What is top down revenue modelling

Overview

Top down revenue modelling is the most accessible approach to capacity modelling, as it's the simplest to build. The challenge with a top down approach is that it can leave businesses with blind spots in their revenue models, ultimately leading to mishiring and setting investment into areas like marketing at the wrong levels.

Exactly as it sounds, top down revenue modelling works from the top downwards, from company target down to junior sales and potentially even marketing. From there, needs are typically modellecd out from sales reps using current ratios (or ratios that are seen as industry best practice)

In the case of sales reps, it means to calculate how many sales reps are needed, it involved dividing a company (or territory) target by the individual revenue target for the reps involved.

You'll note that at this point there's no mention for attainment, however typically extra reps or "Overcapacity" is worked into the models to deal with missed attainment. The challenge with this approach is the inherent assumption that a "good rep" will hit 100% of target.

Remaining staff are then calculated using ratios - These ratios are typically based off industry standards or existing ratios, and can unfortunately lead to either unsuitable ratios, or hiring the wrong roles for business needs (like SDRs when Marketing leads are cheap and abundant (which is rare))

With the ratios in hand, they are simply appplied against the total number of sales as calculated by the top down model.

This gives a total number for each of the roles in the sales teams.

Whilst it could be argued that it is perfectly fine for managers to be hired on a ratio of manager to individual contributor, and potentially the same for Sales Engineers (and any other onward support staff), it unfortunately ignores the reality of capacity.

For managers, their capacity is people, however what happens if this person is carrying a personal revenue target as well as a team target? How do you effectively manage both of their capacities?

For Sales Engineers their capacity is not based around the number of reps that they work with, instead being more of a function of the number of opportunities that they assist with (the number they can handle depends on deal complexity)

The problem with top down modelling is that it's typically incompatible with the modern sales rep, who frequently reach their target through leads generated for them, from either junior sales reps (such as SDR / BDRs) and marketing efforts generating inbound leads.

Unless a sales rep is entirely responsible for self-generation of opportunity and closing, it's impossible for this format of modelling to paint an accurate picture. This is because if 50% of their target is based off an adequate amount of marketing leads, if the marketing leads are below what are projected this rep will not hit target - Adding in additional reps (overcapacity) to help with an attainment shortfall caused by a lack of marketing leads will not fix the problem.

This is why here at Clevenue we teach how to top down model, but only for the purpose of enabling quick and dirty calculations and also highlighting the inherent problems with the concept.

For a more sustainable approach to modelling, check out Bottom Up Modelling instead.