MFRTech: Effective Quota Setting in Manufacturing Sales
January 17, 2018
By Michelle Seger, Global Sales Strategy and Change Management Leader, SalesGlobe
While the manufacturing industry is experiencing tremendous change in areas ranging from automation to regulation to technology, one thing remains constant. The sales organization is key to bottom line success. To maintain a high-performing, high-earning sales team, quotas need to be set correctly and fairly despite irregular buying cycles or market changes.
The benefits of an aspirational but attainable quota aren’t just associated with revenue. When salespeople are given an unreachable target, and find they’re swimming against a strong current, they’ll leave. That turnover is costly, and by several estimates can be about 150 percent to 200 percent of a salesperson’s annual salary.
Today, there isn’t one best way to set quota for a manufacturing sales model. The approach will be unique for each company, based on the characteristics of products, sales cycle and markets. But these components of formulating a quota are consistently helpful in getting it right:
Gather Sales Data
We can learn a lot from history, but it doesn’t give us the whole picture. While many manufacturing companies look at what was sold last year and bump quota up a percentage from that figure, this approach doesn’t consider performance variables. Salespeople who didn’t do well last year may continue to struggle at reaching a higher target. While your high performers, simply being rewarded with a higher quota based on their success the previous year, will likely leave.
Assessing market opportunity means looking at deals closed in the previous year, not just for their monetary value, but also for the type of customer and purchase volume. But anomalies, like a deal that is 30 percent to 40 percent larger than typical, or a sale that addressed a unique situation, can throw off expectations of future sales. As well, changes in buyer, advancing competitors and general market fluctuation should factor into future projections of market opportunity.
Best practice: Use a blend of market-driven methods that include historic trends and indicators of future potential, such as customer demographics, and variations in characteristics for each territory (growth rates, penetration, and competitive intensity). Seek third-party data or conduct direct customer research to understand customer demand and pinpoint how your products or category are perceived and if your offerings are considered critical or complementary, problem-solver or enhancement. Having solid data to back up decision-making provides the rationale for salespeople and sales leaders to better understand the opportunities and challenges within the industry.
Collaborate Across Functions
Is finance aware of sales opportunities and potential based on the current staff? Are product lines changing in 12-24 months that will impact sales offerings and the need to move current inventory quickly? Is marketing launching a new campaign that could impact additional territories or sales functions to multiply fresh prospects? If sales leaders aren’t aware of these factors, then quotas can’t be set appropriately to reach achievement.
Best Practice: It generally takes a cross-functional effort between sales, finance, operations, marketing, and senior leadership to define and operate the right quota-setting approach.
Getting the right mix of organizational representatives at the table sets the stage for clarity about expectations, challenges and opportunities for the sales team. Transparency is essential during the process to ensure buy-in of the entire sales team and avoid the idea that the quota is unfair or imposed as a punishment for less than stellar numbers the previous fiscal year.
Proposed quotas should be circulated to the business units, product leaders and major geographies who will evaluate how these goals translate to the front lines. Involving as many sales leaders as possible in the process ensures quotas are on target and the team will understand the goals as they relate to themselves and the overall company.
In addition to making the quota model most relevant to the team, insights from throughout the sales team give top leadership a clear understanding of sales needs and potential before approving quotas.
An equipment manufacturer for the food service industry took sales managers through a set of workshops that immersed them in the quota-setting process, including the steps to achieve goals and the role accountabilities required. They examined firsthand how market growth, account retention/penetration opportunities and additional sales potential led to final quota numbers. This exercise helped them get on board with a logic-based goal rather than reacting emotionally to a seemingly random target. Combined with a sales compensation program overhaul, this company went from seeing just 30 percent of the sales team reaching quota achievement to 50 percent in the next year.
Balance Billing against Bookings
Increasingly, we’re seeing manufacturing companies allow customers to pay by installments versus one-time capital expenditures. This model, almost like leasing, generates more revenue over time than one payment. But how does it impact sales team quotas? How does the company recognize that revenue? Generally, sales leaders aren’t receiving incentive pay on bookings because they’re paid based on the company’s overall revenue. And salespeople can’t receive a total incentive payout on an installment booking in year one when the revenue has yet to be realized in full.
If an old quota system is in place, but customers are requesting new payment arrangements, top salespeople can miss out on incentive pay.
Best Practice: Reconciling customer payment structures with sales team incentive pay outs is an important piece of quota construction. Companies need to have awareness of this fiscal shift and establish agreement between sales operations and finance about how revenue numbers will be calibrated based on bookings.
Which roles control bookings and which control billings? Hunters (salespeople responsible for securing new accounts or expanding existing ones) should typically have quota goals weighted similarly to 60 percent bookings and 40 percent billings. Account managers should have goals weighted more to billings versus bookings. It’s important to establish goals appropriate to fiscal account roles so that both salespeople and sales leaders are rewarded fairly based on the value of each deal over the number of years payment will be received.
Employ Account Planning
How many people within your organization touch a particularly large account? For a Fortune 100 size account, that could be more than a dozen functions. Account planning isn’t a quota-setting process on its own, but rather a strategic way to view how the team in total can reach quota. Sales leaders, finance staff, sales operations, front-line sales and activation team members can all provide insights into an account relationship based on their customer interactions and knowledge of their account segment.
Best Practice: Account planning involves forecasting future market changes, customer needs and growth opportunities within product life cycles. The account team should share information and intelligence about their account interactions to help identify leverage opportunities for sales to expand current relationships and create new ones within a large account. Intelligence developed during account planning can be great input to setting fair and attainable quotas by better informing leadership about the practical potential within an account.
Account teams should be encouraged to “think big” about the company’s aspirations for an account, leading to clearer longer-term knowledge about the quota potential. A technology manufacturing company applied account planning methodologies with sales leaders to make three-year projections. The process included discussions about production innovation and financial investment needs for large clients. This then allowed the team to back into a reasonable, prescriptive number for the coming year knowing what lies ahead. This process also led to the creation of an action plan to help everyone involved in the account life cycle to know their roles and how they help the team reach the account goal.
Evaluate Quota Focus
The requirements for meeting quota should be within the control of sales. If most of your sales organization is falling short of achieving quota, your model should be evaluated to determine if the components are too general for sales to effectively manage outcomes. For example, one consumer products organization with a generalist sales model was in a five-year pattern of quota shortfalls. Researching customer interaction patterns, company structure and sales processes led to focusing on a new customer acquisition and current account management sales model. The company returned to growing sales revenues within the first year of implementation.
Best Practice: Identify measures to achievement of quota that are controllable by sales reps and lead to company profitability. Some examples of this might be territory revenue to goal and territory gross profit to goal. Such measures are managed by the sales organization, but roll up to the overall company goals so that you have ability to succeed and alignment from top to bottom.
Each manufacturing organization is unique in its operations, customer relationships and product life cycle. The quota setting process should reflect this with a tailored approach to net the best results for the sales team and the company’s bottom line.
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