Does size really matter?
Picking the right type of territory model for your sales team can make the difference between success and failure.
If you are rapidly growing your sales team, adding new products, or expanding internationally – one of the things you must consider is how to set up territories to make your sales team successful. I’m going to share a few different models and some of the lessons I’ve learned over the years in creating territories. In a future post I’ll share a few policy lessons on how to handle transitions if sellers are moving territories, and how to manage deals in progress for the account exec and the director.
First, let’s talk about the types of territory models that are the most widely used. There may be some more obscure ones – but I believe these are the most common:
Geographic (region / territory)
Product (product line, family group of products)
Account sized (based on revenue or employee count)
Vertical (Industry)
Mixed (hybrid) model (say account size and geographic, or geographic with vertical overlays)
There are pros and cons to each of these models. I’ll talk a bit about each and then talk about the one that I’ve used in the last few places I’ve been and some of the challenges we’ve encountered and how to overcome them.
Geographic Based Sales Model: What is a geographic based sales model? In this model, the sales reps are responsible for managing and developing potential and existing customer accounts within their assigned territories. The territories can be defined by various parameters such as city, state, region, zip, or even country, depending on the size and scope of the company. The challenge when using a straight geographic based model is trying to find the right balance of TAM or SAM (total addressable market or service addressable market) so that each sales rep has an opportunity that allows them to hit their quota.
Why would you want to adopt a geographic based model? There are a number of reasons.
Simplicity: This model is easy to understand and implement. Sales reps have a clearly defined area of responsibility, which simplifies account management and allocation.
Local market knowledge: Sales reps operating within a specific region can develop a deep understanding of the local market, its trends, and customer preferences. This knowledge can help them better serve their customers and identify opportunities for growth.
Relationship building: Geographic proximity allows sales reps to build strong relationships with customers in their assigned territories. Frequent face-to-face interactions help develop trust and rapport, which can lead to long-term customer loyalty.
Reduced travel time and expenses: By focusing on a specific geographic area, sales reps can minimize their travel time and related expenses, increasing overall efficiency. I know most companies are watching every penny of T&E these days so this is an important consideration.
Regional customization: A geographic territory model allows sales teams to tailor their sales and marketing efforts to the unique needs and preferences of their assigned regions, enhancing the effectiveness of these efforts.
Channel Partner relationship building: If you engage in a channel model (where I have in my last several companies), there’s an opportunity for the sales rep to develop deep channel partner relationships which will ultimately have a major impact on the business.
While there are a number of benefits to a well-designed geographic based model, there are also a number of challenges to successfully implementing this approach. I’ll focus on the two that I think are the most critical:
Opportunity imbalance. As I stated in the headline of this post “does size really matter?”. What I’m really talking about is geographic size doesn’t matter. Giving each sales person the same number of states, or the same number of zip codes can yield wildly varying results. Depending on how the territories are assigned, some sales reps may have more opportunities and potential customers than others. This imbalance can lead to disparities in workload and performance among the sales team, causing frustration and hindering overall sales effectiveness.
Limited industry and/or product specialization: In a territory-based sales model, sales reps focus on a specific geographic region, which may limit their opportunities to develop expertise in specific industries or products. This lack of specialization can make it challenging for sales reps to address complex customer needs or match the level of expertise offered by competitors with more specialized sales teams. I’ve found that sales reps will often just sell what they know in the geography they have – which may not be the best revenue and profitability mix for the company. Finding a balance here is incredibly important.
Product-based Sales Model: A product-based sales model is an organizational approach where sales representatives specialize in selling specific products or product lines. A lot of tech companies in the 90’s adopted this model. In this model, sales reps develop deep knowledge and expertise in their assigned products, allowing them to effectively address customer needs and offer tailored solutions.
There are a number of reasons to adopt a product-based model and I’ll talk about the top three that I’ve seen:
Sales reps develop deep product knowledge and expertise. This product expertise enables them to better serve customers by offering tailored solutions and addressing specific technical questions or concerns. They often don’t need a pitch deck and can typically answer almost any question the potential customer may have.
Easier to track performance and set targets by product. Companies can more easily track performance and sales metrics on a per-product basis and get a better understanding of P&L for a product and margins. This granular data can help identify trends, areas for improvement, and potential opportunities for growth.
Focused marketing efforts. A product-based sales model allows companies to create focused sales and marketing strategies for each product line. This targeted approach can lead to more effective sales campaigns and greater overall sales performance. It also helps make sure that sales and marketing are fully in sync around sales priorities.
Just like there are benefits, there are a few cons to a product-based model as well.
Geographic inefficiency: Sales reps may be responsible for customers spread across large areas, resulting in increased travel time, higher travel expenses, and reduced time for actual sales activities. As we’ve moved to a more remote-based sales approach this may be less an issue than it was before – but still something to consider. .
Cross-selling challenges: Sales reps who focus exclusively on a single product or product line may have limited knowledge of other products in the company's portfolio. This lack of familiarity can make it difficult for reps to identify and pursue cross-selling opportunities, which could leave revenue on the table.
Training inefficiencies: While specializing in a specific product can streamline certain aspects of training, it may also create inefficiencies if sales reps need to switch product lines or expand their product knowledge.
Account-Sized Sales Model: The account size territory model is a sales territory structure where customers are segmented based on a size metric or revenue potential. Size of account is often based on total employee count or firm annual revenue. This model can also be based on an estimated total amount of revenue you would expect to get from an account (which requires some extrapolation on your part). In this model, the most common approach is that sales teams are typically assigned to specific account size segment (e.g. SMB, Enterprise, Strategic). For example, SMB might be firms with 1-1,000 employees, Enterprise might be 1,001-25,000 and Strategic might be 25,001+ employees. This model allows sales teams to focus their efforts on accounts that fall within their assigned range or tier.
There are a number of reasons to adopt an account-sized sales model including:
Specialization: By assigning sales reps to specific account sizes, they can better understand the unique needs, challenges, and expectations of customers within their segment.
Efficient resource allocation: Focusing on accounts within a specific size or revenue range helps sales teams prioritize their efforts and allocate resources more effectively. This can lead to higher sales productivity, as sales reps can concentrate on the most promising prospects within their segment.
Improved customer relationships: When sales reps specialize in a particular account size, they can build stronger relationships with customers in that segment. This deeper understanding and rapport can lead to increased customer loyalty, repeat business, and referrals.
Increased sales effectiveness: Sales reps who are familiar with the specific challenges and opportunities associated with accounts of a particular size can more effectively position their company's products or services. This can lead to higher close rates and increased revenue.
Better performance tracking: Segmenting accounts by size or revenue potential makes it easier to track and measure sales performance. Management can more accurately assess the success of the sales team in targeting and closing deals within their assigned segments, making it easier to identify areas for improvement or adjust strategies as needed.
Like the other models, there are drawbacks to an account-sized sales model as well. The most common are:
Limited flexibility: Assigning sales reps to specific account segments based on size or revenue could limit their flexibility in engaging with a broader range of customers. Sales reps might not have the opportunity to leverage their skills or knowledge in different scenarios, which could hinder their professional development and growth.
Competition among sales reps: In some cases, the account size or revenue territory model might lead to competition among sales reps for the most lucrative accounts. This could create a culture of internal rivalry, which might negatively impact team morale and collaboration.
Inaccurate segmentation: Segmenting customers based on their size or revenue potential is not always a precise science. Companies might face challenges in accurately categorizing accounts, and sales reps might find themselves working on accounts that are not a good fit for their assigned segment.
Market changes: A company's market can evolve over time, which might affect the relevance of the account size or revenue territory model. If market conditions change significantly, the company might need to reevaluate its segmentation approach and adjust its sales territory model accordingly.
Vertical or Industry-Based sales model is an organizational structure where sales representatives specialize in selling to specific industries or vertical markets. In this model, sales reps develop a deep understanding of the unique needs, challenges, and opportunities within their assigned industries, enabling them to offer tailored solutions and build strong relationships with customers.
There are a number of benefits to using a model like this:
Industry expertise: Sales reps focusing on specific industries can develop a deep understanding of those industries' trends, challenges, and opportunities. This expertise allows them to speak the same language as their customers and provide solutions that address specific industry needs.
Tailored solutions: With a deep understanding of their assigned industries, sales reps can tailor their solutions to the unique needs and pain points of their customers. This can lead to increased customer satisfaction and loyalty.
Credibility and trust: Sales reps who understand a customer's industry can more effectively build credibility and trust. Customers are more likely to engage with sales reps who demonstrate a deep understanding of their business and industry.
Efficient marketing and sales efforts: A vertical sales model allows for more targeted and efficient marketing and sales efforts. Companies can create tailored marketing campaigns for each industry they serve, leading to better results and a higher return on investment.
There are also a few key limitations when using a model like this:
Extensive training: Sales reps in a vertical or industry-based model require in-depth training on industry-specific knowledge, trends, and regulations. This specialized training can be time-consuming and resource-intensive, especially when compared to more generalized sales models.
Adaptability challenges: Sales reps who specialize in specific industries may struggle to adapt to changes in individual industries or market conditions. If an industry experiences a downturn or significant shift, the sales rep's expertise may become less relevant, necessitating a transition to a new industry or product focus.
Geographic inefficiency: Similar to the product-based model, the vertical sales model does not prioritize geographical organization. Sales reps may be responsible for customers across large areas, leading to increased travel time and expenses, and reduced efficiency.
So now we get to the last model type – the hybrid (mixed) type – which is one I’ve used in my last few companies. We happened to use a mix of account size and geographic coverage to create our territories but I have also seen a lot of examples where it was industry and geography. I have also had special overlays for specific account types (e.g. government) because the knowledge required to sell to Federal, State and Local agencies can vary significantly from other industries (as can the need for special certifications).
Hybrid Sales Model combines two or more of the other model types with the aim to leverage the strengths of each while minimizing drawbacks. There are a number of reasons you might want to choose a hybrid model. Here are the ones I have personally focused on when choosing:
Greater customer coverage: By combining geographic territories with product or industry specializations, companies can ensure comprehensive customer coverage. This approach can help prevent gaps in customer service and ensure that all potential customers are effectively targeted.
Efficiency: A hybrid sales model can improve efficiency by optimizing resource allocation. For instance, sales reps could manage local accounts for all products (territory model) but also handle larger, more complex deals for specific products or industries (product or industry model) within their assigned territories.
Adaptability: A hybrid model can more readily adapt to changes in the market or the company's strategic direction. For example, if a company introduces new products or targets new industries, it can adjust its sales model without a complete overhaul. This is really important if you make changes every year (which many companies seem to do!).
Increased cross-selling: By allowing sales reps to specialize in specific products or industries while also managing a broad range of local accounts, a hybrid model can promote cross-selling and upselling opportunities. Doing this though really depends on if you have different sales teams for landing new business vs expanding (hunting vs farming).
Better customer relationships: The hybrid model enables the building of stronger relationships with customers. Sales reps can understand customers' industry-specific needs and provide localized support, leading to better customer satisfaction and loyalty.
Like all of the other models – there are some potential drawbacks:
Training requirements: A hybrid model often requires extensive training to ensure that sales reps are competent in multiple areas. For instance, they may need to understand various products or industry-specific challenges while also having a good grasp of the geographical markets they cover.
Resource allocation challenges: In a hybrid model, it can be challenging to allocate resources effectively. Sales reps may be pulled in different directions due to their various roles and responsibilities, which can lead to inefficiencies.
Risk of dilution: There's a risk that by trying to cover multiple areas, sales reps may not develop the same depth of expertise as they would in a single-focused model. This could lead to a dilution of expertise, which may impact the quality of customer service.
Implementation difficulties: Transitioning to a hybrid model can be difficult, especially if the sales team is accustomed to a single-focused model. This transition may require significant time and resources to manage effectively.
There are a lot of factors to consider when choosing a territory model – I hope that this has given you a good starting point of things to think about.
One additional issue I want to focus on is one of territory equity for the sales teams. If you are trying to give each salesperson roughly equivalent territories – finding the right design and doing the math to really make this work can be a challenge. As a side note - one of my good friends Jason Steckler just went through an incredibly painstaking exercise over a number of months to make this a reality for the teams he supports - the equity he was able to create was amazing - but it is a very very heavy lift. It’s very hard to do a “one size fits all.” You can get close in terms of territories – but it will never be perfectly equitable (and it’s a lot of work to figure out). If you’re planning to grow the sales teams throughout the year – do you start with larger territories for existing reps and then shrink them down when you add new folks? Or start with smaller territories now and round-robin deals from uncovered areas to various folks on the team? Lots of question to figure out along the way.
As companies get more sophisticated in their sales processes, I’m seeing them move to having varying quota targets and territory sizes by sales rep. Not one size fits all. Every market truly has a different potential. Sellers have different sales skills and experience levels. The wrong sized quota or territory can negatively impact morale, and the best sales reps build deep relationships with customers and partners in specific areas. These are just a few of the reasons I’m seeing people move to more and more complex models as they mature as a business.
As always – ending with a pic of Ollie – this time playing with one of his favorite stuffed toys (when he grabs it he wants to play keep away).
Please let me know what other topics you’d like me to cover – and I may start doing some anonymous polls to collect statistics and will share the results back to this group (assuming the ‘n’ is big enough).
Best,
Steve