Incentive Compensation

What is a Sales Quota?

Siva Subramanian
min read
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Sales is a competitive field. Your reps are sure to be driven enough to dodge the challenges that come with selling. But they cannot go all guns blazing without a clearly-defined goal, no matter how experienced they are. This is why you need sales quotas. 

A sales quota is a target set by management for the sales team to achieve in a specific time period. It can be a monthly, quarterly, or a yearly target, and can be measured by the profit generated, number of units sold, or through specific activities of reps like number of cold calls done, emails sent to potential customers, and many more. 

Sales Quota vs. Sales Goals

While sales quotas may look similar to sales goals, they’re not the same. Here’s the difference, sales goals are long-term targets that are set considering the overall objective of the company. This can include expanding into new markets, increasing customer retention, introducing new products or services to increase sales, etc. Sales quotas are time-specific targets that have to be achieved by each rep or the whole team. Sales quotas also include commissions and incentives. 

Why set sales quotas?

Lack of sales quotas causes one main thing: absolute chaos. Channel conflicts, ownership confusion, disengagement of reps tend to happen when you do not set quotas. 

On the other hand, when you have sales quotas in place: 

  • You can make decisions based on data.
  • Forecast and monitoring rep activities.
  • Motivate reps to achieve their target.
  • Keep your reps accountable. 

Objectives of sales quota

Improving sales productivity: At the end of the day, your sales reps are humans as well. They cannot keep doing wonders day in and day out. With an appropriate quota, they’d know exactly what their goal is, and the kind of effort needed to reach it. In this way, you avoid burnout of reps and they can stay productive for a longer period of time. 

Increase sales: You can easily identify the sales techniques that work the best for you, and the ones that aren’t bringing you the desired result. You can apply the best performing techniques across your business which would eventually result in higher sales.  

Measuring the performance of sales teams: You’d know who are the top performers, and who all would need a little motivation from your side to get the job done. Incentivizing the best performers is also something you can consider to further motivate your reps. 

Sales quotas can also be used to decide the requirements of your sales force in the future, and can also increase the coordination between sales and other departments like production, purchase, finance, etc. 

Methods of creating sales quota

Now that you know the importance of sales quotas, let’s look at the methods that can be used to set quotas. There are four main methods, and you can choose the best for you depending on your industry, your goals, and the market you operate in. 

Top-down Method

When the top management sets time-specific goals and assigns it to the reps to get it done, then it is called a top-down method. 

Here, the numbers can be determined based on the company objective, competitor analysis, understanding the market, etc. What’s important here is that the top executives must set realistic quotas without getting overly ambitious. Working along with the front-line sales reps to get some actionable insights can help you arrive at an achievable sales target. 

Bottom-up Method

This method is the exact opposite of the top-down approach where you analyze the capabilities of each rep, their past performance, and create a quota based on them. After you’re done analyzing, you can design the new sales quota at the upper bound of what your reps are capable of doing. The chances of creating a more realistic quota are higher in this method. 

Past Performance Method

You can look at your sales performance from the previous year and come up with the sales quota by increasing them by a few percent. After you estimate the new quota, you can divide it further into quotas for each region, team, and reps. 

Market opportunity Method

When you can consider your past performance and the characteristics of the market you’re operating in to create a quota out of it, it is called a market opportunity method. 

Types of Sales Quotas

Sales quotas can be measured in different ways depending on what you want to achieve as an organization. Let’s look at the few different types of sales quotas that are commonly used.

Revenue Quota

The revenue quota is where the reps are expected to generate a particular amount of revenue in a specific period of time. The different time periods here can be monthly, quarterly, or annual. An example of this can be when you set your sales team a target of $50,000 to be achieved in the next quarter. 

Activity Quota

When your reps are expected to do a certain activity a fixed number of times, then it is called an activity quota. This can include sales activities like closing a certain number of deals, number of phone calls done to the prospects, the number of emails sent in a month, demos conducted, and other similar activities in the sales process. You can keep track of all these with the help of a CRM.

Volume Quota

In this quota type, your reps will be asked to sell as many units as possible in a fixed amount of time, which is generally a year. For each unit they sell, reps will be incentivized.

Combination Quota

This is one of the preferred quota types by organizations. As the name suggests, when more than one quota is combined together, then it is called a combination quota. 

When you combine activity quota and volume quota, your reps will be asked to make a certain number of calls while closing the deal with a few of those. The advantage of this is that it gives smaller milestones for your reps, helping them achieve them with ease.

Forecast Quota

When you set up a quota specifically for territory or to a sales rep, then it’s called forecast quota. You can arrive at this quota by analyzing the historical sales performance of the region, and the revenue target you intend to achieve. 

How to calculate sales quota?

‘Bring it on!’. If this is how your reps would react to your sales quota, then you’ve set the right one. Here’s how you can arrive at one such competitive sales quota. 

Select a quota strategy: From the different types of quota strategies available, carefully choose the one that would help you achieve your vision. You can consider your industry, the size of your business, and your objectives before you finalize the quota type. 

Choose an appropriate method to create a quota: In general, a bottom-up method is used where managers consider historical data of their reps’ performance and derive a quota. You can also consider the top-down method, past performance method, or market opportunity method based on your objective. 

Establish your baseline: This is the minimum number of sales your reps have to make. Analyze the historical performance of your sales team, your market, and seasonal fluctuations to come up with a baseline. What’s important is that it should be based on data rather than anything else. 

Calculate the quota: The baseline number will help you arrive at a sales quota. If your baseline value is $60000 per month, and you want a growth rate of 12% the following month, the sales quota will be $67,200. 

Determine the review period: Your review period should be based on your sales cycle, which can be weekly, monthly, or quarterly. Look for the one that works best for your organization. 

What are your expectations? Clearly communicate with your reps on the metrics that would determine their performance. Let them also know the rationale behind it. Though be open to hear their feedback and tweak as and when necessary to arrive at a quota that would bring everyone together. 

Quota setting tips

  • Always choose a data-driven approach
  • Be clear in communicating the KPIs
  • It can be exciting to set an aggressive sales quota, but may not be the right idea in most cases.
  • Collaborate with the reps to make your quota effective.
  • Constantly monitor for performers who’re below par.

Limitations of sales quotas

When you’ve to ‘guess’ the sales estimates: Accurate sales estimates may not be available in some cases, and you’d have to do the guesswork to arrive at the numbers. 

Not-so-simple statistical techniques: Creating quotas may require the use of few statistical techniques which may be difficult to understand for everyone. 

The ‘pressure’ of selling: Let’s admit it. Salespeople do feel the pressure that comes with sales quotas, and it may affect their performance.

The difference in reps’ abilities: Not all your sales reps are equally talented, and you cannot set the same quota for every rep. 

Biases in setting quotas: Setting fair, accurate, and unbiased quotas aren’t that easy. Sales managers’ views may play a role in setting quotas. ‘

Non-selling activities take a backseat: When your reps are focused on selling, they may miss other crucial non-selling activities like researching the market & consumer behaviour, looking for new customers, addressing the issues of existing customers, etc. 

Final thoughts

Setting up the right sales quota is a great beginning to reach your goals. After all, quotas are the benchmarks that your reps look up to. Take the time it deserves, do your research, and design the quota that brings everyone together. A lot of conflicts can be avoided if you hit the right note in creating your quota!

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