Originally published in January 2021

Note: This is an actual scaleMatters analyst insight report delivered to our customer's executive leadership team in early January 2021. To protect customer privacy, their company name has been hidden from all charts. At the time of this writing, our customer was a PE-backed $20M ARR online engagement software company selling to charities and advocacy organizations.

🚨Funnel Imbalance - Excess Sales Capacity vs. Top of Funnel Demand [JAN 2021]

Summary Findings

Upon deep analysis of Q3 and Q4 2020 data and 2021 plan, there is a probable imbalance between top and bottom of funnel that could cost the company in multiple ways.

1. It appears there are too many sales AEs on staff relative to top-of-funnel lead/meeting volume.
2. You need 9 AEs closing 6-7 deals per month per rep in order to hit 2021 Plan.
3. With recent hires, AE staff is now at 15 people.

Analyst Recommendation

1. Top grade modest performers that you bring this level down to approximately 10 AEs which provides a bit of buffer against voluntary attrition while retaining sufficient capacity to hit 2021 Plan.
2. Stop round-robin distribution of demo/pricing request leads. Instead, prioritize company success over fairness in lead distribution and start distributing highest quality leads to highest performing AEs.
3. If you're not comfortable top grading, demand AEs should self-generate 15-20% of their deals.

Question 1: What is the Capacity of a Fully Ramped Sales AE?

If we first look at deal count by rep, we can try to establish an achievable monthly capacity. It is reasonable to assume that the actual numbers would likely have been somewhat higher if there was an unlimited number of high quality leads available to each rep every month (in which case there would be no need for prospecting or actively nurturing ToFu leads).

Accordingly, as the table below shows, we look at the top 3 monthly counts for each rep since Jul'20 and then take the average of the top 5 reps.

Conclusion: workload-wise it is certainly reasonable to expect that a rep can close 6.7 deals per month assuming sufficient top-of-funnel support and appropriate skills & ambition.

Question 2: What Sales AE Capacity is Required to Hit 2021 Plan?

Applying that 6.7 deals/mo/rep capacity against the # Deals in the 2021 Plan implies that on average...

We need 8.2 ramped AEs with a peak of 8.9 in Q4'21.

Question 3: Does AE Ramping History Indicate Over-Capacity?

Another telltale sign that there are too many salespeople is the abrupt way in which salesperson ramping plateaus after about six months as the chart below shows.

On average the production plateaus at roughly 3.75 deals/month which is less than 60% of the estimated per rep capacity calculated above.

When in balance with top-of-funnel capacity, we would expect to see the plateau begin after 10-12 months and be at a level of 80-90% of capacity which in this case would be 5.4-6 deals per month per rep. (this also assumes that poor performers are identified and weeded out certainly no later than month 6 or so.

Best Reps May Be Demotivated

The final thought on the perils of being bottom heavy is that your best sales folks will be demotivated, as there isn't enough top-of-funnel support for them to make the kind of money that want because it's being distributed across too many AEs.

With the recent hires, Salsa is now at 15 salespeople. Our recommendation would be to use this opportunity to top grade and cull enough modest performers that you bring this level down to approximately 10 AEs which provides a bit of buffer against voluntary attrition.

Our quick math suggests that difference of 5 AEs equates roughly to $35K per month on a fully-loaded basis that could be applied to top-of-funnel initiatives should accelerating growth be the priority, or applied to EBITDA if that is the priority.

Should you choose to follow this recommendation it is imperative that the top-of-funnel capacity that is freed up by a reduction in AEs not be distributed round robin, but more aligned with who will make the most of the leads they get.

Company success should trump perceived fairness in lead distribution (i.e. a football team doesn't rotate evenly among all the running backs on the team...they play the ones that give them the bast chance of winning).

Antidote to Demotivated AEs is Demanding They Self-Generate Deals Through Prospecting

If for whatever reason you are unwilling to reduce the size of your sales team to gain funnel balance (and stop wasting money on excess AEs), then it is imperative to use that excess AE capacity to generate top-of-funnel capacity via prospecting. A good rule of thumb for businesses like this is that AE's should be self-generating at least 15-20% of their deals. As the chart below indicates, Salsa is way below that benchmark. And notice that the most productive salespeople are by and large those that prospect the most.

One of the most effective ways to make this happen is to establish a system where reps earn leads from Inbound, SDRs, etc. based on their performance in self-generated business.