Updated on December 17th, 2018.
2019 Budgeting Cycle
As companies plan their sales budgets for 2019, an overlooked area of sales resource planning is a thorough understanding of the efficiency of your salespeople. At ORM, we define sales efficiency as the expected percentage of orders a salesperson will achieve versus their quota at 100% achievement. On the surface this sounds like a simple calculation, however, the simplicity quickly evaporates when you realize that sales efficiency varies significantly with experience and other factors.
Here at ORM, we recommend the following approach to determine your sales efficiency: evaluate the sales efficiency by salesperson, position, territory, and month for at least a two year period.
This requires knowledge of the following information, which should be readily available from your CRM system:
- The annual order quota by year for a fully effective salesperson by position and territory.
- The planned future order quota for a fully effective salesperson by position and territory.
- An allocation of the annual quota by month to determine the monthly order expectation.
- The actual order performance by salesperson over the measured months.
- The hire date for each salesperson.
Using this information, you can calculate the sales efficiency for each salesperson and sales position by month. We can then combine this data with each salesperson’s number of months in their position for each measured month. For example, you can calculate each Account Executive’s sales efficiency in their first month of employment, independent of which month they started because you have normalized the seasonality in your monthly allocation. Similarly, you calculate this data for each month of employment and then you have an accurate reflection of each position’s sales efficiency based on employee tenure. This data allows you to predict the average sales efficiency expectations by sales position and territory.
Now let’s look at an example from a real sales efficiency calculation. The following table outlines two sales positions that have different quotas and different sales efficiency rates. As you can observe from the data, the Large Enterprise Account Executive has a very low expectation of order achievement in the first 3 quarters of employment, whereas the Enterprise Account Executive ramps to 60% effectiveness by the 3rd quarter. This is not surprising given the Large Enterprise AE has a more complex set of customers and a $1.5M quota expectation vs. the $800K for the Enterprise AE.
Based upon the sales efficiencies noted above, a new salesperson in each position would be expected to achieve the following results in terms of orders and sales.
Large Enterprise AE
Based on the sales efficiency rates, a new employee hired on January 1st, 2017 would be expected to achieve $559K in 2017 orders, which is just 37% of the 100% quota target. In this example, the orders are amortized over a 12 month period, therefore the 2017 revenue estimate is just $173K. The low sales result in 2017 is usually a big surprise to sales leaders because they do not fully realize the impact of the sales efficiency ramp rate. The sales estimate is significantly affected because all the orders are amortized over 12 months. In the first half of the year, the salesperson only achieves $98K of the $559K in annual orders, hence the majority of the revenue for the 2017 orders will cascade into 2018 sales. The 2018 order and sales number are exactly as most would expect because the sale efficiency is at 90% for the entire year.
Based on the sales efficiency rates, a new employee hired on January 1st, 2017 has an expected order amount of $430K in 2017, which is only 54% of the 100% Quota target. The expected sales from these orders are $151K, just $20K less than the Large Enterprise AE. This is due to higher quarterly sales efficiency rates in the earlier quarters. However, when each position reaches their expected target sales efficiency, the Large Enterprise position delivers significantly higher orders and sales.
What to Conclude from this Data
- New hires deliver a small fraction in terms of orders and sales in their first year as they learn their jobs.
- It would take approximately two new hires to replace just one terminated AE in orders and four or more to replace their first-year sales.
- Turnover is the most expensive issue in a sales organization and serious effort should be expended to ensure turnover is minimized.
- If you can improve the sales efficiency ramp in the early quarters you have the potential for significantly improved results. This area is sometimes referred to as “Onboarding” and we will discuss this topic in our next post.
In conclusion, knowing your salespeople’s efficiency ramps over time is critical to achieving your future order and revenue goals. This information allows you to understand your current team capacity and it also ensures you have clear insight into what new team members should be expected to contribute in terms of orders and sales. The combination of these inputs will provide you with the confidence that you have adequate resources available to achieve your order and sales goals.