your sales teams, you need to build in a margin of safety to ensure you can still reach your ARR target. How much to build in for each team depends on their quota attainment rates.
Quota attainment tells you what percentage of their quotas your sales teams will meet on average for a given period. It is typically measured on a monthly, quarterly, or annual basis. Our example focuses on allocations across different teams, but you can also calculate quota attainment for individual AEs.
You can use this information to determine how much you’ll need to increase your sale’s teams’ quotas to ensure you meet your ARR target. That way, if one or more of your teams or individual AEs doesn’t meet their targets you stand a better chance of meeting your overall ARR target.
The formula for calculating quota attainment rate is pretty simple:
Quota Attainment Rate = Actual Sales / Quota * 100
So, let’s take a look at how to build in that margin of safety that will help you reach your ARR goal. Building on our previous example, you’ll recall that based on our actuals from 2022, we assumed that our sales teams could bring in $20M, and they did. But the problem is, at $30M, their quota for the year was quite a bit more than that.
None of your teams met their quotas. Going into this new year, if we assume the quota attainments rates stay the same for each of your teams, we can apply those percentages to our new quota to determine how much we may need to make up to ensure we meet our overall ARR target.
Recall that overall, the team’s new baseline quota, based on the new ARR Target of $40M, if your teams are going to bring in 66.7% of their combined quotas, they’re going to come up short by 33.3% or $13.2M. That shortfall needs to be added into your teams’ quotas somewhere to ensure you meet your ARR target.
It’s worth noting here that sales capacity planning offers a good opportunity to take a closer look at the performance of your sales teams to gain a better understanding of the underlying factors driving their attainment rates. Doing so often reveals issues that if addressed quickly, can help you improve those rates.
Step 4. Determine the gap between your current sales capacity and your new ARR target
Compare the new quotas you calculated for each team (Table 2) with their previous quotas (Table 3). The difference between these numbers indicates the capacity you’ll have to build across each of your teams. Totalling them will give you the overall capacity you need to build.
In the table above, we allocated the extra $13.2M margin of safety across all three teams, multiplying it by the percentage of total ARR each team contributed in the previous year (the relative contribution from Table 1). Then we added that to the difference between their previous quotas and their new baseline quotas to get the total new sales capacity needed for each team.
Note that if you were to find through this exercise that you have excess capacity (your total existing quotas are greater than your new targets) you would need to revisit your target ARR to make sure you haven’t underestimated your potential for growth given your sales’ teams current performance. (A nice problem to have.)
Step 5. Create a hiring plan
Once you’ve figured how much sales capacity you need to meet your new ARR target, the next step is to figure out how many AEs you need to build that capacity.
This is the most challenging step in the process because there are so many variables to consider when determining how many people to hire. For example, you have to factor in ramp-up time for each new AE you hire and how much they will each be able to contribute to your ARR as they get up to speed. Their individual contributions will depend a lot on their previous sales experience, which will vary depending on who you hire.
Depending on how many new account executives you hire, you may also need to factor in additional sales managers and SDRs as well. And of course, you always have to think about potential attrition.
In addition to figuring out how many AEs you need to hire, you also need to figure out when to hire them. Ramp-up time will figure heavily into the timing of your hires. But you also consider the external factors that can impact your ability to hire the people you need when you need them, such as competition for sales talent.
Figuring out the answers to all of these questions is the aim of sales capacity and SaaS business planning. Our goals for this article were to make sales capacity planning a little less intimidating and to encourage you to make it an ongoing practice in your business. The more you engage with this type of planning, the more data you will have to inform it and the easier it will become.
Drivetrain is purpose-built for sales capacity planning
If you plug "sales capacity planning" into any search engine, you’ll find any number of free templates out there, all of which come with claims that they can make sales capacity planning easier. The fact is, sales capacity planning isn’t easy. Yet, many SaaS companies are still struggling with their planning, downloading one template after another in the hopes that they’ll eventually find one that really does make it easy.
The problem is, while spreadsheets can be powerful tools for crunching numbers at scale, they’re particularly ill-suited for a modern SaaS company’s capacity planning and modeling needs. Sales capacity planning needs to be fluid to be responsive to changing dynamics in your business and the market, and spreadsheets are anything but.
As a purpose-built FP&A platform, Drivetrain does make sales capacity planning easier. With seamless automations and sophisticated modeling capabilities behind an intuitive and easy-to-use UI, Drivetrain distills out a lot of the natural complexity inherent in sales capacity planning, such as figuring in the impacts of ramp-up time for new AEs.
Drivetrain automatically aggregates all the data you need for sales capacity planning from all your source systems in real time, saving you weeks of manual data if you’re still using spreadsheets. With Drivetrain, quarterly planning will become far less onerous (and dare we say, even fun?).
Imagine finally being able to make proactive, data-driven decisions based on an accurate and reliable capacity planning model. You’ll never again be caught by surprise with unexpected attrition on your sales team or changing market conditions that can impact your sales. With data feeding into your model in real time, you’ll be able to respond quickly with new projections that will help you correct your course.
And if you do find your sales teams falling behind, Drivetrain makes it easy to track different revenue drivers and to identify the root causes.
Want to know more about how Drivetrain simplifies sales capacity planning to boost your revenues? Get in touch with us.
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