Salespeople and school children have a lot in common. Both operate in highly competitive environments; there is a fair amount of joshing and leg-pulling in each; and both are frequently incentivized to achieve certain time-bound targets.
In the case of school children, it's they who usually choose the incentive while their parents set the targets (You want the new PS5, Timmy? Sure, just get an A in Math this semester. Or: You want to visit Paris next summer, Tiffany? No problem, just make sure your overall GPA is above 3.5).
In the case of salespeople, it's their managers who decide the targets (aka sales quotas). As for the incentives, they vary, depending on how you look at it. It could be an extra commission … or the salary itself. In its crudest sense, the incentive can also be seen as simply keeping one's job.
In this article we'll talk about the various types of sales quotas and the different metrics sales managers consider while setting quotas for their teams.
But first, what exactly is a sales quota?
Sales Quota
A sales quota is a particular target set by sales leaders that a sales rep must achieve within a certain timeframe. These targets are often quantitative, and can range from generating ‘x' amount of dollars/rupees in revenue, clocking ‘y' number of calls, sending ‘z' number of emails, and so on. The timeframe for achieving these targets can be yearly, quarterly, weekly, or even daily.
Sales quotas are often confused with sales goals. But the two are not the same. Sales quotas are a subset of sales goals. Sales goals are long-term results a company wants to achieve, such as growing revenue by 30%, increasing market cap by 10%, etc. Sales quotas, on the other hand, help companies realize these goals.
For instance, your weekly revenue goals are $2500/₹185,000. In this case, you can set a daily quota of $500/₹38,000 (assuming you don't work weekends) to reach your weekly goals. In reality, though, most sales leaders will set quotas whose sum will always be higher than their goals. This is to ensure that minor underperformances on ‘quotas' do not affect the eventual ‘goal achievement'.
Types of Sales Quotas
Depending on your sales cycle and sales activity, there are different types of sales quotas you can implement. These include:
1. Activity-based Quota
Little drops make the mighty ocean
This quota focuses on a particular set of actions performed by members of the sales team (e.g. making 100 cold calls a day, sending 50 emails a week, conducting 10 follow-ups a day, etc).
Activity quotas are usually assigned to Sales Development Representatives (SDRs) and Business Development Representatives (BDRs) since they are not directly responsible for bringing in revenue, and contribute to the organization's sales goals in other ways.
Companies with longer sales cycles use this method, given that a longer sales cycle means more activities to monitor. Activities can be tracked using a variety of CRM tools available in the market.
2. Revenue-based Quota
Show me the money!
Revenue-based quotas focus on only one thing: revenue (duh)
Lets say a salesgirl at a department store has a weekly revenue quota of $5000. She can meet this quota either by selling several smaller items across the week, or by clocking one big sale in a single day. All that matters is that her total sale value at the end of the week reaches (and ideally exceeds, if she wants that promotion!) five grand.
PS: Profit quotas are similar to revenue quotas, except that instead of revenue, they focus on the net income i.e. profit generated from a sale. Profit quotas are useful when the selling costs of a product are high (think high-end real estate) and you want the sales reps to be more mindful of the expenses involved (maybe take the client out for a nice meal instead of drinks at a fancy nightclub).
3. Volume-based Quota
Strength in numbers
This quota focuses more on the total number of units sold as opposed to revenue generated.
It is best suited for businesses with short sales cycles and lower-priced goods sold in bulk. It also works well for subscription-based digital products where the focus is on increased consumption. For example, Erin, a sales rep at a news agency, must sell 25 digital subscriptions a week in order to achieve her monthly volume quota of 100.
4. Cost-based Quota
Time is money, my friend
A cost-based quota gauges the capability of a salesperson to mitigate costs per deal.
Cost based quotas focus on metrics such as time invested rather than revenue collected. They are ideally suited for businesses that rely heavily on controlling expenses.
For instance, Ali works as an electrician in a multi-service conglomerate. Ali's quotas will be based on the time he spends identifying and fixing an issue. In this case, volume or profit-based quotas will not be an accurate measure of his performance. However, the time spent on each house call is considered as the cost of doing business — a cost Ali can control.
5. Forecast-based Quota
Sometimes your past does determine your future
Forecast-based quotas are decided using historical data.
Sales managers analyze previous performances of a rep or territory and use that data to set quotas for upcoming periods. Here, the number of opportunities given to a sales rep can differ depending on the market.
For example, operating in Texas, Jack generated $3000 in revenue selling soft drinks in Q3. His manager wants it increased by 15%. So Jack's Q3 quota will be $3450. Ritu, part of the same team, works in Alaska and generated $2000 in revenue. Her quota in this case would be less than Jack's.
6. Combination Quota
A plan we must hatch, lets mix and match
A combination quota, as the name suggests, involves mixing two different quotas to devise a more distinct target. You can keep the quotas separate or you can combine them to make a new quota.
For example, Joel has to make 71 calls this month and generate $2400 in revenue with adjusted expenses (this combines two quotas — activity and profit). Another example: Wendy needs to make 83 calls this month and turn 35% of them into paying customers (combination of two activity quotas).
Why setting a sales quota is essential
A sales quota plays a pivotal role in helping you achieve your revenue goals. Without a sales quota, you can't fix commissions nor measure performances, be it qualitative or quantitative.
Eliminates ambiguity
Clarity is crucial if you want your sales team to deliver high numbers on a consistent basis. Every rep must be clear about his or her roles and responsibilities. A sales quota aligns the team's efforts, eliminates confusion and misunderstandings, and lets your guys focus on what they do best: sell.
Establishes a company-wide standard
A sales quota is more than just a performance guideline. It acts as an indicator of the high standards your company holds itself to, and the level you aspire to reach. Setting aggressive but achievable sales quotas conveys a strong message to your sales team — it shows them you mean business.
Ensures fair and accurate compensations
60% of organizations are merely estimating the accuracy of their commission payouts. A well-designed sales quota ensures you have a fair and satisfactory compensation plan in place, and allows for easy tracking of all your commission payments.
Boosts team morale
There's no denying the value of a highly motivated sales team. After all, a motivated salesman can move mountains (or at least he believes he can). By dividing a sales rep's work into manageable chunks, sales quotas help provide an added morale boost each time a rep checks a task off their to-do list.
How to set a kickass sales quota
Alright, so far we've discussed the different types of sales quotas and the advantages of using one to meet your sales goals.
But merely knowing all this stuff about sales quotas is only half the battle.
Figuring out the implementation process and getting it right — that's where it gets tricky. No surprise then that 64% of organizations reported accurate quota setting as the major challenge for their sales compensation program in 2017.
But don't worry. Just as a sales quota divides a sales rep's work into manageable chunks, we are here to do the same for you — dividing the process of creating a sales quota into simple, executable steps.
So lets get started.
Step 1: Set a baseline
A baseline is the minimal number of sales you need for your business to function. This number acts as a cornerstone to help you set sensible sales quotas
The baseline is usually a dollar/rupee amount. When determining a baseline, you can look from the viewpoint of a rep, a team, or a region. However you do this, make sure to consider different factors such as available opportunities in a particular region, current and upcoming quarters, and market forces.
Step 2: Decide upon a quota method
Next, you need to decide on a quota method. You may choose any from the ones we have discussed.
As you've seen above, each has a different objective. The quota you pick will be used to set baselines, evaluate quota worth, and assess performances.
It's absolutely vital you choose a quota most closely aligned with your company's goals.
Step 3: Determine your quota implementation method
There are 2 kinds of implementation methods:
Top-down approach
In the top-down approach, the goals of the team are set first. Individual sales quotas are then assigned to help achieve the team's goal.
For example, a sales manager studies this month's company objectives and sees that revenue is top priority. Consequently, the individual sales quotas he sets for his team will reflect that.
There is, however, one caveat with this approach. It does not account for the team's past performances and established capabilities. As a result, the quotas can sometimes be irrational and unattainable.
Bottom-up approach
The bottom-up approach is the ‘reverse uno' of the top-down approach.
Sales managers analyze the past work and abilities of sales reps, and then set quotas based on that data. These quotas determine the sales team's goal.
Companies tend to prefer this approach since it's more realistic and doesn't result in illogical goals.
Step 4: Identify a review period
Your review period depends on the length of your sales cycle. This period can be weekly, fortnightly, monthly, quarterly, or yearly. Monthly and quarterly are the most common review periods.
A shorter review period allows you to deal with problems quickly. However, longer review periods give reps the time to catch up on missed sales. 69% of companies rely on annual or bi-annual performance reviews. More than half of office professionals want performance check-ins at least once a month.
PS: Don't just review sales reps. You must also review your sales pipeline, as that is equally important.
Step 5: Set activity goals
After establishing a baseline, deciding a quota, and choosing the implementation method, you need to set some activity goals.
Activity goals will differ depending on the business. It's imperative you look at historical data and performances and set goals accordingly. This step is unnecessary if you have chosen the activity quota to begin with.
Please note: The goals you set don't guarantee success. They simply provide your reps an estimate of their upcoming workload and also offer a way to gauge their work.
Step 6: Convey your expectations
A sales quota is useless if your sales team doesn't know about it. Best way to communicate? Tell them up front.
After setting a quota, share the numbers you are expecting from your team. You can also inform them how the quota was decided and the measurement process.
Two main benefits with this, namely: 1) The reps can clear all their doubts at the outset. 2) The sales managers get a chance to demonstrate the process behind setting the quota.
Step 7: Plan for seasonal changes
Seasonal changes are the periodic spikes and plunges faced by every business. For example, in winter, the woolen clothing market sees massive spikes. But in summer, it crashes.
Sometimes ups and downs also occur because a new competitor has entered the market or an existing competitor has left. For example: When Samsung launches a new phone, demand for that phone sky-rockets. But if Apple launches a new phone at the same time, demand for the Samsung model dips.
What to avoid while setting a sales quota
There are a few common mistakes people make while setting quotas. These can prove detrimental to your team's and company's performance, and should be avoided at all costs.
Impractical quotas
If sales reps are like supermen, then impractical quotas are their kryptonite. If your sales quotas are unreasonably high and don't factor in seasonal changes, capabilities, and historical data, your team is bound to fail.
Surprise adjustments
Refrain from adjusting quotas midway through. Raising quotas just because you've had (or are expecting) a robust sale period can discourage even your best-performing reps and stymie growth. Before any adjustments, first gather sufficient data, then discuss your plans with the team before execution.
Commission limits
Limiting the amount of commission a rep can earn is as good as limiting your potential revenue. When a sales rep reaches his or her commission cap, they are not going to go above and beyond to close more deals for you (unless, of course, they are of remarkably noble spirits — a risk not worth taking).
Only considering historical growth
Quotas set simply by adding a percentage to the previous year's quota while ignoring market potential are never going to work. A better approach would be to assess real market potential and combine a bottom-up view from the front lines with a top-down view of what needs to be sold to meet revenue targets
Some nifty tools to help you set sales quotas
Panalysis — Sales Target Calculator
A handy little calculator that you can use to measure the number of deals you have to close to reach your target revenue. They also offer a free consultation to help you calculate sales targets for your company website.
CalculatorSoup — Profit Goal Calculator
A free online calculator that can be used for sales-related math like total sales, quotas, interests, and annual percentage rates. If your quota is profit-based, this is the best tool for you. Simply punch in the values — sales, profit, variable costs, fixed costs, etc — and find your quota.
Yesware — Sales Quota Calculator
This calculator is used to measure quotas for different sales territories. It has both bottom-up and top-down approaches. Choose one, fill in the data, and get your results. This tool is particularly useful if your sales team works on monthly recurring revenues.
Good quotas are crucial
Ultimately, salespeople have only one goal - to close as many deals as they can and progress within the organization. Sales quotas are a way to help your reps reach their goals — and, in the process, help you reach yours.
For a good quota, you need to have a competent sales organization in place. Their expertise can make all the difference. And don't hesitate from using CRM tools to evaluate sales performances and set quotas accordingly. Prioritize setting realistic quotas as irrational ones can really stress your team out.
Remember: Quotas work when there's consensus.
