Developing a Sales Quota?

By Bob De Contreras

 Do you set goals for yourself? What happens when you establish a goal and believe in it? You work hard to achieve it. What happens when you achieve it? You feel good about yourself and your success drives you to achieve more.

 A sales quota is a goal; it is a target you expect your sales staff to meet. It must be a target your sales team believes they can achieve. Each sales person must understand the importance of their target and how it fits in as part of your total business plan. When you wrote your business plan, you established specific sales targets. The sales quotas you assign to your sales staff are the building blocks used to meet the goals stated in your business plan.

 The sales quota is part of an incentive compensation system. As milestones within the quota are met, the sales representative is paid a commission or bonus. So, the more the sales person sells or the closer the salesperson gets to achieving the sales quota assigned the more money they are paid in commissions or bonuses. 

The development of a quota system in your business can be simple or complex. Planning is required and some business judgment has to be applied. The following are some simple rules you could follow:

 1. Company revenue goals and the business plan should be the basis of and tied to the quota.

 2. An achievable quota is required before it can be deemed an effective quota. The sales people must view the quota as achievable. Quotas that are impossible to meet are ignored. Unrealistic quotas will make you look foolish.

 3. Industry typical sales quota attainment should be considered in setting the quota assignment.

 4. A simple, clear and easy to understand quota and compensation system is required to ensure sales person focus on the right goals.

 5. Define the sale, the event for which quota is paid, in the context of determining how the quota attainment commission is going to be paid.

 4. Don't penalize successful sales people by pushing their quota out of reach. They may retaliate by selling less.

 5. Don't threaten by using a quota system as a weapon against poor performers. It will not solve the problem.

The following are some considerations for building the best quota system for your company.

1. Establish parameters for developing quotas

•  Historical trends: How much of each product and each service have been sold in total and in your various sales territories over time?
   

• Last year's revenue: What was the total revenue from all products, services and sales territories?
   

• Industry standards: How much did all vendors (selling the same types of products and services) sell?
   

• Territory analysis: How much do the sales people think they can sell in their individual sales territories based on their existing pipeline and recent successes?
   

• Simplicity: Keep it simple.  The easier it is to understand the better it will be to guide the actions of the sales people.
   

•  Life cycles:  Particularly in high tech industries such as computer hardware/software, telecommunications, biotech and others will also impact revenue performance trends and should therefore, be considered.

 2. Add a growth expectation 

• Realistic: What is doable for your products in the current state of your market? Some industries can realistically expect sales growth of 5% while others may see 100%.
   

•  Challenging: The goals you set should require each member of your team to work hard to meet the assigned goals.

 3. Adapt the quotas to each sales rep

•  Assigned job: If you have different types of salespeople within your team, you may need to adjust quotas based on the type of job. The potential for sales of telemarketing people may be different from that of outside sales people. The potential for product sales vs. services sales may be different.
   

•  Sales skills: Some members of your team just have better sales skills than others. Having better sales skills is more likely to result in higher sales results and therefore higher quota assignment.
   

•  Market potential: Each territory may be different in its needs and appetite for acquiring each of your products or services.
   

•  Competition: In some territories, the competition may be strong and thereby reduce the potential for sales. In other territories, competition may be weak or non-existent.

4. Adapt quotas to market conditions and company revenue plan

•  Roll-up: The quota of all sales people added together should be at least equal to the company revenue plan.
   

•  Over assignment: Since some sales people will not make their quota the total quota assigned should be more than the company revenue plan.
   

•  Market conditions: As market conditions change (up or down) the quotas may need to be adjusted.  This is so sales people don’t significantly over achieve quota or become demoralized because of under achievement.

5. Other considerations

•  Sales resources: Completing the research listed above, you may discover that you need more sales people in order to achieve your company revenue goals.
   

•  What’s included: Determine what is included in the quota – products, services, maintenance, long term sales, follow-on sales, out of territory sales, etc.
   

•  Guide behavior: The quota and compensation plan should guide and motivate the sales people to achieve the specific goals of the company business plan.
   

•  When paid: Decide when sales quota attainment triggers payment of commissions – monthly, quarterly, yearly.
   

•  Quota sharing: Decide if it’s possible for more than one sales person to be paid if two or more sales people work on the same sale.
   

•  Ramp up: When assigning new sales people a quota or when introducing new products/services the quota should ramp up – start lower and increase to a higher number as traction is attained.

 6. Sales management

•  Management vs. staff: Sales executives or managers should be on a quota.  The sales managers can have their own individual sales quota assignment, a quota equal to the sum of the quotas of the sales people reporting to the manager or a combination of the two.

 7. Get buy-in from your sales team

•  Explain quota: If quotas are imposed on your salespeople without an explanation of how they were developed and defined, the result could be resistance.
   

•  Planning meeting: In one of your sales meetings, outline the process you'll be using to set quotas. Describe each of the steps you will be taking and the likely completion date. Most importantly, explain how your team will be involved in this process.
   

•  Involve sales people: Have your sales people help gather information for the quota-setting process. Let your sales people gather the information about their individual territories that you will use as one of the parameters for setting your quotas.
   

•  Individual meeting: Meet with each person to determine an individual quota. In the meeting, discuss any factors that might influence the setting of that person's quota. Make it a joint decision, if possible, to gain buy-in and commitment from the sales person.

 After reviewing this list of considerations you my think quota planning is a complex process?  It is and you should consider getting help if you are not experienced in the process.  Contact Paladin and Associates if you would like to discuss how we can help.

Developing a Sales Quota Case Study

By: Bob De Contreras

As we discussed in the lead article in this newsletter – developing a quota system is a complex effort.  There is a lot to consider if you are going to get it right and have the plan guide the correct behavior in your sales people. 

 With this in mind let us share with you the discussions we had with a client and their actions to implement a quota system.

 This company is a service provider in the health care industry.  They have significant competition, but have found success in their national sales efforts.  This company is five years old and just starting its first growth phase with revenues of 2 million dollars.  They contacted us because their growth had stalled and they wanted our help to get them growing again.

 As is the case in many situations we see, there were several things that they were doing and not doing that contributed to the stalled growth.  In our view, the biggest was that they did not have any documented company goals nor a sales quota.  Our early discussions were based on, “…how can you expect to grow if you don’t set any growth goals … how can you expect to increase sales if you don’t have a growth quota?” 

 We were surprised to hear their response, “…we don’t know how to set a quota or what it should be.”  So, we scheduled a planning meeting to discuss quota setting, quota planning, and sales compensation with the three key executives of the company.  We discussed most of the considerations listed in the main article of this newsletter.  With that competed we let the three executives start the planning for their quota system. 

 They first wrote down their revenue attainment from last year.  Then they decided what they thought they could do next year.  We then challenged them to raise the bar and set a goal higher than what they thought they could do.  They set a “stretch” goal that they would have to work hard to meet, but that they thought was attainable.

 Next the three executives decided that they wanted the quota to be assigned for growing existing accounts and signing new accounts.  They wanted a balanced performance in these two objectives. 

 This decision led to the necessity for them to decide which existing accounts would be assigned to each sales person.  This was required to balance the existing accounts across the sales people so the company could assign an equal quota to each sales person.

 The three executives then decided that they would have a new position of inside sales or telemarketing.  After some discussion they came to the conclusion that the inside and outside sales positions should have the same quota because the two positions were equally difficult.  This brought the staffing level to three outside sales people and one inside sales person.

 The company had done some research, including talking to their competition and had a good handle on typical sales quotas in the industry.  The problem was that the range between the numbers was wide.  But, the data showed that the industry average sales quotas per sales person were lower than cross industry numbers we had seen.

 We then came back to the company revenue objectives and discussed how the sum of the individual sales person quotas should be more than the company wide objective.  So, we worked it backwards and added 10% to the total company quota which gave a total company wide quota of 2.6 million dollars.  Dividing this by four (the number of sales people) gave an individual sales quota of $650,000.  The range of the industry quotas was $500,000 to $800,000.  So, we were all comfortable that the $650,000 quota per sales person was a good number.

 The last piece we needed to decide was the quota split between growing existing clients and signing new ones.  It just worked out (because of good assignment of the existing accounts to the sales people and good growth potential in the existing accounts) that the quota for both existing account growth and new clients was $325,000 each.  So, they had a balanced quota splitting the overall quota of $650,000 between the two. 

With our guidance they also agreed to document the quota plan and include the caveat that market conditions change and that the company would review quota assignments in September and make one time adjustments based on market and other unforeseen situations.

 We hope you agree that this was fairly straight forward when you have the right help.  If you need help with you quota planning call Paladin and Associates to discuss what we can do for you.

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            Bob De Contreras                                                  
            Rich Kramarik