At the beginning of a sales period, companies typically give all sales teams and reps a sales quota, which represents their expected contribution to revenue within a specified period. An unfair quota may bring confusion and discontent among the reps.
The chief objectives of setting quotas are:
- Communicate sales priorities
- Distribute sales effort among team members according to:
- territory characteristics and growth potential
- average revenue the rep has historically generated
- competitive intensity of the market
- rep skill and experience
- Establish a benchmark to evaluate performance, which drives incentive compensation
So, where do the magic quota figures come from? Here are some ways organizations set quotas when they are pressed for time or when they do not have a formal quota setting process:
- Last year’s quota: They start with the previous quota without first evaluating its success. Sales leaders often add a ‘reasonable’ growth estimate to the previous year’s numbers to set quotas. However, relying solely on past figures may lead to skewed achievement numbers.It also works against the sales territories who have less untapped potential.
- Revenue growth targets: They calculate the necessary increase in revenue required to meet desired growth targets. Top management chooses a national forecast which fits the revenue targets and hands it over to the sales managers or leaders. The sales leaders then allocate the quota equally to their reps based on that number, without stopping to analyze if its attainable.
- Attainment of top performers: They choose the top performing sales reps to shoulder the bulk of the increased targets. Reps feel ‘punished’ for doing well and may be tempted to hold back next time, so the company does not saddle them with higher, unrealistic targets. This results in goal oscillation—alternating high and low goals, as well as performance, from period-to-period.
The quotas assigned this way are usually unfair to the reps.
Productivity vs Quota: A Balancing Act Leads to Success
It is common wisdom that vague and unrealistic goals never lead to the desired result. Similarly, quotas that are too difficult or too easy to attain benefit one side, but leave the other party bitter. Sales people will always prefer a low number that is easily achievable and brings them easy money. Sales leaders, on the other hand, would prefer to set aggressive targets to boost sales productivity.
In a bid to make the most out of the team, some sales leaders end up making these cardinal mistakes of quota setting:
1. Skewed quota allocation among team members: Sales leaders allocate very easy goals to some sales people and unattainable ones to others. The result is discontent and demotivated attitude among the latter. The company’s profitability is affected negatively as well.
2. Flat allocation across territories: Some companies assign every territory an equal share of the expected revenue. This may be difficult for territories have already been tapped to the maximum. Not taking current market scenario into account also leads to unfair quota setting.
3. Setting unattainable quotas on purpose: Some companies set unrealistic quotas in an attempt to motivate sales to be more aggressive and creative in closing deals. However, this approach may backfire when reps decide to sit out a battle that they know they are sure to lose. The company loses too, as reps miss quota by a larger margin than expected. The following graph shows how the degree of quota difficulty affects sales reps and sales overall:
4. Not devoting enough time or resources to quota setting: Often, an organization simply does not have the time or resources for the due diligence required to set effective quotas. In fact, many companies do not even set quotas by the time the fiscal year begins. Quotas may trickle in as late as the first, or even second quarter. Needless to say, by that point, no one really expects anyone to hit these fictional numbers.
The best way forward is to set balanced quotas to get the right response and achieve higher profits.
Is it even possible to set fair and realistic quotas?
In a word, yes. It is possible to set quotas that increase a company’s profitability and motivate sales reps to hit them.
Consider the following points while setting quotas and you are more likely to create a fair and realistic set of numbers:
- Market growth rate and trends
- Major competitor’s performance, products, and current standing
- Potential new entrants in the market, if any
- Size of each territory and their current capacity
- Availability of new products and services for reps to sell
- Feedback and expectations of your sales people who are in the field
The last point is the most important one. The more you involve your sales people in planning, the better and more realistic will be your quota figures. After all, they have their hand on the pulse of the market and are the best judge of what works and what does not.
Here are some insights on quota setting: