Revenue Operations

Headcount Planning: Building a Model

In our last article in this series, we covered the first step of any headcount plan. 


Revenue goals.


To understand how many people you need, you’ll also need to know:

  • What’s the company’s long-term goal? Sell, IPO, other?
  • What’s your CAC? What should it be?
  • What was the growth in previous periods?
  • How long does it take for a salesperson to be productive?
  • How many accounts does a salesperson need in their territory to be successful?
  • What is our addressable market?
  • Are there product developments coming that will make selling into more markets possible?


Once you know these things, you can start working on your headcount plan and build a case for hiring several supporting roles. We’ll use the example from last time to look at a few different ways to build out planning models that start with known metrics (bottoms-up) and models that go from the revenue goal back down. We’ll also talk about why it’s essential to build out worst-case and best-case scenario plans.

The Models

Before we dig into the models, let’s look at our example from last time and call out some key data points:

  • The leadership goal is to maintain 1.5X growth and increase the net margin from 40% to 75%--so our goal is to increase efficiency while maintaining prior growth.
  • Product is releasing new features that are projected to reduce costs by 25% by the beginning of the year.
  • Your current cost of customer acquisition is $2,414.77.
  • We have nine full-cycle sellers, and two are underperformers.
  • With all nine sellers, the average number of deals closed per month is eight at $3,693 average sales price. The average is ten units sold per salesperson per month with a $3,800 average sales price if we drop our two unproductive salespeople out of the calculation.
  • The ramp schedule for salespeople is $0 in month one, 50% of quota in month 2, and fully scaled in month three.
  • The current sales quota is $44,000 per month.


Currently, the total addressable market is 21,000 accounts, with 46% broken out into Tier 1 (4X more likely to buy), Tier 2 (2X more likely to buy, Tier 3 (1.5X more likely to buy), and “Other.” With nine full-cycle sellers, their current account distribution is 2300 accounts.

Bottoms-Up

The bottoms-up headcount planning approach looks at what each department can produce and then adjusts variables to project growth. I've always viewed the bottom-up approach as a bit saner because you're looking at capacity and account potential rather than starting with a goal and then projecting how many people are needed. In addition, it prepares you to argue for additional resources your team and others will need to make scaling possible.


First, we build out what we currently have in a spreadsheet:


Next, we apply the 25% reduction in cost to the CAC calculation ($2,125,000-($2,125,000*.25)) / 880). Your growth is flat, but you’ve had a big spike in margin thanks to that reduction in cost:


Sales management has decided to let go of the least productive sales reps and backfill their positions immediately. They think they'll have some trouble getting new people in January and project their second hire will fall in February. To increase sales, we have to increase headcount, which also increases cost, which can increase the cost of goods sold while salespeople are ramping.


If we consider that management wants to reduce costs of goods sold while maintaining a 1.5X growth rate, we can look at hiring additional salespeople. Management doesn’t want to hire the number of reps necessary to ramp up all at once. They want to stagger hiring so that they don’t have to train everyone at once. They think they can get some added efficiency and get everyone up to the higher performance averages if they hire a CRM expert and enablement professional to scale sales processes, freeing the VP up to help coach his team and close key deals.



After looking at the hiring plan, sales management has decided they’d like to group the new hires in H2 as much as possible. They feel that with an enablement manager, it would be good to cluster groups together so everyone can learn at once, and these learnings can be applied by sales enablement to future classes and get a headstart on next year’s growth plans:


Now we have a strong start.


Wait. Did I just say start?


The thing is, not every salesperson will be fully productive. You'll need to plan for a percentage of salespeople to fail (there isn't a nice way of saying it). Historically, we've had a 22% fail rate. It takes at least five months for management to see if someone is going to work out, but one of the KPIs assigned to the sales enablement manager is to decrease that fail rate by 50%. So our hiring plan will look a little more like below with adjustments for low performers where needed:


Building a plan for attrition and support staff will help account for unpredictable events, but we'll get more into that later.


For a detailed breakdown of expense calculations and other formulas, check out the template here.

Top-Down Comparison

A top-down model starts with the goal, calculates approximately how many people you’ll need. It’s not as detailed and leaves some discretion up to the managers.


An example of a top-down model would be:


Managers would have to advocate for additional headcount, software, and other resources to support their new sales team with a top-down model. Then you would have to adjust your sales volume and person count needed to adjust for the additional expenses.


On the surface, top-down seems less time-consuming. However, the initial time savings quickly gets eaten up by the meetings needed to figure out a more realistic hiring schedule, supporting resources, and fluctuations in the margin.


Ultimately, we recommend going through both exercises, if only to verify your findings.

Scenario Planning

Between 2008 and 2020, planning was easy! The numbers were pretty predictable year-over-year because there weren’t immediate, drastic changes to buyer behavior taking place.


That all changed in 2020, and we’re still trying to figure out long-term implications.


Now that we have nearly two full years of data since the beginning of the pandemic, it’s getting easier to see what will happen in the immediate future (maybe up to three months out if you’re feeling bold, although I would argue one month is more realistic).


So how does that impact planning?


Assuming your top-down and bottom-up models didn’t reflect unusual buying behavior (the template we linked did not), I recommend building out a worst and moderately-impacted version in your worksheet. This involves talking to business leaders, looking at the impact COVID-19 has had on your industry, and what that means for your business if things continue to be chaotic in the year (or years) to come. Then follow that line of thinking for a “moderate” scenario.


How will this be reflected in your model?


You’ll need to consider possible changes to the cost of goods sold due to inventory challenges, employee attrition, and material cost increases. Then you’ll need to factor in buyer behavior and potential decreases and surges in purchasing behavior. For example, if you’re a toilet paper manufacturer, you may see some surges in purchases as the supply chain is impacted elsewhere. If you work for an airline or travel agency, you’re likely looking at random cancellations and the cost of redirecting or canceling flights.


Research trends in the market in general and study your industry specifically. In our example, we’d need to factor in people driving less. Commutes have changed. However, van and recreation vehicle sales soared at the beginning of the pandemic, and it will be interesting to see how those trends evolve.

SDR Planning

Your SDR planning model should look similar to the top-down and bottom-up models discussed above. 


For top-down, you'll need to calculate the historical number of meetings a full-cycle seller required to support their quota. Then you'll need to determine the meeting production per month per SDR to support the full-cycle sellers required to meet the company goal, factoring in ramp time for the SDR.


The bottom-up model will be more involved. Ideally, you start with current leads generated by marketing, factor in how many leads are needed to generate a meeting and build up from there. This will directly inform your marketing budget, the number of marketing personnel, and the number of sales managers in addition to your SDR count. You will require the cooperation of your marketing analyst, or at least access to marketing data if you don't have a dedicated analyst.

Operations Planning

There are a few approaches you can take when planning for operations headcount. To bolster your argument, look at sources like Gartner (they monitor CMO spend, including their planned investment in operations), Hubspot’s content library, and communities for peer observations. The more external data you have, the easier it will be to build your business case to support your findings.


According to some resources, you’ll need one sales operations person per ten to fifteen salespeople, and marketing operations headcount is variable depending on the amount of activity your department expects someone to support. 


Unfortunately, it isn’t that simple.


You can scale with both systems and resources. Some systems will take care of the volume of work previously handled by a full headcount. The only way to figure out who you need to hire is to determine what your organization needs the most and why and build a business case.


For more on building a business case, click here, and for more on what your revenue operations department should look like, including early hires, click here.



NEXT TIME: Developing a Marketing Budget & Headcount Plan

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