Q&A with Neeraj Agrawal, General Partner at Battery and Bill Binch, former operator and Operating Partner at Battery.
NA: It’s the time of year that every company is building next year’s plan. As an investor, I see a lot of these plans and I see many miss some key planning assumptions. I’ve joined up with Bill Binch to walk through how to best build a sales plan – one that factors in the variability you’ll inevitably encounter over the year and insures your actuals stay abreast or ahead of plan.
Bill, you’ve been part of Marketo* and then most recently Pendo*. Both companies were in earlier stages when you joined, so you’ve had a lot of repetition in building the sales plans. What are the most common mistakes you’ve recognized?
BB: I’ve unfortunately not only seen many of the mistakes, but made them firsthand! But there’s a basic blueprint for companies to use, and a few pitfalls to avoid. The most common one is that founders build a plan, put AE hiring down, but fail to account for variability. The variables are timing of hires, ramp periods, attrition, and then attainment levels.
NA: Please walk us through how teams should think about building their sales plan.
BB: Start with a spreadsheet and a partner. Normally the head of sales, head of finance, and often the CEO get together to work on their assumptions.
NA: Which helps everyone get onto the same page.
BB: Exactly. Ideally this is a collaborative effort and not just one person’s plan.
NA: Where do you start?
BB: Build a spreadsheet with rows for your different types of quota-carrying reps and the number of those reps you plan to hire. This can be by segment, by geography, by vertical of the different types of AE’s you have. The goal is to determine how fast you’ll get quota onto the street to be able to make your plan.
(See Figure 1)
NA: So your starting point is to segment the different kinds of AE’s. Why?
BB: This is important because AE’s are not one size fits all. Different AE’s can have different quotas, different ramp-up periods, and of course different hiring periods, so you need to account for all of these variables in your plan.
So in the columns across, create the months of the fiscal year. This is critical. You can collapse it to view by quarter later, but you need to build this out by month for the specific plan.
NA: Okay so we’ve created the roles we’re going to hire for by the month level detail. Now we need to determine what the quota capacity will be, correct?
BB: Yes, a good next step is to determine what quotas the different roles will carry. For instance, most SMB AE’s tend to carry lower quotas than their Enterprise peers. You would also factor in any AE’s in different geos or different verticals here.
NA: Why would an AE in a different geo carry a different quota?
BB: Great question. When I use the term “geo”, I’m implying a geo outside the nation where your HQ is located. If, for instance, you expand from the US to Europe, you probably haven’t done marketing in that area of the world. Your brand recognition starts from a lower place. Therefore you may need to adjust quotas down to account for building your business overseas.
NA: We have our AE’s, AE’s by segment, and their quota. Now we have to determine when we hire them.
BB: Exactly. Now we have to factor in timing. Start with your AE’s that are already on board, and then build your spreadsheet with the new hires for the new year.
Figure: 4 – Create a new table with the hiring date for each role across the 12-month year. Use 0’s and 1’s to show the hiring date:
BB: Of course. We need to apply a ramp schedule to all our new hires. And importantly, some of your hires from the year prior may still be on their ramp-ups, so be sure to incorporate that into your assumptions.NA: But hire date is not the same thing as getting quota onto the street. Can you talk about that?
On setting ramps, you’ll want to index off the length and complexity of the sales cycle. Most Enterprise sales cycles are longer than your SMB ones, so most companies tend to apply longer ramps to the big account sellers. Here is an example:
- Enterprise – 0% in month 1, 0% in M2, 0% in M3, 15% M4, 35% M5, 75% M6, 100% M7
- MM – 0% in M1, 0% in M2, 20% in M3, 50% in M4, 80% in M5, 100% in M6
- SMB – 0% M1, 33% M2, 66% M3, 100% M4
NA: Now we have all the elements in place necessary to create the sales plan. As an investor, one the key metrics I pay attention to is the amount of quota on the street.
BB: 100% agreed. Now what you want to do is use the elements we’ve just built to build the QoS (quota on street plan). This is a key metric to include, because in most board decks I’ve built, I show what the plan versus the actual is.
So apply the simple formula of quota X hiring date and apply the ramp. The output you get the following quota on the street (QoS):
NA: This is where we graduate past the Sales Planning 101 level though.
BB: Correct. We have to factor in sales attrition. The truth is sometimes we make a bad hire, or sometimes a teammate opts to leave. You need to plan for this fact. And if you’re an early-stage company and don’t know how to plan for attrition, a good industry benchmark to use is 20% per year.
NA: This part is especially hard to predict. What’s the best way to anticipate the who and when of attrition?
BB: This is difficult and imprecise. The idea here is to look across your entire AE population and incorporate whatever level of attrition you feel is right. Again, 20% is a decent estimate.
NA: Ouch, attrition really hurts the quota on street.
BB: Yes, which reinforces the lesson why you should never truly stop recruiting and hiring.
NA: I definitely want to hear more about that, but there’s still more to do on our planning.
BB: Yes, we now have to anticipate productivity.
NA: Say more about the productivity swings.
BB: We all wish every rep sold exactly 100% of quota. But in reality, you have AE’s who overachieve and ones that underachieve. We need to factor that range into the plan.
NA: How do we incorporate this? Can we predict this?
BB: You can use prior years’ data if it’s available. Most companies track attainment – what percentage of AE’s make quota, and also productivity – what the average attainment is across their sales reps.
What I do is look at prior history, and then determine if I think productivity will go up, stay same, or go down this year.
NA: What are some factors that would affect this?
BB: Investments in sales training, for instance, could increase your productivity. Having a new product to sell also tends to increase productivity. Org models, certain tools can impact your productivity as well.
NA: Is there an industry standard or benchmark for productivity?
BB: No, it moves around quite a bit based on stage and maturity of the company. A decent estimate is between 70-80% for planning purposes. And back to why it’s important to segment your types of sales reps…different reps may have different productivity rates. If your business started in selling to SMB’s, and that’s the most mature part of your business, you may factor a higher rate of productivity here.
- ENT – 70%
- MM – 75%
- SMB – 80%
NA: You’ve now created some level of expected performance at the company level across each role.
BB: Correct, and now adding that to your above plan, you have what your actual plan looks like.
NA: It’s great to see the output. And it emphasizes the importance of a strong hiring cadence.
BB: The important learning is that to achieve your quota for next year, you need a lot more than quota capacity on the street than your plan requires. Lots happens in a year – AE’s are ramping, AE’s quit, AE’s crush their quotas.
This introduces the concept of over-assignment. There are a few different terms for this concept, but the idea is simple: if the company needs to hit $1M in bookings, you’ll need some dollar amount over that to achieve quota. Many orgs start with a tiered model:
- Company plan: $1M
- VP Sales quota: $1.1M
- Sum of all sales managers quota: $1.2M
- Sum of AE quota: $1.3M
NA: I think keeping your eye on this is critical.
BB: It should be part of the board deck. If you get behind in hiring, or your productivity is below planned levels, or more reps quit than you anticipated, then you can get behind what your plan is. It’s pretty hard to achieve quota when you have less quota than in the company plan.
NA: This is critical and one of the reasons we have to focus on hiring.
BB: This is a good topic. I get asked a lot by sales reps: “Why are we hiring more AE’s? We have more AE’s than the company quota.” Fair question, and I answer something along the lines of: Imagine if the company had exactly $1M quota for the period, and we had $1M of quota out to AE’s. If we push one committed deal, if one AE quits, if one bobble happens in our plan, the company misses plan. The role of a sales leader is to build the plan that protects against those scenarios happening.
There are more sophisticated planning models than this, but this is a good framework if you need to build something based on capacity in a sales-led world.
NA: I tend to encourage companies to think about hiring two different people for technical recruiting and for sales recruiting.
BB: This is the ultra-critical part of this topic. Hire a dedicated recruiter. Let me emphasize here….hire a dedicated sales recruiter.
NA: I agree.
BB: If you have anything over 5-6 AE’s to hire next quarter, it’s not getting done if your sales leader is the owner. The sales leader has to make the quota; she has to onboard the last new hires; has to design a comp plan and pay the AE’s, et cetera, et cetera.
Hire at least one recruiter. In my experience, an in-house, dedicated recruiter can hire 5-6 AE’s per quarter, maybe seven if they’re killing it. So if you have 8-9 AE’s to hire next quarter, you need two dedicated.
NA: Do you see sales recruiters ever hire more than that?
BB: Yes. In mature organizations, ones that have a good reputation, you may get a few more. But do yourself a favor. You just closed a big round of fundraising; don’t go cheap now. The recruiter is probably the most important hire you’ll make if you want to achieve your annual quota.
NA: This is so true, on both the sales and the engineering side.
BB: I think so too. When I first start advising companies, if they’re missing quota, do you know what my first question is about? Nope, it’s not about the pipeline; we’ll get there next. It’s about recruitment.
NA: You’re exploring to see if they’re invested in hiring.
BB: Yes, exactly. I’ll ask: how does the planned AE headcount vary from the actual? It’s almost always behind. And even if you have the actual butts in seats, did you hire them per your hiring timeline? Just because you hired 5 AE’s last month and have “hit your hiring plan” doesn’t mean you’re in good shape. You just have 5 hungry AE’s who will need time and investment from you to ramp up.
NA: And the gaps will continue to widen right?
BB: Yes, this part is so easy yet so often missed. Every founder would rather hire another quota carrier than a recruiter. Do yourself a favor and commit to NEVER being behind on sales recruiting. The pace never stops – even if you’re at full headcount, if you source a good candidate, hire ‘em. Someone will leave the team, so be ready.
NA: I know you’ve used a few techniques to help your teams stay on hiring plan.
BB: I used to encourage my front-line managers to hire their planned headcount plus one. I would give the extra +1 hire to them free. ”Look, your quota is $2M for the quarter. Your headcount is 8 AE’s. If you get 9 AE’s on board, your quota is still $2M.”
That’s the insurance plan.
NA: Do sales manager understand this concept?
BB: Savvy ones do. They know if they only have 6 AE’s on board, their quota is still $2M. So if you’re giving me the chance to get ahead, I’ll take it.
NA: What about CFO’s — don’t they resist this plan? Do they think the extra heads will push their costs above the budget?
BB: Again, savvy ones get it. Let’s be honest, how many companies have a hiring plan and are at 100% of it? I almost never see that, but if you’re there on the productive, quota-carrying capacity or even above it, you’re in better shape than most.
But I’m a realist. I know in a seed company, it’s unlikely you’ll have a dedicated recruiter. It’s also unlikely you need to hire 5 AE’s next quarter too. But if you’re an A round company, in this frothy environment of venture funding, you can afford this hire.
NA: That’s a good call out about the stage of the company. I think this factors into your planning.
BB: I do too. The above recruiting metrics take various factors into account: stage, reputation, location, how many reqs you have open. If you’re in a well-known company, your productivity is probably higher than this; if you’re early-stage and relatively unknown, it’s likely lower.
NA: Thanks for the great advice and conversation, Bill. Now go build your plan and hire your recruiter!
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