Headcount Planning: Choosing a Revenue Goal
This article is the first in a series that focuses on annual headcount planning. Article one discusses goal attainment, and the following articles will cover full-cycle seller headcount planning, SDR headcount planning, and operations headcount planning.
We all love that time of year when the leaves hint at changing, the weather begins to turn, and the executive team goes to battle to determine topline goals, then sends everyone in operations into a full-on sprint to figure out how to staff and support the organization.
Ah, sweet memories.
Ideally, operations plays a vital part in giving the executive team the information they need to make a data-driven decision. But this doesn’t always happen (particularly with startups) without elbowing your way into the process. You may need to proactively provide the data your C-Suite needs to advocate for an attainable number and communicate the current state of the market, the achievable market, and the costs that go into each tier of additional revenue.
If you’re not given that opportunity, your executive team will want you to follow the most common headcount model involving backing into their ambitious revenue number by adding a modest lift to the existing quota numbers then calculating the delta and how many salespeople are needed to fill the gap. This is what we call a top-down model, which we will cover in later articles.
Even if you’re being forced to work with a pre-determined number, we highly recommend doing a bottom-up model to verify what will be needed to hit your number. While it’s unlikely your board will have second thoughts about their revenue goal, the best companies build multiple models that also attempt to consider market forces.
We’ll walk through the things you need to know for building a template to determine what your goal should be (with made-up numbers).
Determining the Revenue Goal
Know Your End Game
Not all companies are transparent with their employees regarding whether they would like to IPO, be acquired, or sell their intellectual property. Knowing that aim, however, is crucial to determine how aggressive your revenue goals should be.
For the sake of the exercise, we’ll assume we’re targeting car dealerships with a moderately-priced ($4,000 annual or $350 monthly payments) digital marketing platform. Our startup had modest growth in the first two years while we figured out how much we needed to customize versus templatize our product and how likely dealerships were to hire people dedicated to digital marketing.
In year three, we formed an alliance with a few big players in the market. They liked the look and feel of the digital presence we projected for their dealerships and helped promote our product for a substantial discount. Our growth spiked mid-year, leading to 2X growth but slowed down after those initial agreements to a steady 1.5X growth per year over years four through six.
Due to the steady but mediocre growth, the leadership team has decided to put feelers out for an acquisition. This means minimizing margins, lowering the cost of acquisition, and focusing more strategically on areas of the market that haven’t been efficiently sold into.
What does this mean from a strategic standpoint?
You’ll want to develop a model that supports 1.5X growth (at minimum), spend time understanding how long salespeople take to ramp and determine whether efficiencies can be gained by cutting your lowest performers and backfilling their positions with stronger salespeople. This, of course, will involve analyzing the market to determine whether you’ve designed some poor territories and recutting account distribution.
You’ll also want to determine whether investing in channel managers makes sense given their cost or you have enough runway to maintain the current growth for a few years during the acquisition process.
Understand Your Market
Some companies create products that fit the bill for a vast number of verticals, individual consumers, and/or use cases. The sky is the limit for low-cost products, and your only real issues stem from product development limitations and competitors.
Many of us work with companies that have a product that is intended for a niche, vertical, or a few use cases. For some of us, that means we only target marketing departments within technology companies or high-six figure golf fanatics or American car dealerships… The list goes on and on.
For the sake of the template, we’ll assume we’re targeting car dealerships with a moderately-priced ($4,000 annual or $350 monthly payments) digital marketing platform.
It is absolutely critical that companies look beyond historical growth and understand their viable market. In the case of car dealerships, there are only so many in the market (let’s say 21,000), and we know which OEM-aligned dealerships are most likely to buy from us and the market share:
When we summarize the above against what we know about the market:
Finally, it’s advisable to understand how much activity goes into each prospect to close a deal and the estimated win rate for each tier.
Understand Your Customer Acquisition Cost
The simplest way to calculate your customer acquisition cost is to take all of your gross net new revenue and divide it by the sum of all of your marketing and sales expenses (ideally including operations!).
Looking at last year’s number of deals (880), we see that 73 deals were closed each month. While we have a range of talent, we have nine full-cycle sellers, and the average number of deals closed per representative was 8. If we remove the bottom two performers, that average goes up to 10 deals closed per rep.
Those nine full-cycle sellers have a base salary of $65,000 and earn up to $160,000 with commissions. The average salary was $95,000 times nine plus $270,000 for our Sales VP for $1,125,000. Add in $250000 for the sales support (ops & deal desk) team. Our marketing team runs lean, with a VP of Marketing, a Marketing Operations person, and some contractors. Their budget runs $750,000.
Total marketing and sales expenses are $2,125,000, which means your customer acquisition cost is $2,125,000 / 880 or $2,414.77.
Take your $4,000 gross net new revenue per customer, and you have a 40% gain to cover operating expenses. This means efficiency gains will be the focus next year to try to widen your product margin.
Understand Your Product Margin
A good gross margin for SaaS is 70-80%. Unfortunately, your dealerships have needed a lot of convincing and handholding once the product is rolled out. The initial implementation phase is running too long, putting you at the inverse of where you should be. Meaning a dismal 25%. No wonder the leadership team is thinking of selling, but they won’t get a buyer unless they can broaden that margin to meet industry standards.
Calculate Your Time to Productivity
The good news is, car dealerships are hungry for a better, easier way to manage their digital presence. Since your company handles the majority of the busy work for them, they love the product. Which means a new seller only is unproductive for the first month, hits 50% of quota in month two, and should be fully up to speed in month three.
Get a (Realistic) Product Plan
We get some great news from the product team.
They’ve heard the customers’ complaints and are months away from rolling out a platform update that will allow onboarding dealerships to enter their dealership colors, logo, and connect directly to their inventory system to make listing vehicles a snap.
This will mean a 25% reduction in margin because they are clearing up major time for your support team to focus on one-off issues rather than initial build and ongoing maintenance. This means our gross margin is still (a not great) 45%, but we have a better baseline to work with.
Happier customers should mean easier sales cycles (testimonials are everything!).
What’s the Strategic Play?
In order to determine the goal, we have to keep in mind:
- The goal is to sell the company in two to three years
- The CFO knows that we need a 75% gross margin and maintain our growth to be attractive to buyers
- We have plenty of runway, so the immediate concern isn’t cutting budgets
- The time to ramp to seller productivity is fast
- Our high-performance salespeople have proven they can move to any major market and be successful. The key is ensuring enough Tier 1 and Tier 2 accounts are in their territory.
If the business wanted to eventually IPO, a different set of priorities would come into play. Knowing that the UI is improving drastically could mean more customer testimonials and an easier time of winning both OEM partnerships and customers. We could sustain a lower profit margin with our investment runway, and we are (barely) operating in the black.
We also know we have some under-performing salespeople, and selling is about to get easier with a boost in reputation.
However, we must put the leadership’s goal first.
In this case, we know that 1.5 growth is attainable. We have enough Tier 1 and Tier 2 accounts to sell into without establishing a new OEM relationship. We also know that we can cut loose the low performers and gain even more efficiency in close rates with future product updates.
In this case, the CFO ultimately decides that holding growth steady while slashing product margin is the top priority. Your goal will be:
1,320 net new deals for $5,280,000 gross net new revenue with a focus on less overall expenses and greater productivity per salesperson.
Tune in for our next installment in the series. We’ll develop a template to build a bottom-up and top-down model for full-cycle seller headcount using this article’s baseline (fake) numbers.