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  • Writer's pictureAlex Handsaker

The Revenue Formula That Everyone Gets Wrong

The Revenue Formula

It's not what you think.


When it comes to sales capacity planning, business after business has been making the same fatal planning error - Quota overallocation.


Fine, it makes sense to have the ability to hit higher revenue than you need for your target, but if your maths is purely based off quota and not what drives the attainment of it, something will inevitably break.

Revenue formula 1

Whilst it feels as though this maths makes sense, what happens if each sales rep is purely inbound, and budget was stripped out of marketing 6 months ago? The maths potentially no longer works.


Even worse is when they start factoring in "current attainment", to adjust for the average attainment of the teams, which will increase the number of sales reps that are recommended:

Revenue formula 2

The problem with this is that it simply further dilutes the opportunity! If the current market and lead opportunity is only capable of delivering enough for 10 reps at 80%, you could serve 80% of those reps the same opportunity and get them to 100%.


Mathematically, unless you have your sales reps generating vast amount of opportunity, you're simply diluting the opportunity further, and causing it all to self-perpetuate. The revenue formula you are using is making things worse.


Revenue formula 3

So now at the end of the following year, you have a business where overall revenues haven't increased at the planned rate, but you have even bigger targets to hit to get back on track, let's say you agree a reduced target of $7.5M.


Revenue formula 4

You can surely see where this is going - The maths allows businesses to iterate themselves into financial oblivion, and it's all thanks to using the incorrect revenue formulas.


The biggest problem with all of this, is that it's simply not the right way to be working out the number of reps, nor any additional amount for "over-capacity".


Revenue formula 6

The key thing with this is the word Average against Conversion Rate and Deal Size - Unless you have loose hiring and management standards, there shouldn't be massive variance in ability between people doing the same role. Whilst some will over or under perform, they are promoted into roles with higher targets or performance managed.


By rearranging the formula, and adding tags to be explicit


Revenue formula 7

This means that if the CVR and Deal Size become a constant in the formula, it means that the total number of leads that someone receives is the biggest factor in their revenue attainment, and unless AEs are set to source 100% of their own business through their own outbound efforts, the volume of leads you provide through GTM motions or the dilution of leads thanks to excess hiring is the biggest factor that drags down your overall attainment.


In this instance, the ratio of received leads vs. required leads becomes proportional to revenue attainment. It's clear that this is a hugely important part of the plan, or checking against plan that gets missed out.


Revenue formula 8


And if you're relying on the old version of the revenue formula? It means overhiring and overspending.


So, how do you deal with this?


The revenue formula that you need to be working to is the following:


Revenue formula 9

What does this mean for my Sales Capacity Planning?


Your revenue models need to be far more complex, and start at the bottom working up (bottom up planning) - Working from lead gen targets as well as historic actuals, working from the point of lead will not only give you a better outcome with your end revenue, but should highlight bottlenecks in your revenue motions that are starving your sales reps of opportunity.


Whenever the sales reps aren't solely responsible for their opportunity, the original revenue formula will fail to work, every time.


If you have SDRs or Marketing inbound in the mix, you should stay well clear of this particular revenue formula.


How do I model this in a spreadsheet?


This is where things start to become complex and difficult (which is why most capacity plans run the old revenue formula) - Once you start adding in scenario planning as well as the impact of hiring plans, your ability to model in this kind of way becomes rapidly diminished.


Instead, there's an alternate - Clevenue


Using Clevenue you can model the impact and outcome of your business plans as well as easily testing every scenario possible, all within minutes. The best bit of all is that you can get going for free.




See how planning should look 👇


F.A.Q


Q: Why should I not use Quota Overallocation in capacity planning?

A: When businesses base their planning solely on quota without considering what drives its attainment, it leads to problems, especially if there is a lack of marketing budget or if the current market and lead opportunity cannot support the recommended number of sales reps.


Q: How does factoring in "current attainment" perpetuate the problem of quota overallocation?

A: Factoring in "current attainment" further dilutes the opportunity and can perpetuate the problem of quota overallocation. If businesses consider the current attainment of their sales reps, they may overestimate their capacity to meet quotas. This can lead to overhiring and overspending, as the recommended number of sales reps may not be realistic based on the actual performance of the team.


Q: Why are incorrect revenue formulas problematic in sales capacity planning?

A: Incorrect revenue formulas can lead businesses into financial trouble. If businesses use inaccurate formulas to calculate revenue, they may overestimate their potential earnings and make decisions based on unrealistic projections. This can result in overhiring, overspending, and a failure to meet revenue targets, ultimately affecting the overall financial health of the business.


Q: Why is using averages important in sales capacity planning?

A: Assuming averages is important when considering conversion rate and deal size in sales capacity planning, as it implies that there shouldn't be a massive variance in ability between people in the same role. By using average conversion rates and deal sizes, businesses can create more realistic revenue projections and ensure that the capacity planning is based on attainable targets for the entire sales team.


Q: What are crucial factors to consider in revenue attainment for sales capacity planning?

A: Two crucial factors to consider in revenue attainment for sales capacity planning are the volume of leads provided and the ratio of received leads versus required leads. If businesses do not have enough leads or if the lead-to-sales rep ratio is unbalanced, it can hinder revenue attainment. Ensuring an adequate volume of leads and a balanced lead-to-sales rep ratio is essential for accurate revenue projections and successful sales capacity planning.


Q: How can modeling revenue planning in a spreadsheet be challenging?

A: Modeling revenue planning in a spreadsheet can be challenging due to the complexity of the calculations and the number of variables involved. Revenue planning requires consideration of factors such as lead volume, conversion rates, deal sizes, and sales rep capacity. Managing and updating these variables manually in a spreadsheet can be time-consuming and prone to errors, making it difficult to accurately model revenue projections and plan sales capacity effectively.


Q: What tools can help with scenario planning and modelling business plans for sales capacity planning?

A: Clevenue can help with scenario planning and modelling business plans within sales capacity plans. Clevenue offers the ability to test different scenarios and simulate the impact of various factors on revenue attainment, providing a more efficient and accurate way to model revenue projections and plan sales capacity, reducing the challenges associated with spreadsheet-based planning. Best of all, Clevenue is available for free, making it a valuable resource for businesses.

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