A post on HubSpot this morning titled “Check Out This Chart: The Rise of Marketing Is Killing Off Jobs In Sales” spurred me to do a quick analysis of lead quality vs. sales headcount. Why have I been thinking of this?
With a fixed call volume for an inside sales team, the more leads you provide sales, the more hiring they have to do to call the leads. Theoretically, it doesn’t matter if the leads convert to opportunities at 1% or 15%, sales needs to hire the same number of people to call the leads that they are being given each day.
So lead quality and quantity drives sales headcount.
But at what point does the lead to opportunity conversion rate, the best indicator of lead quality, get so low to make the cost of sales too high for the company?
Here is a simple model you can download (salesstaffingvleadquality), that I will make more sophisticated over time.
The model is built for a company looking to generate $10M from an inside sales team. Assume the selling price of the product is $10,000, the opportunity to close rate is 25%, and each rep can handle 50 new leads per week. The number 50 is an approximation assuming each new lead gets a 4 step call process, and also assumes that reps are also spending time on calls closing business and working opportunities in their funnel. It also assumes a 60 call per day quota – more on this modeling later.
With this model, you can see the results below:
Essentially, required sales headcount for this model drops dramatically once lead quality gets to 6 or 7% and halves again once you get into the 12% lead quality region. Wow! That is a lot of headcount. Now the numbers are even more interesting when you look at the revenue per rep graph:
The revenue generation per rep drives margins, but also rep turnover, happiness, and the sales staffing model. Revenue per rep numbers here surprised me at exactly how high the lead conversion rate had to be to make enable a sales rep to generate over $500K per year. Eight percent lead conversion rate is not trivial to achieve, but then again most inside sales teams I know have quota closer to $800K which requires a whopping 13% lead to opportunity creation rate.
More on this topic later.