Sales Targets Drive Growth: How Sales Quota Optimization Uplifts Pharma Companies
Year after year, pharmaceutical organizations find it challenging to set effective targets for their sales forces. The process does not seem to improve over time. Studies show that about half of companies struggle with some aspect of target setting, ranging from choosing the best methodology, to rewarding the highest performers and supporting the sales strategy. The stakes are high: inaccurate targets lead to loss of top talent, failure to achieve sales objectives, and the inability to take advantage of opportunities in the pharmaceutical value chain.
If targets are not set accurately, in a way that both creates a financial advantage for the company and motivates the sales force, the entire sales compensation plan can be compromised. Quota setting should be an integral part of sales compensation strategy and work with other components of the plan to meet business objectives.
This paper will help your organization better understand and manage sales target setting based on accepted pharmaceutical industry best practices and research. It will describe the most commonly used methodologies and detail the advantages and disadvantages of each.
The Benefits of Sales Target Optimization
Executing any business strategy depends on the cooperation and proper functioning of all levels of the sales organization. Target setting is an integral part of strategy execution and, when done correctly, enables sales organizations to:
Sales representatives and sales managers aim at a specific goal that is both attainable and challenging, and one that they understand and consider fair.
Offer equal earning opportunity for all
Accurate goal setting rewards commitment, talent, passion and results, regardless of local market circumstances.
Achieve compensation objectives
Fair targets link pay directly to performance and clearly differentiate low and high performers, helping retain top talent.
Remain flexible to market changes
Optimal target setting allows sales managers to quickly adapt to changes and respond to the complexities of the pharmaceutical value chain.
Achieve sales goals
With a motivated sales staff and targets that are specifically designed to support the sales strategy, the organization can reach its sales objectives.
52% of organizations consider setting effective quotas to be the biggest sales compensation challenge.
42% of companies have trouble differentiating top performers.
SalesGlobe and The Sales Management Association, 2015
Commonly Used Target Setting Methodologies
Flat Quotas Approach
Allocating flat quotas means giving the same commission rate to all sales representatives. While this might work for small sales forces or markets with unconstrained potential, it is not realistic for organizations with complex operations and objectives. The advantages of a simple quota system are quickly overshadowed by the lack of performance-based rewards and inequitable targets, and also by the inefficiency resulting from a strategy that doesn’t account for business insights.
Historic Quotas Approach
Historic quotas are set by looking at what happened in the past and, on that basis, adding a projected increase. They are a popular methodology with companies because of the rather straightforward calculation, as compared to more complex models that consider an array of variables. Historic quotas are also easy to understand by the sales force and don’t require a lot of data or business insights. There are considerable disadvantages of this methodology though, the most important being that it only looks in the rearview mirror, disregarding future opportunities and changing business objectives. Another drawback is that it tends to punish high performers: their reward for hitting the target is receiving a higher one the following year.
Maintenance and Growth Approach
A step forward from the first two approaches, the maintenance and growth methodology is based on qualitative insights, and it uses factors and weights to allocate growth over the baseline volume. This approach is effective in that, unlike the previous methodologies, is driven more by market opportunity. The challenge is to achieve consensus on which factors and weights to use in the model. This methodology might also underestimate momentum from past sales.
48% of companies use historic quotas.
Regression-Based Approach Recommended for Pharma Companies
In the pharmaceutical industry, deciding how to set sales targets can make the difference between a company thriving or merely surviving. Optymyze recommends a regression-based approach to target setting for pharma companies because it allows for high accuracy while providing both motivational and financial advantages. On the down side, this approach is complex, requires additional data, and might prove difficult to communicate. However, these obstacles can be overcome with the right systems, processes and expertise.
There are 5 steps in regression-based target setting:
1. Identify factors that impact sales
These can be sales factors, such as historical product, market and share volume, and historical growth rates; or non-sales factors, such as method of payment, demographics, inventory levels and customer satisfaction. We recommend avoiding these factors: salesperson tenure, previous period quota attainment and skills rating.
Typical Outcomes Achieved with Regression-Based Target Setting:
- Increased accuracy
- Reduced bias
- Fewer adjustments
- Improved communication
2. Build regression model and evaluate factors
At this stage, data drives results. Run the regression model and eliminate extraneous and cross-correlated variables. Select the 2-4 most important factors in the model based on key metrics.
3. Finalize and evaluate model
A qualitative analysis follows the quantitative one. Adjust the model based on business insights, market landscape and anticipated changes. Lastly, test the model to verify that it allocates goals correctly. Here is where outliers are identified and bias is removed, so that all reps enjoy fair sales targets.
4. Allocate goals
Using the data at hand, use the model to predict future performance and to translate it into contributions.
5. Communicate targets
This step is crucial to having a motivated sales force. Make sure to communicate targets prior to the beginning of the goal period. Every sales rep should understand his or her target and how it was calculated, and they should also have visibility into the trends that show why objectives are achievable.
Target setting is a challenge that remains high on the list of sales compensation problems. For the pharmaceutical industry, the process is all the more crucial for meeting growth objectives. While the regression-based target setting methodology is more technical and requires more expertise than other approaches, in Optymyze’s over 20 years of experience in the industry, it is the only one that truly performs in terms of financial control, increased levels of motivation of sales reps, and improved sales.
Optimizing your company’s target setting process may be challenging because it requires the cooperation of different departments and roles and may imply adjustments on different levels. However, change is imperative for organizations to stay competitive and flexible, and to successfully tackle the complexities of the pharma value chain.