By Mike Anello, M33 Growth
COVID-19 has turned many businesses upside down and hit pause on many of the growth aspirations companies had set at the start of the year. This has left leaders feeling like they might need that ever-elusive crystal ball to determine how to best direct their teams to emerge from these uncertain times in a stronger position. While there is still plenty of uncertainty ahead, if you want to be prepared for a successful upcoming year, you need to start the planning process now to achieve your goals.
Here are three key areas that software companies should evaluate now to set their business—and sales and marketing teams—up for success in the upcoming year:
- Set an initial software bookings target for the upcoming year—this will give you the guardrails to establish your sales, marketing, and product development budgets
- Examine your sales quota coverage and plan accordingly—this is critical to hitting your growth target plan—hiring sales reps too late can put you behind the eight ball before the year even starts
- Evaluate your marketing strategy and demand generation capacity for new reps—adding new reps creates a greater demand on marketing to generate sufficient leads—teams need to start testing the dials now to meet the increased demand generation needs of a growing team
Setting your software bookings growth target for the upcoming year
A common question that bootstrapped, vertical software entrepreneurs tend to ask is: What does an appropriate sales and marketing spend, and investment in new product development look like for us? A simple framework to start with is that sales, marketing, and product development spend should be contributing to new software sales—if they are not generating new bookings, it is not worth the investment.
A good rule of thumb is that for every $0.50 to $1.00 you put into sales and marketing, you should be receiving at least a dollar back in software bookings. This is similar for the product development spend— new products or improvements to existing platforms should be driving new bookings. Combining these two will result in spending anywhere between $1.50 to just over $2.00 in sales, marketing, and product development for every dollar of recurring software bookings generated.
2020 will no doubt be an odd year for companies—in part because it will be harder to build growth projections based on the results so far this year. At this point, companies can use a rough growth projection, for example, a 30% year-over-year (YoY) growth target. You’ll come back to further refine this number as you see the results over the final months of the year. With this number “penciled” in, you can now start to create your draft plans for these three departments, such as the timing of new hires, planned marketing program spend, etc.
Examining your sales quotas and planning new hires early
One of the key aspects many companies miss is having the appropriate ramped quota coverage to hit their sales targets for the year. Here is an example to explain ramped quota coverage.
At the end of the year, a company has closed its last deal and hit a record sales goal-achieving 30% growth and $4M of new software bookings. The company had five sales reps, each with million-dollar quotas, and now the company sets its target for 40% growth next year to achieve $5.6M in bookings.
The company then must figure out how to achieve this new growth target. This typically starts by evaluating the current team. The company’s two top sales reps carried the sales team ($3M of total bookings between them) but collectively the other three only achieved $1M in bookings. This presents a big challenge to hit $5.6M in the upcoming year.
With the year already started, the company knows it must hire additional reps (and maybe move on from one to two current reps) to achieve the proper quota coverage for the upcoming year. However, they did not factor in the time it takes to hire people (usually two to three months) or how long it will take to get the new reps fully ramped to achieve their sales goals (depends on sales cycles, but typically four to six months). This lag means the two new reps can likely only be counted for 50% ($500k each) of their quota target for the year. This leaves the company with a total of only $6M in quota coverage, meaning they will be cutting it close to achieving their growth target goal of $5.6M. A good rule of thumb is to aim for 120% quota coverage to bookings target to allow for a buffer in your plan.
This example outlines the importance of planning for future growth. Had the company identified the need for fully ramped reps or at the very least reps “ready-to-go” shortly after year-end, they would have started the recruiting process three to four months earlier.
One key tip here is that the top reps you’ll want to recruit are often into their commission accelerators in Q4. While you can’t necessarily hire them before year-end, you can still recruit them early with a target start date of shortly after the new year when their final commission check has cleared.
Evaluating your marketing strategy and capacity for new reps
To build a good sales pipeline, marketing should be leveraged to create new opportunities for the sales teams to pursue. Few things are more frustrating for both the company as well as new sales reps than not having enough prospects. As a benchmark, marketing teams typically generate 30% to 50% of the sales pipeline, but this can vary widely based on the go-to-market strategy and vertical the company pursues.
The key opportunity many companies miss is extrapolating prior marketing results for future needs. What many companies find is, as they grow their bookings target, they will need to build new marketing channels to generate the appropriate lead flow cost-effectively. For example, paid advertising channels may have been a great lead source historically, but as companies try to double that paid advertising spend, they tend to find it generates very few additional quality leads.
By setting your bookings target early, the marketing team can identify their initial opportunity creation target and estimate what existing channels can generate to make sure they’re ready to achieve their target in the new year.
By using these strategies, companies can ensure they are prepared for the upcoming year and that their sales and marketing teams are aligned so they work together to help the company reach its target and remain competitive. This is especially important in these uncertain times as companies lay the groundwork to emerge stronger on the other side.