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When it comes to leads, most people assume more is better. That’s not always true. Sometimes you have more than your sales team can actually handle, in which case your leads go cold. The flip side—when you have more sales capacity than lead flow—is equally bad. This is why it’s so important to balance demand generation with sales capacity. Let’s take a closer look.
Establishing Your Quarterly Demand Goals
First off, you need to establish your desired lead flow. I like to model mine to be even throughout the quarter. The ideal flow is to add the exact same number of leads per week, summing up to the total you need for the quarter. You can see this represented by the straight diagonal line (“Target” in light green) from week one through week 13 in Figure 1 below. No one is that good, so you should aim to hug that diagonal target line as closely as possible. A little under and a little over are okay.
In this example, we did pretty well. We were a little light at the beginning of the quarter in weeks one to five, then a little over in weeks eight through eleven, and ended up at 105% attainment, shown in purple text.
Figure 1: Quarterly demand-generation attainment graph
Why is an even flow important? Well, if you have no demand in a given week, your salespeople have nothing to do—in other words, more capacity than leads. On the other hand, if you spike demand—say, by exhibiting at a large event—your salespeople are flooded with leads they can’t necessarily handle. To prevent this, anticipate spikes and dial down other programs to compensate. Alternatively, have your lead qualification team take a first pass on these leads. That way the leads don’t go cold; you just pass a smaller number of better-qualified leads to the sales team.
I started using the graph above in my weekly demand-generation review meetings with sales management. It shows both how we doing on lead attainment and if we have the right demand flow for the sales team.
The Per-Rep Demand Model
One mistake demand marketers make is to use company new revenue as their target. But you need to figure our how much demand you need for the reps. Here’s why.
Sales leaders assign quota assuming that some reps will not make it. In other words, they hedge. If you add up all the rep quotas, the total will be more than the company revenue target. This means you actually need a higher number of leads to generate that higher amount of quota new revenue. If you don’t do this, then all of your reps will have fewer leads than they need, and you will be affecting the good reps along with the underperformers.
Let’s take a look at how a head of sales might hedge to illustrate the difference in the revenue target. A quick way to hedge is to have 125% of quota coverage to compensate for only 80% of reps hitting their target. Here’s how the math works. Say your company’s revenue target is $10 million. Quota is set at $12.5 million. Eighty percent of $12.5 is $10 million. You are now covered if 20% of the reps have zero attainment, which is possible if you have long sales cycles, but not likely. You’ll have upside if those reps come close to quota or the other 80% of reps overachieve. A head of marketing needs to generate the demand to cover an additional $2.5 million in target revenue.
You can build in the leads to cover the revenue needed per rep by starting with a single rep’s quota. Let’s say quota per rep is $1 million for the year. That means every quarter the company needs $250,000 in closed deals for that rep to hit 100% of his or her quota. Let’s assume a rep closes one out of every four opportunities—a 25% conversion rate. I divide $250,000 by .25 to get my pipeline requirement, which is $1 million per quarter. If our average deal size is $50,000, that’s 20 opportunities. I know that one in five leads converts to an opportunity, a 20% conversion rate. Thus, I divide 20 opportunities by .2, which is 100 leads per quarter. That’s our per-rep model. Multiplied by my total number of reps is my total number of leads per quarter.
One other important aspect of per-rep modeling is geographic distribution of your leads. I’ve had quarters in the past where we had more than enough leads per rep, but they were not evenly distributed around the world. Reps in certain territories had too few leads to work. We had to create programs just for those territories on top of what we were already running.
Hiring New Reps and Annual Planning
One of the problems I’ve experienced running demand-generation teams is the sudden addition of sales capacity. When does has happen? Usually at the start of a new fiscal year. When a company does well the previous year, a head of sales typically wants to add more salespeople to take advantage of the momentum. This may sound like common sense, but it comes with a potential problem. As I touched on at the beginning of this post, this leads to more sales capacity than demand.
Let’s say your head of sales wants to add five new reps to our ten-person sales team. For simplicity of the example, we’ll assume that reps ramp right away and are ready to start selling. That means that you suddenly have 50% more sales capacity than in the previous year. What if your demand only grows 20% a quarter? (That, by the way, would compound to 100% a year. Not too shabby, but not enough!) You’re going to have one to two quarters where you have more demand than the previous year, but with a lot more reps, and therefore each rep will have fewer leads. This causes existing reps to become dissatisfied, and new reps not having enough leads to hit their quotas.
To solve this, sit down with your head of sales in the quarter before the new year and plan the hiring so it phases in according to your demand plan. Hopefully, what you can do is more or less align your demand growth and your sales-capacity growth so they’re about even.
David Skok from Matrix Partners takes it a step further, believing that in addition to leads, a sales person needs to have full supporting staff resources to be effective. As he put it succinctly in an email to me:
Hiring more sales people without creating more leads for them results in a very expensive unproductive resource. The planning unit that I recommend companies use when modeling their business going forward is a salesperson. They have to consider the marketing investment needed to generate the right amount of leads to support that salesperson, as well as the investments in customer success, onboarding, renewals, and other resources required to support the customers that are signed up by the salesperson.
Here’s an easy way to visualize the concept from a presentation David gave at the 2017 SaaStr conference.
Figure 2: A sales person needs leads, sales development reps (SDRs), and renewal reps to be effective. (Courtesy of David Skok)
At the beginning of a new year, make sure you’re aligned with your head of sales so you’re not going to set yourself up for failure by having too many reps with not enough to do.
The name of the game in demand generation is matching the capacity of your sales team with the volume of leads from your demand generation. Having a mismatch either way—too many leads or too few leads—can result in either missed opportunities or dissatisfied sales people.