Setting Sales Quotas: A Driving Force of Sales and Performance
Sales quotas ensure sales performance is driven to keep your team motivated and aligned with business objectives. A sales quota gives sales representatives a number to work towards, showing them what they must do to receive all of their compensation. Additionally, the quota gives managers a means of tracking performance and hence making data-driven adjustments in order to forecast the revenue of the business. This guide will touch on why setting effective sales quotas matters, the available types of quotas, and how to set them strategically.
What is a Sales Quota?
A sales quota is the amount of sales a representative, team, or company is expected to make in a given period. Many times, these are attached to compensation plans based on On-Target Earnings (OTE).
For instance, it could be that a sales representative has to achieve a certain amount in revenues or sell a certain number of products within a month to reach his or her full OTE. Quotas can be set individually, at the team, or regional level and are usually considered benchmark indicators for performance evaluation.
Quota Sales Example
Think of a sales representative who has an OTE of $80,000 per year. Their base salary is $24,000, with their variable commission amounting to $56,000. If the rep is on a 10% commission rate, they have to drive $560,000 in sales every year to get their full compensation. In this case, their sales quota would be $560,000 for the year.
Sales Quotas versus Sales Goals
The big difference between sales quotas and sales goals involves their focus. Quotas identify the short-term sales that a representative needs to obtain to receive their commission, whereas sales goals are long-term, broader objectives aligned with a company’s growth strategy. If a company wants to make a profit of $1 million, for example, it will need to determine how many products it has to sell to achieve this target and then set a quota on how many individual reps or teams need to sell.
Example of Sales Objective
If a company has to sell 100,000 widgets to make $1 million in profit, then that is the sales goal. Once the goal is identified, a company can set actual sales quotas their reps should meet within a defined period of time.
Types of Sales Quotas
There are numerous types of sales quotas that can be customized to meet particular business targets. Each serves a different purpose and fosters certain behaviors out of the selling team in different ways.
1. Revenue Quota
A revenue quota defines a specific target of revenue the sales representative is expected to achieve. This is a relatively simple approach because the reps are incentivized to make a certain dollar amount of revenue within a specified time. Revenue quotas are ideal for businesses that have a limited product range or operate in stable markets.
Example: A salesperson sells with a quota of $10,000 revenue per month. A $10,000 quota means they have to sell $10,000 to make quota and receive commission.
2. Volume-Based Quota
Whereas revenue quotas are directly related to the revenue generated from a product, volume quotas relate to the number of products sold, without regard for exactly how much money is taken in. This is helpful if the business is trying to achieve market penetration or sell lower-priced items in higher volumes as part of its strategy.
Example: A salesperson is supposed to sell 150 lots of a product every month, regardless of how much revenue is generated from the sale of those lots.
3. Quota for Activities
Activity quotas measure certain discrete activities driven by sales representatives, such as calls, demos booked, or leads followed up. These activity-based quotas are common when measuring and taxing the performance of SDRs or business development reps who are not directly responsible for closing sales.
Example: An SDR has a quota to make 100 follow-up calls and schedule 15 product demonstrations per week.
4. Quota on Profits
Profit quotas address the true profit a salesperson brings in, taking into consideration the cost of acquiring the customer and producing the product. This type of quota makes sure that sales aren’t just bringing in revenue but are actually plumping up the bottom line.
Example: A salesperson has a quota or goal to generate $3,000 of profit on a monthly basis. This ensures they are targeting higher-margin products with their sales efforts.
5. Quota Forecast
Forecast quotas are determined by using historical sales figures, as well as projecting future sales. These quotas make use of market trends, information on sales territory, and past performances to set actual achievable targets. They are used more at a team or departmental level rather than for individual reps.
6. Combination Quota
Combination quotas blend different quota types together in an effort to achieve multiple business objectives. For example, a salesperson could have both a revenue quota and an activity quota to ensure they drive revenue and key sales activities.
Example: The salesperson has to generate $5,000 of revenue per month and book 10 product demos.
Best Practices to Set Sales Quotas
Setting effective sales quotas requires a strategic approach where the sales quota must be essentially reasonable but challenging. Here are some key considerations when setting the quotas:
1. Quotas Line up with Business Objectives
Establish the overall business goals first: whether it is revenue growth, market penetration, or profitability. Based on established goals, set quotas in line with these objectives. For example, if your objectives relate to increasing market share, then use volume quotas to push more products into the market by the sales representatives.
2. Choosing the Correct Quota Setting Method
Basically, two ways exist in which quotas are set: top-down and bottom-up methods.
- Top-Down Approach: Start with some overall company-wide goals and then break those down to a quota amount for each of the sales representatives.
- Bottom-Up Approach: Base quotas for each rep against historical performance data and individual rep capabilities to establish realistic quotas.
3. Make Quotas Realistic and Achievable
Quotas should be attainable for the majority of your sales team. There is a general rule of thumb that 70% of your sales representatives should achieve their quota. Unattainable quotas may depress your representatives and result in high turnover.
4. Include Aims for Activities
In addition to revenue or volume quotas, consider activity goals to drive your sales reps. This could be things like calls made or meetings set up; anything that helps the reps keep on track with activities that drive sales.
Conclusion
Setting effective sales quotas is critical to inspiring and driving success from your sales team. Aligning quotas to broader business objectives, selecting the right type of quota, and establishing quotas that are both realistic yet challenging provide a framework that will enable your sales representatives to perform at best-in-class levels. Setting activity goals and taking a balanced approach to quota setting will help keep your sales team focused and motivated to execute against the company’s strategic objectives.
