Capacity Planning

Rachel Haley has run capacity planning while in sales ops leadership roles at Snowflake, Sumo Logic, and Salesforce. In this guide, she details the steps of a good sales capacity planning process, and the major deliverables that come out of one.

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Questions covered in this guide

What is the purpose of capacity planning?

To set a plan to hit a revenue goal if you have a million dollars as a bookings goal, you have to figure out how many AE’s and supportive roles you need to hire (and by when) to hit that goal.

To merge top-down and bottoms-up goals and assumptions – from the board-level, you start with a top-down model and then you need to build a bottoms-up mode that meets in the middle. Capacity planning is all about getting the bottoms-up correct.

When should a company invest in formalizing capacity planning?

It’s never too soon if you’re at $1M+ in ARR and trying to double, you need a plan. It’s better to have a well thought out plan and be over prepared than underprepared. It could be overkill to run a huge process if you’re only trying to hire three reps, but you still need to think through how many people you need to hire, and how many you need to hire each month, then how they’re going to have to ramp.

Build the muscle early – a key element is ensuring that people think through how capacity planning decisions have downstream implications. If you get in the habit of planning: the structure, the process, the iterations and cadence, will go smoothly or be in place as you scale (especially if you’re a small company). 

Who runs the process and who should be involved?

Capacity planning should be run by finance or sales ops – sales leadership should always be involved. As you get larger and you’re scaling on a larger absolute value, then marketing would be involved as well. 

How long does good capacity planning take?

For a smaller company, say 5 reps going to 10, give yourself a full quarter there’s a lot of back and forth conversations in terms of “these are the assumptions we’re working off of and is this realistic?” The more AE’s you’re hiring, the more iterations you’ll have. Consider starting in the middle of Q2 and have it done by the end of Q3, so you’re not trying to rush it at year end since there are holidays and everyone is focused on end of year goals. 

For a larger company, it can be a 5-6 month process – and it only gets bigger at huge organizations. When I was at Salesforce, we would have our year end on January 31. By March we were already updating the current year plan to take business changes and fluctuations into account, and we would start planning for the next year in April or May. 

What are the key inputs into the calculation?

Annualized quota, adjusted for attainment how much do you think a fully ramped rep will be able to achieve in a 12 month fiscal period? You can input quota for what you’re going to assign them. If their quota is 2 million, but everyone is hitting 2.4 million, then you should have had 2.4 million in your plan. On the flip side, if the quota is 2 million, but people are only getting 1.6 in terms of attainment, then you should input 1.6. The more data you have, the better. Either quota or actual results on an annualized basis is input number one. If you don’t have the data, aim for 80% of quota attainment across the board. 

Ramp time – this is the time it takes from the AE’s start date for them to reach a monthly attainment equal to 1/12 of his/her quota (or time to a quarterly attainment of roughly 25% of quota). This is the most sensitive variable in the entire equation and it becomes compounded with the more AE’s you have. If you can improve your ramp by one month, thereby bringing more bookings forward, that’s far more powerful than some marginal increase in the attainment of each rep.

Attrition – you should be really conservative with this metric because if you assume that the only people who will churn are the people who aren’t ramped, then you’re really giving yourself the benefit of the doubt because that doesn’t normally happen. The safest assumption is that anyone who churns is fully ramped and they churn in the first month of the next quarter because normally they’re going to want to wait for their quarterly payout. Churn varies from company to company, but a conservative assumption on an annualized basis is 20%. If you haven’t seen a lot of churn with your sales reps, then you can continue to drop the percentage. If you’re not hiring a lot of AE’s and don’t think there’s a chance that the people you have on board are going to churn, you can drop it further. I wouldn’t go to 0% because you do want something in there that’s a buffer.

Linearity of bookings attainment/seasonality it’s unlikely that all AEs who are fully ramped hit a consistent 1/12 of their quota each month. Attainment is usually low in Q1 in month one and two, and then it spikes up in month three. From there, it especially spikes up in the back half of the year, depending on your compensation plan and if you have accelerators. Most people’s bookings come in the latter half of the year for the full fiscal period. You should also factor in your business’ seasonality – for instance if you’re an advertising business where more sales happen around the holidays, then you should factor that into your plan. You really want to see which sales reps are going to be coming online and be fully ramped during your biggest booking time periods.

What are the steps in the planning timeline?

Step 1: Alignment between board and exec team on revenue goal – determine your revenue goal for next year. For example, we’ve decided that we’re trying to get to $10 million and we’re at $5M. How many AE’s are we going to need to bring on board to make that possible? This is a loose top line model, for instance, if typical quota attainment is $1M per year, then you would need 5 fully-ramped reps to hit a $5M goal, starting at the beginning of the fiscal year. It’s a very rough starting point since you need to factor in ramp, but this needs to be the first piece that everyone signs off on.

Step 2: Historical AE attainment analysis to inform input assumptions – the more AE’s you’re hiring, and the more AE’s you have, the more important this analysis becomes. Look at as much data as you can, in terms of:
  • How many AE’s have you hired on average?
  • How long does it take from an AE’s start date to when they book anything (i.e. >$1 of new revenue)?
  • What’s their first month to hit 8.3% of their overall quota, or which quarter (or rolling three-month period) do they hit 25% of average quota?
  • On average, what’s an annual attainment? The larger the organization, the more detailed you should be with this analysis, e.g. does the attainment vary by region, segment of the business etc.? If there is variation, it should be factored into your model.

Figure out all the analysis you need to fit back into the four variables discussed above. The analysis you need to do is to look at the historical data to see what those answers are to those 4 inputs of the overall equation. Now we have these 4 assumptions that AE’s are doing 1.8 million a year once they’re ramped, it takes them six months to be ramped, we’re going to model 20% for churn, and we have our seasonality through all four quarters. 

Step 3: Figure out how many AE’s you’re going to need – given your key inputs, how many AE’s will you  need to get to that original goal number, and by when (i.e. by which month do you need to hire each class)? Timing and ramp are big factors; missing a hiring goal by one month has compounding downstream implications.

Step 4: Build the model (top-down, then bottoms-up) build a bottoms-up model assuming that you can only hire so many people per quarter. Say it’s on the tops down, roughly we’re going to need 10 AE’s. 10 AE’s, you could hire all 10 AE’s the first month, but realistically you’re not going to be able to make that happen. You’re going to have to spread it out over the year. If you do a bottoms up model assuming certain people come online at certain months and then they ramp, how does that feed in? At the end, you loosely have a plan of how many AE’s you’re going to need and when you’re going to need to hire them. 

Inputs
Outputs

Step 5: Check that the plan is realistic with the sales leader (CRO) – check in with your CRO/head of sales to see if the plan makes sense, because they’re going to have to be able to actually execute it. Then they say “yes, that is possible” or “no, I don’t think we could hire that.”

Step 6: Territory and market penetration and TAM analysis – if we’re going to hire these reps, where, exactly, are they going to sit physically in the United States or the world? What is their territory going to be? Where is the most opportunity for us and where should we hire?

Step 7: Iterate to get buy-in from sales leaders and finance – it becomes a back and forth iterative process because if sales leaders take on a certain number of heads, that becomes a corresponding quota. It can become a negotiation because not everyone is going to want to hire that many AE’s or feel like the quota you’re giving, which is assumed by the headcount, is possible. Expect for this part to take weeks if you have a large sales org.

Step 8: Engage recruiting to open up recs show the plan to recruiting and see if they think it’s possible. Start opening headcounts as soon as you can.

Stem 9: Engage marketing for the corresponding top-of-funnel plan determine how many leads you’re going to need. Communicate with marketing and sales development on how they’ll have to help make those numbers possible.

What tools or resources make this easier?  How do you create/use them?

You can go a long way with Google sheets or excel there are some tools that make capacity planning a lot easier, but they’re expensive. In Google sheets or Excel, I’d enable locked ranges and have some kind of security feature if you’re only wanting one person to be the one inputting things. Other tools like Anaplan or Host Analytics are good because they allow for scenario modeling as well as version control, but I don’t think you need something like that until you’re a larger institution, think 100+ AEs and growing.

What are the master documents?

Bottoms-up analysis this is the file that will take all of the inputs and spit out your quarterly projections of where you think you’re going to land and getting to your annual number. 

Headcount planning file – this is the consolidated version of the bottoms-up analysis. We know we’re going to hire 20 reps and we know 15 are going to be in North America, but maybe we’re going to do more in Q4 than Q2. So people are going back and iterating that which will also inform your bottoms-up model. 

Territory analysis – shows “butts in seats” for where AE’s are going. This also informs the bottoms-up model, but not as much. Instead it allows you to see where the most demand in the company is located. You have to ask questions like: what assumptions do you have about where you expect to see the most demand? What’s the overall market size? 

Once all of those are set, you can give out planning versions of the territory and the headcount plan by quarter to sales leadership. 

If you’re hiring a lot of reps relative to your existing team size, how do you factor that into your capacity planning?

It’s more ongoing, you need to keep updating it as you go it’s a more condensed timeline and you have to have a good recruiting team. You also have to be prepared for the plan to change. You might have to update your plan on a quarterly basis to see how realistic your goals are in terms of hitting your targets. That helps to keep everything fresh and it helps inform the next year. Ideally you’re ultimately going to build a model that you can use for a couple of planning cycles, so you’re only re-inputting data and not recreating the wheel every year. 

What other factors should be taken into account with capacity planning?

Maturity of the customer base and potential for upselling if you’re lucky to have a product with awesome net revenue retention (like Snowflake), and one customer could double or triple their spend, that’s the same amount of revenue as if you had three more fully ramped AE’s; you’ll want to take that into consideration. Combine the existing number of accounts you have with their usage and their projected spend and add that to the number of AE’s you’re trying to bring on and what you think their attainment will be.

If the quota is going up, be conservative about attainment if you’re going to use a new quota as an input (without a track record of reps hitting that number), haircut it to 80%.

What are the most important pieces to get right?

Make sure that you really have the other support (recruiting, marketing, sales development) you need for this sales plan to succeed be sure that you aren’t developing a plan that you don’t have the team in place to execute.

What are common pitfalls?

Failing to align on all of the assumptions and communicating with all stakeholders – make sure that everyone who is involved in this process, and has a target because of it, is on board and aligned. Even if the ramp takes longer than expected, that’s alright if everyone is on the same page. It’s worse if sales leaders aren’t bought into their targets or there’s a debate on how much quota they’re taking.

 Getting too analytical and theoretical with the perfect model – you can finish the model and from a mathematical or data perspective, it’s perfect. Everything matches, everyone’s happy. But then Q1 comes on and you realize that you didn’t actually have the recruiting bandwidth you needed, and you need to reset everything. Reality happens.

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