Every year we ask sales leaders, “What’s your biggest challenge with sales compensation?” and every year we get the same answer: quota setting. Quotas are a hassle for all involved, but it’s critical for your sales team that you set them correctly.
Quotas are the allocation of the company’s goal to the business units, sales teams, and front line sales reps. Without quotas, most sales compensation plans won’t work. Given the choice, I’d rather have a good sales compensation design and a good quota-setting process than a phenomenal plan and a bad quota setting process.
But one quota-setting approach does not fit all situations: the old “take last year’s goal and add 10%” method is usually a bad idea. Quota-setting methodologies vary based on the market and types of accounts.
Below are five standard quota-setting methods and how to determine which will best fit your organisation.
1. Flat quotas are simple and effective in the right situations.The flat quota approach is common in new business development situations where reps don’t have an existing base of business to manage and may have few boundaries to their sales opportunities. It’s survival of the fittest.
2. Historical quotas are the most common in companies, yet they create some of the biggest issues by assuming that history is predictive of the future and of potential in a market. This approach creates quotas that recreate history.
A better version of this quota setting method is the historical-modified quota. This method is best suited for markets where specific account-level data is not available or reliable. It uses the historical growth trend and modifies that trend by differences in market characteristics. Account managers’ quotas are based on historical performance and known characteristics about the market.
3. Market opportunity-driven quotas are developed by starting with historical information and building on it based on the characteristics of the market. Market opportunity considers indicators of how much opportunity might reside in an account. For example, if you’re selling office chairs, the number of employees at a certain location may be correlated to revenue potential. Those indicators can become part of a larger predictive model that either estimates the potential of a territory or compares that territory with other territories to help allocate the goal correctly across those territories.
4. Account opportunity-driven quotas consider characteristics of the accounts as well as the market. By looking at the sources of revenue retention, penetration and new customer acquisition, and the existing and planned sales pipeline, a sales organisation can build the account opportunity components, bottom-up.
Those growth estimates can be compared with top-down intelligence on the overall market, and growth predictions. The company can also consider sales capacity and the capabilities of reps to capture that account opportunity.
This method is best suited for markets where specific account-level pipeline data is available and reliable. It incorporates existing revenue, retention, penetration, and acquisition opportunities. Quotas for account managers are based on account knowledge and pipeline planning.
5. Account planning can be used for growth planning, coaching reps to the plan, and of course, setting quotas for the account. This process is effective in situations where there are a small number of large accounts. The account plan provides information on growth targets in the account as well as tactics the team will use to grow the customer relationship.
By considering and combining these methods, your organisation can develop a quota-setting approach that matches each type of account segment and can increase the opportunity to hit the company’s overall sales objective.
This article originally appeared on Sales Initiative.