For sales organizations in the manufacturing industry, quota achievement is the ultimate measure of success: the fixed, time-bound goal that drives salespeople to contribute to the objectives and growth of the organization. Meeting or exceeding quota is crucial for managers and executives too; in fact, their jobs may depend on doing so. After all, attainment translates directly into revenue. So it’s no surprise that quotas sit at the center of the sales universe.
What may come as a surprise is that according to Forbes, a whopping 57% of sales reps missed their quotas last year.
The fallout that results can have lasting repercussions on an organization. When sales teams continually miss their target, salespeople get frustrated; their self-esteem plummets, they lose motivation, costs increase, and revenue drops. And turnover rates surge. As stated in a recent Harvard Business Review article, firms in the U.S. spend $15 billion a year training salespeople, and another $800 billion on incentives. Attrition reduces the return on those investments. Add on the average cost per turnover of $97,690 per salesperson (according to DePaul University), and the whole approach sounds risky.
The real culprit here, however, can be found behind the scenes. It’s forecasting, from which quotas arise, and which affects not only sales, but production as well. This is especially true when overly optimistic forecasts for short-cycle products lead to high quotas and increased production. Should salespeople fail to reach these quotas, the manufacturer could be left with a surplus of products, some of which time will turn unusable. On the other hand, when forecasts are too pessimistic, quotas will be low, as will production. If reps exceed their quotas, the company, facing a shortage of products, will be unable to honor contracts in a timely fashion, leading to dissatisfaction among customers.
How can manufacturing organizations overcome the challenges of the following trajectory? Forecasting > quota-setting > inability to achieve unrealistic quotas > loss of motivation > production nightmare. Moreover, how can these organizations improve the overall performance of their sales force, and cure chronic turnover?
In my experience working with some of the world’s leading industrial manufacturing organizations, I learned six essential steps that lead to effective quota-setting. Though these steps may pose challenges for the typical salesperson, they’re achievable.
Adopt a data-driven strategy
History is important, but it seldom repeats itself, especially in today’s dynamic manufacturing business environment. Market conditions change so fast that simply taking old metrics and equally dividing them among your salespeople no longer cuts it.
Every quota-setting process needs to begin with accurate data. Start with your historical data and add insights about market potential, market share, competitor influence, and pipeline or demographic information relevant to your business. Also, ask yourself what a reasonable revenue goal for this year looks like.
- Will your company launch new products?
- Will your marketing team bring more and better prospects?
- Did you recently implement a new and improved CRM system that is expected to increase upsell/cross sell opportunities?
Once you’ve established data, set the corporate target, started allocating quotas according to each salesperson’s role and territory/area of influence and potential.
Choose the allocation method that best suits your business goals
Before you start, keep in mind that one quota-allocation approach does not fit all situations. The key is to choose the quota-allocation methodology that best suits your business goals and then regularly reassess its effectiveness.
But before we focus on the specifics let’s look at the three major directions quota allocation methods follow:
- Top-down. The sales organization establishes a national sales forecast. Then, each level of the organization allocates quotas to the next level. This direction gives executives and managers full autonomy while also holding them accountable. The sticking point: it can be an ambiguous process that leads to inconsistency in allocation rules.
- Bottom-up. In these circumstances, salespeople drive the sales goals/quotas throughout the organization. Moving forward in this direction guarantees ownership of the sales goals, but on the downside, the quotas are not really tied to the financial approach, and the organization might end up with too many different approaches to forecasting accounts.
- Top-down & bottom-up. A combination of the previous two directions, this route starts with calculating the contribution of each salesperson relative to the total and then continues with allocating the national sales forecast based on these contributions. This mix will ensure a consistent approach to quota setting and alignment with the sales forecasts. But it also has its drawbacks: it is a complex process that leads to an ownership void and may be difficult to manage.
Based on these three directions, sales organizations choose specific quota-allocation methods that will bring them closer to achieving their revenue goals. Successful sales organizations in the manufacturing industry most often go for one or more of the following quota-setting methodologies:
- Account-planning. This is a bottom-up method that takes into consideration characteristics of the accounts and the market. Salespeople forecast business for each account they own; then, sales leaders allocate quota to reflect future opportunities in local markets. This way, salespeople end up with accurate quotas shaped by actual business insights. On the downside, this method is fertile ground for biased quotas and, depending on the number of accounts, can also be time-consuming.
- Business insight. Here, quota-development begins with last year’s info, taking customer and market data into account during the design. After sales managers identify the factors that led to success, or future potential determinants, they estimate how each factor will impact sales this year and allocate quotas accordingly. This method produces more accurate quotas, but it requires the use of difficult-to-gather aditional data for factors that are hard to quantify or track. And it also underestimates momentum from past sales. However, it is an efficient approach when you have significant confidence in your knowledge of how to identify potential and what will drive the market in the future.
- Take last year’s goal and add 10 percent. Just like its name suggests, this method is based on historical quotas to which a 10% increase is added. The underlying idea is that all opportunities and resources are equal. And while the method is easy to calculate and understand, it can lead to inequitable quotas, as sales territories and the opportunities they carry within differ widely from one another. Salespeople that are assigned territories with low potential will find it difficult if not impossible to reach quotas, while for reps in well-producing territories, hitting and exceeding sales targets will be a breeze. The ability to incorporate potential and to appropriately target growth is crucial for making this method work efficiently.
What follows are the quota-setting methods most commonly used in the manufacturing industry. Other industries also allocate sales quotas using these and other methods:
- Equal division – Everyone in the sales organization receives the same quota (Quota = National Sales Forecast / Headcount).
- Trending – Applies data trending techniques and uses each sales rep’s performance trajectory as a guide to set their future quota.
- Regression – Based on quantitative and data-driven indicators, it also applies qualitative insights as a final touch to data-driven results, in order to select the final set of factors.
Be fair and realistic
Choosing the best quota-setting process is not easy. Complexities abound. But only one crucial principle should guide manufacturing organizations to the right solution: fairness. The secret to achieving corporate goals lies in finding the perfect balance between challenging salespeople and handing them achievable targets.
The consequences of setting unfair quotas can lead manufacturing companies to lose millions of dollars annually. The impact is very well captured in an example borrowed from a sister industry of B2C U.S. manufacturer. This manufacturer’s sales performance management system was churning out unfair quotas and inaccurate payments for sales representatives, and the existing quota management system could not properly account for the dynamics of customers, product segments, and territory size in its calculations. Crucial data was missing or just out of reach. As a result, quota allocations led to a paradoxical situation, with average performers overpaid and high performers underpaid.
Help arrived in the form of a new data-driven SPM solution. By relying on it, the company gained the ability to effectively mine sales data and calculate revenue potential for every single combination of product mix and customer location, and then roll the results up to the territory level.
Ensure quotas and territories are well balanced
Paying attention to territory assignments is crucial to allocating fair and accurate quotas. Not all sales territories are created equally. Take this into account when setting quotas for your sales team, and make sure you don’t unintentionally end up favoring some salespeople over others. A territory with low potential simply won’t bring in as much as one with high potential. What’s crucial is that you balance workload and resources and avoid placing too many sales salespeople in territories that don’t have enough market potential to exploit. Without sufficient activity to meet their targets, salespeople will become discouraged and nonproductive.
Make coaching and training a routine
You can identify your discontent salespeople – before they part ways with the company – if you schedule regular coaching sessions with your sales force. In fact, successful sales organizations in the manufacturing industry have made coaching a habit. No technique is more impactful when it comes to helping salespeople improve quota attainment and adapt to the ever-changing industry landscape. According to the Sales Management Association, companies with effective sales coaching initiatives see up to 16.7% faster growth than companies that do not have a coaching program optimized for coaching quality and quantity.
Keep communication timely and transparent
Communication and transparency build sales force support and engagement. Communicate targets prior to the beginning of the goal period. Salespeople need to understand their target and how it’s calculated. After you’ve announced quotas, ongoing communication helps reduce compensation disputes, shadow accounting, and second-guessing territories – which can disrupt sales momentum.
An automated quota management solution ensures transparency and eases the process of quickly, clearly communicating quotas. With the help of mobile apps, salespeople gain access to crucial quota and compensation information, regardless of their location.
Setting sales quotas are often strenuous and time-consuming. And well worth the effort. Accurate and fair quotas have enormous power to enhance the efficiency of your overall sales operations, and give your salespeople and sales managers the motivation they need to achieve the company’s revenue target.
The Essential Guide to Quota Planning
Quota planning is a big concern for sales organizations. Read our guide to discover best practices in sales quota management and decide on the best approach for your business.