10 Sales Quota Best Practices
What makes good sales quota setting so challenging? Consider these 10 sales quota setting best practices to help improve sales performance for your organization. Keep in mind these four Ps: People, Perspective, Potential, and Process.
- People - Involve the Right Team
Sales quotas involve a different set of players than sales compensation. During the sales compensation process, sales or human resources is often in the driver’s seat. With apologies to finance organizations across the world, many wild sales quota setting rides begin and end with very bright finance folks at the wheel. Unfortunately, finance-unlike the front line-rarely has visibility into the market opportunities. Instead, finance’s vision is usually set to investor requirements for growth. Finance often needs some market-sensitive guidance. Make sure the sales quota setting team, including finance, is oriented toward market opportunity as well as corporate growth expectations.
- People - Remember the Players
Remember, quota setting is about the people and the process as much as the numbers. If managers and reps are in the dark, or if their input isn’t reflected or explained in the result, then just a number may as well have been given. If they understand the process, the process is transparent, they have input, and they see the results of their input, then the resulting sales quota will be better received by all.
- Perspective - See Beyond a Single Number
When executives design a good sales compensation plan, the team steps back and admires the final product. To the design team, it’s not just a sales compensation plan-it’s a sales compensation program. To those who developed the plan, it may be a work of elegance and intricacy, because sales compensation plans for the entire organization can be a complicated and exhaustive logic puzzle. When the plan is presented to the salesperson, the first action is to read through it-carefully. The sales quota, by comparison, is simply a number. It carries the same level of impact as the sales compensation plan, but often is not given the attention it requires. Regardless of how high or low the number is, one thing is for sure: No one really likes their sales quota. It’s not elegant. It’s not intricate. The thinking that went into setting the number may not be apparent. From a rep’s perspective, the boss might have just come up with that number yesterday to try and dole out the punishment from above. In truth, the work that goes behind a good sales quota may not be simple at all. Be sure to emphasize the importance of a good sales quota setting process and not let its seeming simplicity minimize its significance.
- Perspective - Get a View from the Bottom-Up
One of the easiest ways to set sales quotas is to divide the big corporate number and allocate it down to the organization in some pro-rata fashion based on the size of territory or portion of total sales. While it’s easy, it’s also a one-way street from the top of the organization down to the field that usually results in a disconnect and reluctant sales quota ownership by the field. By combining a bottom-up view with the top-down expectations, granular information can be considered from the field on account opportunity and reconcile it with a bird’s eye view based on market opportunity and overall macro forecasts or trends for market growth.
- Potential - Move Beyond History
Most organizations set sales quotas by looking backward. Historic sales performance may be the primary driver of the quota, which is usually determined by taking a snapshot of the most recent year’s performance and applying a standard growth rate on top of that performance. This historic approach is the source of most performance penalties that simply add a bigger expectation on top of a rep who had a great sales year. Historic quota setting may also create a “porpoise pattern,” where sales and quota attainment leaps up and then dives down in alternating years. For example, a rep with great revenue performance (a leap) in year one, resulting in an inflated sales quota in year two, often has low attainment of that inflated quota (a dive) in year two. Of course, this may then lead to a lower quota in year three, followed by another leap in great performance over that low quota. And so, the pattern continues. Challenge the team to acknowledge history but to lean toward forward-looking indicators of market opportunity.
- Potential - Balance Market Opportunity with Sales Capacity
Market opportunity should be a primary driver of the sales quota. More specifically, territory opportunity relative to other similar territories can be a good indication of what portion of the total goal should be allocated to each territory. Indicators of territory opportunity may be characteristics of accounts that correlate with revenue potential. For instance, a company in the bar-code scanning business determined that the square footage of a retail grocery store and the number of beds in a hospital were both metrics that were predictive of the potential annual sales for its scanning solutions. By applying a formula to all customers and prospects in a market or territory, the company got a relative sense of the sales potential across all markets or territories. But that indicator of market opportunity was only half of the answer.
The other half was the practical physical ability, or capacity, of the sales force to close a certain amount of business. This sales capacity considers the number of hours each rep works in a year, the percentage of that time that is spent actually selling versus handling other operations and administrative activities, and the productivity of those selling hours given the time it takes to manage or close an account and close rates. By understanding and balancing the two sides of market opportunity and sales capacity, a multidimensional view on how to allocate the sales quota can be gained.
- Process - Fit the Methodology to the Account Type
One sales quota setting approach does not fit all situations. While a more analytically driven, standardized sales quota may work well for small accounts with a transactional sales process, a more bottom-up market opportunity approach might be better suited for a midsize account segment. Near the top of the account pyramid, national account sales quotas may be more accurately based on the information and strategies developed in an account plan. That account plan might provide input for sales quotas and serve as a planning and coaching tool for sales managers to use with their account managers. Apply an appropriate approach for each type of segment or market.
- Process - Don’t Get Lost in the Legacy
One of the most popular sales quota setting approaches is called “the way we’ve always done it.” This familiar but flawed quota approach has a way of living on like a crazy old aunt who shows up at Thanksgiving. She may not be perfect, and nobody can understand her, but we only have to deal with her once a year, and that’s easier than changing our address. If the quota process isn’t working, be a champion of change, not a defender of the legacy.
- Process - Make the Approach Scalable
A telecommunications organization we worked with had re-engineered and piloted its new sales quota process, which incorporated top-down and bottom-up inputs, predictive market data, and precise steps for the entire team to work through the process. It all worked well during the pilot phase, only for the company to find out after full introduction that the process was just too complicated, delicate, and unwieldy. The process that worked perfectly in a contained environment just couldn’t scale in the organization without coming apart at the seams. Further, it was creating workload demands to manually manage steps and exceptions that weren’t captured in a non-scaled environment. Err toward the side of simplicity. Accounting for every possibility may not be much more accurate but can certainly be much more manpower intensive than using a simpler, streamlined approach.
- Process - Don’t Over-, Over-Allocate
A sales leader in a Fortune 100 transportation company recently asked me a very straightforward question: “Why is it that our CFO reported to Wall Street that we were on plan for revenue for the quarter, yet leadership is beating on us because we’re behind plan in the field?” As we examined the question, the answer became clear. It was a case of over-, over-allocation of the sales quota. Over-allocation refers to the approach of taking the sales goal for the business overall and, as it is allocated to the next level of management, adding a little extra to that goal. The sum of all unique, non-overlapping front-line sales quotas compared to the company’s goal is a simple measure of sales quota over-allocation. For example, a company with a $1 billion corporate goal with a sum of all front-line quotas of $1.05 billion has over-allocated its goal by 5 percent. Most organizations over-allocate quotas by about 3 percent to 5 percent from top goal to front line. That little extra allocation acts like an insurance policy. If the manager has a sales position that remains unfilled for a period of time with no one to effectively cover that territory, the over-allocation makes up for some of that loss. If a rep falls dramatically short of the sales quota, the over-allocation also makes up for some of that performance shortfall. Over-allocation, within limits, can keep the organization on track with its sales quota. However, when the sales quota is over-allocated too much at too many levels, it can lead to distortion on the front line. In the case of the transportation company, the company had over-allocated its goal to a point where the C-level and the front line had two different realities. The sun was shining at the C-level while the front line saw only cloudy skies. Keep the sales quota allocation trim so that executives and reps all participate in the company’s success.
For more on quota setting, see Chapter 6, A Quota Quandary, in our book What Your CEO Needs to Know About Sales Compensation.