No sales manager has ever said, ‘We want the revenue to increase. That’s it. Let’s work towards that.’ It’s nearly impossible to run a business without setting predefined goals or quotas.
Consider a parallel in life; it’s much easier to plan a journey, work out the best routes, foresee problems and tackle common challenges if you are well aware of the destination right from the beginning.
In business, setting sales team quotas or goals, do something similar – they give the sales reps a target to work towards and help them recognize and measure the progress.
While setting sales team quotas help boost business revenue, for the members of the team, quotas serve as a motivator and a bridge that connects personal and business success.
Sales Team Quota: What is it and why is it so important?
In sales, a quota is a sales target or financial goal that the sales manager or management sets for an individual or the sales team for a duration (month, quarter, or year) for a particular region, product, etc. Quotas are usually set in terms of the number of sales, revenue or profits, sales member activity, etc.
Sales Quotas and Sales Goals: Are they the same thing?
While the terms – sales quotas and sales goals – are at times used interchangeably, they are not the same. We can define sales quotas as a series of milestones or actions that assist the reps or team to achieve a sales goal.
A good case in point is the approach followed by JVN Skates. The year-end goal of the company is a 25% increase in revenue for the year 2019. It’s the responsibility of the management to ascertain the sales number they need to hit to achieve the revenue goal. With the sales target in hand, the sales leadership can then plan the sales campaign, strategies, and sales target per quarter, per team, and per sale rep.
The Importance of Setting Sales Team Quotas
Meeting sales team quota is typically followed by bonus, reward, and recognition. Hence, as previously mentioned, sales team quotas can be used by managers to spur their reps and team and to motivate and challenge the team to boost productivity and performance.
The whole process – from setting sales team quotas to achieving them – could offer valuable insight into the functioning of the sales team and the behavior of the sales representatives. A good sales manager would use the sales quotas to arrive at other conclusions, namely:
- Bonus, commission, and compensation plans that are fair and effective in motivating the sales reps.
- The sales leadership can learn the reasons for the success of a sales strategy or its failure.
- The sales team quotas also help the management chart a better sales pipeline, by identifying the bottlenecks and weak areas that need immediate attention.
- Helps the management to identify the cream of the crop, study their sales technique, and use the strategy to train and replicate the success with other members of the sales team.
- Use the sales team quotas to keep a tab on the sales expenses.
- Set future quotas, targets, and goals that are challenging yet achievable.
What are the different types of Sales Team Quotas?
In business, there is certainly no one size fits all approach. The type of sales quota that suits your business might not work for another. That said there are four main types of sales team quotas. The first 3 are based on revenue, volume, and activity. The last one is a combination of the other types.
Bear in mind, the type of sales team quota you choose must align with your business. Let’s take a brief looks at the main types of sales quotas.
Revenue-based Sales Team Quotas
The revenue quota opens the list because revenue or profit is the most commonly used method to set quotas. In this method, the sales team is not expected to focus on the units sold, but the revenue generated at the end of the sales cycle.
This type of method usually comes with a shorter sales cycle – a month or quarter – but longer cycles, say an annual revenue sales team quota, are not completely unheard of.
The revenue quota method is best for businesses with flexible prices that allow the sales team to up-sell a product. In addition, this method is apt for businesses that serve unique territories or multiple market segments.
For instance, a company has two sales team; both tasked to sell switches. But, the target market for one team is the consumer electronics industry, which results in a large sales volume but at lower prices. The other team has the medical device industry as the target market. Here, the sales volume is generally low, but the price per unit is high. In this example, any other method would miserably fail to truly reflect the performance of the sales teams.
Volume-based Sales Team Quotas
In the volume-based quotas, the sales team is required to sell a fixed number of units for a given period. This is the easiest method to set, monitor, and regulate. The volume-based quotas are best suited for businesses that have a single or similar product line, use fixed price, and/or have a short sales cycle. In addition, this sales team quota method is also the easiest to track and report.
As an illustration, let’s consider a company selling a niche product – carom boards. The product might vary in color and look, but there is little difference in the price among the various versions of the product. In this case, the sales management sets quotas based on the volume of goods sold in a given period.
Activity-based Sales Team Quotas
The term activity-based quota is self-explanatory; in this method, the sales team is expected to perform a measurable activity and is expected to achieve a target that may or may not translate into sales immediately.
The activity-based quotas are best suited for the sales team involved in long lead development cycles, taking part in different stages of the sales pipeline, and where several reps contribute separately to deliver a single sale.
A good case in point is a business using a team to make calls to inform the launch of a new product or service. The team manning the phone lines might not be closing sales, but form a crucial link in the process that eventually end up in a sale. Here the performance of the sales team is measured by various yardsticks such as the number of people agreeing to subscribe to the newsletter/brochure, attend a seminar, or try a sample.
A Combination of Sales Quotas
It’s possible to assign more than one sales team quota to a sales rep. Businesses do it all the time. For instance, a sales manager might assign an activity quota and volume quota at the same time. Don’t get too carried away with this method, as not all sales reps are capable of multitasking. Combine quotas only if it fits your overall sales plan.
Consider the case of a business that sells computer security software. The sales leadership would certainly want their sales reps to do more than just introduce their new software to existing consumers. Apart from achieving their activity quota, the sales team might also have to pursue a volume-based quota for a given period.
How to Set Sales Team Quotas?
The figure that’s commonly tossed around by sales gurus is 80%. That is; a good sales team should be able to achieve 80% of the sales quota set to them, quite easily. Anything less, the sales leadership should accept the blame for choosing an unrealistic and unattainable goal.
The perils of setting a sales team quota that is beyond realistic and attainable are many. I won’t throw the ‘Glengarry Glen Ross’ example at you. The real-life result of setting an unrealistic quota is scarier than the fictional tale.
In 2016, Wells Fargo & Co. were slapped with a fine of $185 million for wrongfully opening more than 2 million new credit card and deposit accounts without informing or seeking approval of its customers. Investigation revealed that thousands of employees opened such accounts between 2011 and 2015 to meet the tough sales quotas set by the management and to win bonuses and rewards promised by the bank under its ‘incentive-compensation program.’
Here is how you can avoid such mistakes and set attainable sales team quotas:
The Bottom-Up Approach
In the bottom-up approach the sales manager uses historical data – the performance of the sales team in the past month, quarter, or year – to arrive at the quotas for the future.
Since the sales team quota must satisfy the two key conditions: challenge and attainable, the new quota is usually higher than figures that the reps have managed to achieve in the past.
For example, to create the sales team quota for the next month or quarter, use the volume (sales) that was achieved over the last quarter or year. Then divide the sales volume by 3 or 12 to arrive at the next crucial number. You might want to use this number as the sale team quota, but bear in mind, there are other filters to be applied before you get the ideal sales team quota for the next month.
You have to adjust the figure for seasonal fluctuations, market dynamics, territories, etc. It’s equally important to factor in your forecasted growth. For instance, if the company wants to grow by 10% by the end of 2019, you need to push up the sales team quota for subsequent months to reach the forecasted growth at the end of the year.
The Top-Down Approach
Alternatively, in the top-down approach, the sales leadership uses the company’s objectives or predetermined yearly goal to calculate the sales team quotas for a month or quarter. In this case, the historical data, the sales team’s past performance, or the reps abilities are considered secondary to the company’s goals.
Suppose a company aims to generate revenue of $100,000 at the end of the year. Based on the average revenue per sale, the management can calculate the number of sales that each rep must achieve or the revenue he or she must generate per month.
Some advice against the use of the top-down approach as it could result in the setting of unrealistic quotas.
All things considered, effective sales team quotas – based on revenue, volume, activity, or a combination of two or more of these – must be ambitious yet realistic and challenging yet attainable. Quotas also serve the purpose of supporting a company’s long-term goals, reinforce its business values, and set reasonable expectations from the sales team.