Secret to Setting a Good Sales Quota in 2021
A sales quota is the deciding factor for your revenue. Without a quota, you can’t fix commissions. You can’t measure performances, be it qualitative or quantitative.
So, let’s get to the nitty-gritty of it.
What is a sales quota?
A sales quota is a particular target set by sales leaders that a sales rep has to achieve, within a timeframe. The target can be dollars/rupees, number of calls, number of emails sent, etc while the period of time can be yearly, quarterly, daily, or weekly.
Sales quota is often confused with sales goals. But they are not the same. Sales quota is a part of sales goals.
Sales goals are long-term results a company wants to achieve like revenue growth, increased market cap, etc. Sales quota is a method to achieve those goals.
For instance, you can set a daily quota of $500/₹37,000 to reach your $2500/₹185,000 weekly goals. In reality, most sales leaders will set ‘quotas’ whose sum will always be higher than their ‘goals’ - just to make sure that minor underperformance on the ‘quota’ still doesn’t affect their eventual ‘goal achievement’.
Why setting a sales quota is essential
Sets achievable goals
Sales quota ensures an equilibrium between setting attainable goals for your team and pressing them to work at their finest.
And if a quota is easy, you are not setting it right.
Used as a standard
Sales quota is used as a guideline of performance which shows what the salespeople have to do to reach the company’s goals.
Further, it also implies the organization’s standard for performance. It’s useful to reps as they know what they need to do to grow within the company.
Establishes a fair and accurate sales compensation
60% of organizations don’t track payment accuracy and estimate the correctness of their commission payments.
An accurate sales quota helps design a fair and satisfactory compensation plan. A satisfactory compensation means healthy competition among reps.
Motivate the reps
Reps’ motivation is crucial. Sales quota lets you do that.
If your reps have achieved their quota, it gives them a morale boost also called the dopamine rush.
They feel like it’s finally done and they can move to their next task. Also, happy workers are 12% more productive and unhappy workers are 10% less productive.
Varieties of sales quota
There are different quota types you can implement depending on your sales cycle and sales activity. Following are some:
This quota measures a certain number of actions made by a salesperson. Those actions are part of a process called the sales process.
E.g. making a certain number of calls, sending ‘n’ number of emails, etc.
This quota is measured by keeping track of the activities using CRM tools.
Companies with longer sales cycles use this method. A longer sales cycle means more activities to monitor.
This quota is assigned to Sales Development Representative (SDRs) and Business Development Representatives (BDRs).
Why? They are not expected to finalize deals. So you can’t assess their performance based on revenue.
Rather, you use this quota to ensure they are contributing to the organization’s sales goals. Examples - 49 calls/day, 117 mails/week, 9 demos/month, etc.
The profit-based quota means a rep has to sell a definite dollar/rupee amount of your product to meet revenue goals.
It’s based on the gross profit of a sales team or person.
To calculate the gross profit quota, subtract the selling expenses and cost of goods sold.
Organizations selling multiple products in different markets use this system. Profit quota’s prime focus is profit.
Reps shift their attention from selling more to selling more valuable products.
For example, John sold less furniture but at higher prices than his coworker Jane. Jane sold more but at lower prices. Their profit quota would be different.
The volume-based quota is focused on the total number of units sold or total revenue generated within a time period.
This quota’s success relies upon reps selling their assigned number of units.
It is best suited for businesses with short sales cycles that focus on revenue growth. For example, Eren must sell 167 units to achieve this year’s quota.
The cost-based sales quota gauges the capability of a salesperson to mitigate costs per deal.
It focuses on metrics like time invested rather than revenue collection. This method is suited for businesses solely focused on controlling expenses.
For instance, an electrician can have quotas based on the time they spend identifying and fixing an issue.
In this case, volume or profit-based quota will not be an ideal measure of their performance.
However, the time spent on each house call is considered in the cost of doing business that the electrician can control.
The forecast-based quota is decided using historical data.
Sales managers analyze the previous performances of a rep or territory and use that data to set quotas for upcoming periods.
For example, operating in Texas, Jack generated $3000 in revenue selling soft drinks in Q3. His manager wants it increased by 15%. So his Q3 quota will be $3450.
Rose, who works in Alaska, generated $2000.Her quota would be less than Jack’s. The number of opportunities can differ depending on the market.
A combination-based quota mixes two 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 combined the quotas - activity and profit. But it didn’t make a new one.
Another example, Walter needs to make 83 calls this month and turn 35% of them into paying customers.
How can you set a kickass sales quota
64% of organizations reported correct quota setting as the major challenge for their sales compensation program in 2017.
We know the types of quotas. But merely knowing them is winning half the battle. Figuring out the implementation process and getting it right is another half. Let’s get started.
Set a baseline
The baseline is the minimal number of sales you have to make to continue the business.
This number behaves as a cornerstone to make 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, consider the different factors. For example, available opportunities in a particular region, current and upcoming quarter, and market forces.
Decide upon a quota method
Now you need to decide on a quota method. Choose any we have discussed.
Each has a different objective. The quota you’ll pick will be used to set baselines, evaluate quota worth, and assess the performances.
That’s why it’s important to choose the one most inclined to your company’s goals.
Determine how to implement the quota method
There are 2 kinds of implementation methods:
1. Top-down approach
In the top-down approach, the goals of the team are set first.
Then the individual sales quotas are assigned to assist the goal.
For example, a sales manager studies this month’s objectives of the company.
If the target is revenue, the goals will show that. But one caveat is the quotas set with this approach can be irrational.
It doesn’t account for the team’s past performances and established capabilities.
2. 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 the sales reps. Then quotas are set on those data. Those quotas will determine the sales team’s goal.
Ideally, companies go for this approach as it’s realistic and doesn’t set absurd goals.
Identify a review period
Your review period relies upon the sales cycle’s length. A review period can be weekly, fortnightly, monthly, quarterly, or yearly. Monthly or quarterly is the most implemented review period.
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-annualperformance reviews. More than half of office professionals want performance check-ins at least once a month.
And you don’t have to stop at reviewing reps. You can also review your sales pipeline, as it’s equally important.
Set activity goals
After establishing a baseline, deciding a quota, and choosing the implementation method, you set some activity goals.
This is unnecessary if you have chosen activity quota. Activity goals will differ depending on the business.
So it’s imperative that you look at historical data and performances and set goals accordingly.These goals don’t guarantee success.
They simply offer reps an idea of their upcoming workload and provide another way to gauge their work.
Convey your expectations
A sales quota is useless if a salesperson doesn’t know it. After setting a quota, share the numbers you are expecting of them.
Also, inform them about how the quota was decided and the measurement process. Best way to communicate? Tell them up front.
That way, salespeople can ask away their queries. Moreover, sales managers get a chance to demonstrate the process behind quota setting.
Plan for seasonal change
Seasonal change is the periodic spikes and plunges faced by every business. For example, in winter, the woolen clothes market sees massive spikes.
But in summer, it always crashes. There’s no demand. But sometimes ups and downs happen because of a new competitor or an existing competition leaving the market.
For example - whenever Samsung launches a new product, its demand sky-rockets.
But when Apple launches at the same time, Samsung’s demand is low. Instead of flocking to Samsung, people are split. So also keep in mind these factors.
Avoid these things while setting a quota
A few things can act against your ability to set a good sales quota that can affect your reps’ performance.
Impractical quotas are the bane of existence for a sales team or salesperson.
If you are setting quotas too high without considering seasonal change, capabilities, and historical data, your team is bound to fail.
And don’t adjust quotas midway through because of an unexpectedly big deal. Raising quotas without discussion due to a robust period can discourage best-performing reps and stymie growth.
Before increasing quotas, gather sufficient data before deciding on a quota.
Putting an upper limit on the amount of commission a rep can earn is impractical. When a salesperson reaches his/her cap, they are not compensated for additional sales.
This de-incentivizes reps from going above and beyond to close more. Furthermore, you are limiting your potential revenue.
Only considering historical growth
Quotas that aren't properly set don't show an accurate market representation.
They are historic – simply add a percentage to the previous year's quota. A better approach combines a bottom-up view from the front lines, assessing real market potential, with a top-down view of what needs to be sold to meet the company's revenue targets.
Not studying the market potential
Ignoring market potential can be detrimental to your quota-setting process. Simply reviewing past data and performances will only take you so far.
Analyze the market. See what works and what doesn’t.
For example, if you’re selling air conditioners, check which kind is in demand, when its demand reaches its peak.
Study your competition. Measure the tactics they employ. If it’s effective, adopt it.
Tools you can use to calculate/plan sales quota
This calculator is used to measure the number of deals you have to close to reach your target sales.
It’s a free online calculator that can calculate every math.
Total sales, quotas, interests, annual percentage rates, you name it. If your quota is profit-based, this is the best tool to use.
Put in sales, profit, variable costs, and fixed costs to find your quota.
This calculator is used to measure quotas for your different territories. It has both bottom-up and top-down approaches. Choose one, fill in the data, and get the result.
Good quotas are crucial
Ultimately, salespeople have one goal - to close more deals and make progress in the organization.
And sales quotas are a way to reach those goals. There are different types of sales quotas.
Be prudent in choosing one. After deciding on a quota, ideate on the setting process while evading a few hurtful things.
Also for a good quota, you need to have a competent sales organization in place. Their expertise can be useful.
Use CRM tools for evaluating sales performances and set quotas accordingly. Prioritize setting realistic quotas as the irrational ones can stress your team.
Quotas work when there’s consensus.