One of the biggest challenges for SaaS companies is accurately forecasting revenue for the next fiscal year. Whether it’s from new logos or existing clients, projecting new business, renewals and expansions can be tricky, but it’s far from rocket science – we promise, it’s not as daunting as it seems once you understand what goes into quality annual planning. What it does require is reliable data, a clear methodology, and a realistic understanding of both internal capacity and market conditions.
Effective sales planning is crucial for setting achievable revenue targets and aligning sales strategies., After all, leaders will make very big decisions based on annual planning, including headcount, so finding the right balance between ambition and realism is key. Companies generally use one of three approaches to set sales targets—top-down, bottoms-up, or a hybrid model. Each has its advantages and challenges, and understanding how to apply them to your business can help you set more accurate and effective goals.
In this article, we’ll explore how these methods work, from leadership-driven top-down approaches to rep-driven bottoms-up methods. We’ll also discuss how to balance ambition with practicality and offer practical steps for implementing each strategy in your own sales planning process.
Top-Down Approach: Overview
In the top-down approach, company leadership sets high-level sales goals based on factors like broader company strategy, market conditions, or investor expectations. These high-level goals are then broken down into specific targets for individual sales teams, which are tasked with meeting them.
Advantages:
- Clarity and Alignment: Leadership sets clear goals that are aligned with the overall company strategy, ensuring a unified direction for the entire organization.
- Speed: This approach is typically faster because decisions are made at the top level and handed down to teams.
- Investor-Driven: It often aligns with investor or board expectations, especially for growth-oriented SaaS companies where aggressive revenue targets are critical.
Challenges:
- Unrealistic Expectations: There’s a risk of setting overly ambitious targets that don’t reflect real-world factors such as sales cycles, market demand, or team capacity.
- Lack of Buy-In: If the sales team isn’t involved in the goal-setting process, they may feel disconnected from the targets, which can lead to decreased motivation or engagement.
Example:
A SaaS company aiming for 20% revenue growth sets an aggressive annual target of $60 million based on market analysis. The leadership distributes the target equally across regional teams. However, teams in slower markets or with fewer resources struggle to meet the quota, while those in high-performing regions exceed expectations. This can lead to imbalances and frustration within the sales organization.
Bottoms-Up Approach: Overview
In the bottoms-up approach, sales targets are generated by gathering input from front-line teams—sales reps, managers, and customer success personnel. This approach builds projections based on historical performance, market conditions, and customer demand, making it a more realistic and grounded process.
Advantages:
- Realistic Goals: Sales projections are built using real data from those closest to the customers, which often results in more achievable and realistic goals.
- Team Buy-In: Involving the sales team in the planning process increases their motivation and sense of ownership since they contribute to setting their own targets.
- Adaptability: Targets can be adjusted based on feedback from sales reps and managers, allowing the company to stay flexible as market conditions evolve.
Challenges:
- Slow Process: Collecting data from multiple levels of the organization takes time and can delay the sales planning process.
- Conservative Goals: Sales teams may set lower, more conservative targets to ensure they hit their numbers, potentially limiting growth opportunities.
Example:
Performance data is collected from the broader sales teams including sales reps, sales management and even sales enablement, with each rep estimating their expected revenue based on current client relationships, their sales cycle, and market demand. These estimates are aggregated into a total company-wide target. Leadership then reviews these numbers and adjusts based on broader strategic goals, leading to a grounded, achievable target that reflects the realities of the business.
Balancing Top-Down and Bottoms-Up Approaches
Many companies find success by combining both approaches in a hybrid model. Leadership sets broad strategic targets using a top-down approach, while sales teams use a bottoms-up method to create realistic estimates of their contributions. This hybrid approach ensures that company-wide targets are ambitious yet achievable, as they are rooted in both strategy and on-the-ground insights.
Example:
A SaaS company sets an overall goal of 15% growth using a top-down approach. Regional teams, however, are allowed to adjust their targets using a bottoms-up method based on local market conditions, sales cycles, and customer demand. This balance enables the company to pursue aggressive growth while considering the unique challenges of each market segment. Keep in mind that this growth should come from all areas of revenue generation, including renewals and existing customer expansion, not just new business from new logos.
Practical Application with an Example: Calculating Sales Targets
Step 1: Establishing the Directional Number
- Start with the top-down number: For example, a company with $50 million in revenue aims for 20% growth (so the new revenue goal is $60 million);
- Calculate existing customer revenue: In this example, the assumption is that $40 million comes from existing customers.
- Apply churn rate (e.g., 10%) and expansion rate (e.g., 15%). After applying these, the new total expected from existing customers is $41.4 million.
- The difference between $60 million and $41.4 million ($18.6 million) represents the amount that should come from net new business (new clients).
- Assign these $18.6 million among the reps factoring in criteria such as region, deal size, sales cycles, segment, and role.
Step 2: Validating the Numbers with Bottoms-Up Data
- Break down existing clients list account-by-account and ask reps to estimate:
- Client health: Will the client renew, or is there a churn risk?
- Upsell potential: Is there room for expanding the account?
- Cross-sell opportunities: Can the client be introduced to other products?
- Assess new business opportunities, factoring in market trends, sales cycle length, and historical win rates.
- Combine the results of these estimates and compare them with the initial top-down number. If they don’t align, adjust the top-down figure or revisit the assumptions made by the sales team.
Capacity Planning
Capacity planning is a crucial component of sales planning, particularly when accurate sales projections must align with the available resources. Proper capacity planning ensures that the sales team is equipped to meet set targets without overextending the team’s bandwidth.
Key Factors in Capacity Planning:
- Sales Rep Capacity: Evaluate how many deals a rep can realistically close in a given period, considering deal size, complexity, and sales cycle length.
- Team Growth: Factor in whether the current team size can handle projected targets or if new hires are necessary.
- Collaboration Teams: Ensure that customer support, marketing, and product teams can support the growth in sales and customer success teams effectively.
We discuss sales capacity planning in a separate article.
Final Thoughts: Key Considerations for Sales Planning
- Growth Stage: Early-stage SaaS companies may rely more on top-down planning to meet investor-driven growth expectations, while more mature companies often benefit from bottoms-up planning for realistic forecasting.
- Market Maturity: Companies entering new markets may prefer the top-down approach for setting expansion goals. In contrast, the bottoms-up method provides better insights in mature, well-understood markets.
- Sales Cycle Length: Companies with long sales cycles need to factor in potential delays, which makes bottoms-up planning crucial to avoid overestimating new business potential.
- Team Involvement: Combining both approaches ensures that leadership’s vision is grounded in real-world insights, leading to better goal alignment, stronger team buy-in, and more effective execution.
Example:
If a SaaS company forecasts $18.6 million in new business, but current reps can only generate $15 million based on capacity estimates, leadership may need to hire additional reps or adjust expectations. For instance, if each Account Executive (AE) can handle 10 deals a quarter, and your goal requires closing 50 new deals per quarter, you’ll need at least five AEs to meet that goal.
Conclusion
For companies, finding the right balance between the top-down and bottoms-up approaches is key to creating effective annual sales plans. A hybrid approach combines ambitious growth goals with realistic, data-driven projections, enabling companies to align strategy with execution and drive sustainable growth.
By aligning sales targets with rep capacity, companies can ensure achievable growth while maintaining the quality of sales efforts. Balancing capacity with realistic expectations can also prevent burnout, improve team morale, and enhance long-term sustainability.
For more on Annual Sales Planning and other revenue topics, you may enjoy our Quest to Quota Attainment Course which is broken up into short modules making it easy to learn and practice new skills in short but effective time blocks each day. And finally, if you need hands-on support for your revenue-generation efforts, check out the services we offer.
