Sunday, May 23, 2021

How to Set a Sales Quota

The sales landscape is naturally competitive. So it’s no surprise it attracts people with personalities to match.

Sales reps love a good challenge, which is why they thrive when given clearly defined sales quotas and metrics. In return, you can expect better results, more sales, and higher profits.

However, setting a sales quota does have its fair share of nuances.

You have to consider your rep’s experience and expertise, the type of product or service you sell, and the market you operate in to set a realistic target.

Read on to learn how to set the perfect sales quota that’s challenging enough to push reps to work hard—but without freaking them out.

What to Expect When Setting a Sales Quota

The whole point of having a realistic sales quota is to secure better results while simultaneously motivating your sales team. “Realistic” is the operative word here, as you don’t want your reps to shake their heads and say that their goal is impossible.

Here is a step-by-step rundown of the best way to go about it:

  • Step 1 — Select the Appropriate Quota Strategy
  • Step 2 — Think About Your Target Review Period
  • Step 3 — Sort Out the Performance Baseline
  • Step 4 — Calculate Sales Quotas for Every Review Period
  • Step 5 — Talk to Your Team Members About the Achievability of the Sales Quota

The Good

Having targeted goals and a focus on results is great for promoting a healthy sales culture. The world works better with goals.

It’s why having a sales quota can inspire your team to strive for more within reasonable limits. This will keep all your salespersons in check while facilitating your company‘s growth.

Furthermore, sales quotas are very flexible. They can differ based on perceived potential, as well as from one company to another. In the case of a large company with multiple offices, the goals for every office or location can differ based on its perceived potential.

An office that’s seeing a lot of market potential will have a higher quota for its salesmen than one in an area with limited customers.

The Bad

A sales quota is merely an estimation, which is precisely why they can become unrealistic. Unrealistic quotas set your team up for failure, causing lots of undue stress.

The fact that many companies utilize commission caps to limit the amount of commission a salesperson can earn is another disadvantage. Reps aren’t rewarded financially for closing more business once they hit their commission cap.

This can negatively affect their morale, where they’ll lose interest in pushing limits and closing more business.

According to SaaStr founder Jason Lemkin, the only time to cap commissions is when: “You’re at $20-$30 million ARR or more, or maybe much higher.”

Avoiding commission caps—or capping them later down the line in the very least—can help you maximize your revenue per lead.

Step 1: Select the Appropriate Quota Strategy

You’ll find four types of sales quotas, each with its own set of pros and cons.

As not all sales quotas are equal, making the right choice is vital as certain quotas are more appropriate for certain businesses. For instance, a quota strategy that works for an ecommerce company won’t be the best option for a B2B company. Similarly, if you want to maximize company profitability, you should choose a profit quota and not a volume quota.

The type of quota you choose will determine how you set your baseline, calculate your quota value, and measure performances. It’s best to narrow down options that align closely with all your company initiatives.

Let’s take a look at the different sale quota types in more detail below.

Profit-Based Sales Quota Strategy

A profit-based sales quota is measured based on the net profit made by a sales rep. Here, the salesperson has to sell a specific dollar amount of a product or service to meet a revenue goal.

This quota strategy is excellent for increasing sales productivity and scoring higher profits as the reps are more motivated to close higher value deals. It’s why it’s an excellent fit for businesses that sell a wide range of products and services and operate in multiple market segments.

Example: Suppose you sell mobile phones. Under a profit-based sales quota, your sales reps will try to sell high-margin accessories and service plans instead of cheaper alternatives.

Volume-Based Sales Quota Strategy

The volume-based sales quota strategy is based on the number of units sold during a specific period. You can consider the total revenue generated during a particular time frame to measure it.

Sales reps are motivated to sell as many units as possible, making this quota system an appropriate choice for businesses with a short sales cycle and fixed pricing. It’s one of the easiest and most popular quotas and can be measured using common inventory or sales reports.

Example: Suppose you create a quota where every rep has to sell 30 mobile phones every month. The reps will have to sell at least 30 mobile phones to meet their quota, and if they do, they’ll receive a commission for every device sold, along with a bonus for achieving their target.

Activity-Based Sales Quota Strategy

An activity-based sales quota involves sales reps completing a predetermined set of actions. This can include making a specific number of phone calls, setting a set number of appointments, conducting a set number of demos, and so on.

Here, you must keep track of every activity in a customer relationship management software or call log to measure results. It’s precisely why an activity-based sales quota strategy works best for companies that have multiple consumer touchpoints, several sales reps, and longer sales cycles.

It’s also appropriate for sales development representatives (SDRs) and business development representatives (BDRs) who aren’t directly involved in closing sales.

Example: Suppose you assign an SDR the monthly quota of making 200 phone calls, sending 80 follow-up emails, and holding 25 product demonstrations every month. You can then track their daily activity and monitor progress in your CRM.

Combination Quota Strategy

As the name suggests, the combination strategy is where you combine more than one type of sales quota. It’s a great option for multidisciplinary sales teams and industries that experience long sales cycles.

Even B2B sales teams utilize this quota strategy. A sales manager can assign reps a volume-based quota as well as an activity-based quota to enhance prospecting and conversion results.

Note: There’s a fourth quota strategy called a cost-based quota, but I’ve left it out since it isn’t very common and restricted to businesses that want to prioritize cutting down expenses.

Step 2: Think About Your Target Review Period

The review period is the total time one takes to measure sales performance. Managers should discuss predetermined sales quotas and the performance of every rep against that quota during the review.

Those who meet their quotas should be praised, while those who don’t should be encouraged to work harder.

Figure Out the Review Duration

A short review period, where performance is measured weekly or monthly, lets sales managers identify shortcomings and suggest performance improvements. However, many companies prefer evaluating performances quarterly or annually, giving reps a longer window to make up missed numbers and show results.

Your business type can help determine your review period. For example, retailers with high sales volume would find a monthly review better, whereas an annual review would be better for B2B companies with longer sales cycles.

Step 3: Sort Out the Performance Baseline

A performance baseline refers to the average of three activities:

  • Reviewing past performances
  • Accounting for seasonality
  • Making necessary adjustments for market influences

The derived baseline serves as the benchmark for the final sales quota, typically expressed in a specific percentage of the baseline status. For example, if the baseline is $50,000 a month, you can set a quota representing either a 10% growth or simply $55,000.

Startups or businesses that don’t want to use prior performance as an indicator of success can use their respective sales forecast instead of the performance baseline.

Here’s how you can establish your team‘s performance baseline in greater detail:

Review Past History

Go through your last one to two years of sales data. Use the target review period as a guide to summarize the total performance by sales volume, cost, profit, or sales activities that took place over the same period in the past.

You can use sales reports for volume-based performance quotas, margin reports, or P/L statements for profit-based performance quotas, activity logs like call reports and trip reports for activity-based performance quotas, and finally, service logs and expense reports for cost-based performance quotas.

Account for Seasonality

Seasonal businesses experience recurring spikes and dips in sales. For instance, an umbrella manufacturing company might have large spikes during the monsoon season but may see a drop in sales during the winter. All this should be accounted for when setting up sales quotas from one period to the other.

You should observe your historical sales data to identify seasonal variation patterns. You can then use the information to forecast future sales while setting up a realistic sales quota.

Once that’s done, you can adjust your sales quotas to account for seasonality. In other words, you have different sales quotas for every review period.

If you expect your sales to double in the third quarter, your sales quota should reflect the expectations and vice versa.

Make Adjustments for Market Influences

Market influences refer to changes in buying habits and specific events that cannot be tied to seasonality, like shortage of components, the launch of a new product, and so on.

It’s also possible for industries to experience dramatic growth or contraction, see the entry of new competitors into the market, sales forecasts, among several other factors that could affect your industry.

Your job is to look for market forces that may cause an increase or decrease in sales. The more accurate your prediction, the more precise your baseline, giving you a reliable benchmark to measure performances.

Step 4: Calculate Sales Quotas for Every Review Period

At this stage, you already have your baseline metric—all that’s left to do is calculate the actual sales quota after adjusting it for desired or expected growth.

Aim to have a sales quota that’s within 5% of the baseline metric. Make sure they are achievable by around 80% of your team for better results in terms of performance and profitability.

Make Accurate Calculations

Consider the quota strategy used in your company to calculate your sales quota as accurately as possible.

If your company uses a volume-based sales quota, you can calculate your ideal sales quota by dividing your forecasted sales target by the number of salespersons.

On the other hand, if you have a profit-based quarter, go through the profitability over the past 12 to 24 months and then multiply it by a fixed growth rate. This will give you your quarterly profit quarter.

Step 5: Talk to Your Team Members About the Achievability of the Sales Quota

Once you have your sales quota in hand, you should set out to verify one so that you know it’s realistic and achievable.

How to do this, you ask? Compare it to your established baseline.

And once that’s done, you must communicate your expectations with your team members to ensure everyone is on the same page concerning performance.

Check the Quota Achievability

You can use a performance baseline to evaluate whether the calculated ideal quota is realistic or not. This way, you can compare the two values and determine whether the difference between the two is achievable depending on your business.

Communicate With Team Members

Every sales rep should know their sales quota. You can then tell them about the number, how the quota was decided, and when and how it will be measured.

I recommend holding face-to-face meetings where you inform each salesperson about the established quota and communicate performance expectations.

This will also allow salespeople to ask questions, clear up any doubts they may have about the sales quota, and fully understand it.

from Quick Sprout