6 Quota Setting Methods: Which is Right for Your Sales Team?
Quota setting continues to be one of the top challenges for sales leaders. Quotas are a hassle for all involved, but it is critical for your sales team that you get them right. An effective quota method should put sellers on equal footing to achieve sales success by accounting for the factors that impact their sales opportunity.
Quotas are the allocation of the company’s goal to the business units, sales teams, and frontline sellers. Commission and rate-based compensation plans do not require quotas. However, most sales compensation plans will not work without them. Quotas also allow organizations to objectively distinguish between top and bottom sales performers. Given the choice, you should choose a good sales compensation design and a good quota setting process over a phenomenal plan and a bad quota setting process. A bad quota setting process can negate the desired outcomes of a phenomenal compensation plan.
Keep in mind that one quota setting approach does not fit all situations. The old “take last year’s goal and add ten percent” method is usually a bad approach. Similarly, increasing quota for a previous year’s over performer and lowering quota for the low performer sends the message that the quota process rewards low performance. It is important to choose the most forward-looking quota setting method based on your types of accounts, and the level of data you have available.
Below are six types of quota setting methods and how to determine which will best fit your organization.
1. Flat
A flat quota is simple and effective in the right situations. This method assigns sellers with the same role the same quota. The flat quota approach works best for new business development teams where reps don’t have an existing base of business to manage. It is also the method available when the sales opportunity data is limited or not available. As one client recently put it: “It’s like gladiator selling.”
2. Historical
The historical quota method is the method organizations most commonly use, yet it creates some of the biggest issues by assuming that historical sales performance is predictive of future sales performance. This approach creates the performance penalty cycle. It increases quota for a previous year’s high performer and lowers quota for a low performer, sending the message that the quota process rewards low performance. It is difficult to recommend this method, and we encourage organizations to evolve to the market factor method.
3. Market Factors
The market factor quota method addresses the performance deficiencies of the historical method. It uses the historic growth trend from the historical method and modifies that trend by analyzing differences in market characteristics. This method is best suited for markets where specific account level data is not available or reliable. Account managers’ quotas are based on historic performance and known characteristics about the market.
4. Account Potential
The account potential method considers indicators of how much opportunity might reside in an account. For example, if your business is selling office chairs, the number of employees at account locations may be correlated to revenue potential. Take time to identify other firmographic factors that could be indicators of sales potential for your business. Those indicators can become part of a larger predictive model that either estimates the potential of a territory or compares it with other territories to help allocate the goal equitably across those locations.
5. Opportunity Forecast
The opportunity forecast quota approach produces the most equitably distributed opportunity-based quotas for a considerable number of accounts. As a result, it also requires the most CRM discipline, is the most difficult to execute, and requires the most robust sales analytics capabilities. By looking at the sources of revenue retention, penetration, new customer acquisition, and the existing and planned sales pipeline, a sales organization can build the account opportunity components from the bottom up. Those growth estimates can be compared with top-down intelligence on the overall market and growth predictions. This method is best suited for markets where specific account level pipeline data is available and reliable. Quotas for account managers are based on account knowledge and pipeline planning.
6. Account Planning
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 is 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. The quota is based on specific opportunities identified that are expected to be booked or closed in the fiscal year.
In addition to these stand-alone methods, your organization can also use a combination of methods to develop a quota setting approach that matches your account segments and capabilities. An optimal quota approach will increase your opportunity to achieve the company’s overall sales objective.
SalesGlobe is a leading sales effectiveness and data-driven creative problem-solving firm. We specialize in helping Global 1000 companies solve their toughest growth challenges and helping them think in new ways to develop more effective solutions in the areas of sales strategy, sales organization, sales process, sales compensation, and quotas. We wrote the books on sales innovation with The Innovative Sale, What Your CEO Needs to Know About Sales Compensation, and Quotas! Design Thinking to Solve Your Biggest Sales Challenge.
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