The number of sales reps on a team affects both revenue and costs, ultimately impacting profitability. While it may be simple to estimate costs per rep by evaluating historical data (compensation, benefits, travel, etc.), revenue is far more unpredictable.
It can be tempting to use financial metrics to determine how large your sales force should be, but these metrics alone can often lead to poor hiring decisions.
1. Adding a salesperson when there are enough sales to pay for that person
This approach treats salespeople as a cost justified by sales and not as an investment that drives sales. While this may be necessary in certain markets or within smaller organizations, this can ultimately result in sales forces that are too small to capitalize on the available opportunity.
2. Splitting a territory as soon as its sales hit a threshold level
Splitting a territory when sales hit a certain threshold comes with a variety of complications, all which limit growth potential.
3. Keeping sales force costs at a constant percentage of sales
When you keep sales costs at a constant percentage of sales, there is no stability in team numbers. You can reduce the cost-to-sales ratio by cutting headcount, but the impact on profitability is only positive if the sales team is already too large. Alternatively, sustaining a historical ratio is dangerous during business downturn, when excessive downsizing could amplify the impact of the downturn and leave the company poorly positioned for a turnaround.
Do you know what your open sales positions are costing you? Check out our free Sales Vacancy Calculator to find out.
A better approach requires three steps.
1. Evaluate trends in the following areas indicating an over or under-sized sales force:
- Customer behavior (Complaints of inadequate service vs. avoiding calls)
- Sales rep behavior (Complaints of too much work and travel vs. not enough opportunities)
- Sales activity (Order taking instead of prospecting vs. menial activity)
- Competitor activity (Expanding their sales forces vs. downsizing)
2. Analyze customers, not financial constraints. Segment your customers according to their needs and potential, then determine what sales process and how much sales force time is required to meet those needs. By aggregating time required across customer segments, you can estimate the number of sales people required to effectively cover your customer base.
3. Confirm your findings with financial ratios. Adjust as needed to ensure affordability.
Keep in mind that changes in sales force size have both short-term and long-term impact. The cost impact is immediate, but the revenue impact accrues slowly and accelerates with time.
When hiring outside sales professionals, it takes time to get them acclimated and make sales, and for the new customers they acquire to make repeat purchases. Alternatively, when downsizing a sales force, loyal customers may continue to buy for a while despite reduced sales force coverage. But eventually, repeat business dwindles away.
The best sales force sizing decisions look at profitability over at least a three-year time horizon. If leaders under pressure to deliver short-term results focus only on the first-year impact, they will under-size the sales force. As a result, they sacrifice long-term profitability.