“Each time we add sales heads, they generate more than enough revenue to cover their costs and seem to indicate that another should be added. As we keep adding sales staff, though, we are not sure how to determine how much is too much. Is there a way to calculate the point of diminishing returns to increasing the size of the sales force?”
Answering the question ‘when is the next new sales rep too many?’ requires some insight into the unique operating environment of the sales organization and its benchmark metrics. Some of the data points a company should be tracking include:
Sales per head – Average revenue generated per sales rep
Sales expense per sales head – Average cost per sales rep
Ramp-time-to-productivity – Average time it takes to get new hires to full productivity
Ramp failure rate – Average number of reps who never make quota
Sales cycle length
Average deal size
Carryover % - Percentage of recurring revenue generated in the following year from previous year’s activities
Profit per sales head – Average Sales per head less Sales Expense per head
With these metrics in hand, you are ready to calculate the point of diminishing returns; the point where the gross contribution (margin) of each additional sales rep begins to taper off. See chart below.
There are several key points to consider when determining when to stop adding sales staff:
Eventually sales costs from increasing sales force size will overwhelm the gain. Referring to the chart above, sales costs associated with each additional head is linear while the gross margin contribution of each incremental rep diminishes over time.
There is a lag between the cost incurred by a new-hire and the net new revenue he/she generates. A new hire has upfront costs (recruiting, training, etc.). These costs are realized before the new rep becomes fully productive.
As sales staff is added, sales per head declines. Typically, the best territories are already covered. Therefore new territories will tend to be marginally less productive.
The variable cost of adding new sales heads and the built-in time delay of revenue realization from these new sales heads impact financial management ratios. In other words, as headcount grows, the sales force costs as a percentage of sales begins to rise.
The degree of recurring revenue (or carryover) impacts any decision to change the sales force size.
There is a sales force size that maximizes profitability.
As you can see, Sales Force Sizing is a multi-dimensional exercise. If you want to learn more download our whitepaper on Sizing Best Practices.