Part One: The Number
What are the three most feared words in the English language? Well, in my house it is “Some Assembly Required.” In the world of sales and service, it can be “Here’s Your Quota.” Why is that the reaction? Research shows it comes down to trust, transparency, and communication. I decided to take this challenge on to show the good, bad and the lazy when it comes to determining, communicating, and administering goals/quotas targets. There is a lot of information to uncover in one reading. So, I split it into three key areas. Here is Part One – The Number.
How can we pull back The Wizard of Oz’s curtain on these key components for salespeople and help them become more engaged through transparency and inclusion leading to greater success?
Having managed businesses in seven different business models over four different industries I can emphatically say I am not an expert in sales quotas. Having also been a creator of quotas or frustrated at the quota process in all those different businesses, I wanted to take a stab at how we can be better leaders to help our teams understand and navigate the sales quota process.
The information here can be useful if you are a start-up, a young company still trying to figure things out and for more seasoned companies, it is good to re-think old practices.
Anyone who has been in sales for more than five minutes knows they will have some sort of goal or quota to achieve. In fact, almost any job today has some set of objectives or goals to accomplish. Setting a goal is an important part of every business. For the sake of this discussion, we will focus on the sales team’s quota (some call it targets or budget) and compensation.
You might call this a bit of a “how to” for those in sales or leadership or businesses just starting out, or a “please avoid” to leadership. We know there is no perfect quota methodology, there are, however, some basic methods and pitfalls to avoid that will help build your team’s trust and through this, results. We also know that a quota is only as good as the compensation program it supports AND vice versa, so it is important to include compensation in the discussion.
I will begin with a bit of a challenge:
What do you think is the percentage of sales representatives in your organization that can accurately describe how their quota is determined and can calculate their compensation at any given point during the month/quarter or year?
The truthful answer to that can give you insight into areas you need to address.
“Quota systems are never fair…so get over it and figure out how to hit yours.” “It’s supposed to be unrealistic- it’s your sales quota!” That was advice I received as a sales rep many years ago. I am unsure what I would reply to the manager who relayed that message to me if they were here today, but I am pretty sure the response would not be professional.
Ultimately sales quotas or goals drive the company’s revenue and success, but they also drive commission or bonus outcomes. The two work in tandem and must work well together. While they can inspire and challenge some, if not done well, they can have the opposite effect on others.
Sales quotas are a difficult minefield to navigate. The pages of this article totaled seven! So, I decided to break it out into three sections listed below. Let’s start this journey with The Number.
The Number
The Communication
The Administration
The Number
If you are part of the leadership team setting the number, it requires answers to many questions. Here are a few basic ones:
New company/venture?
Sales History Exists?
Activity-based or Revenue based or Hybrid?
Sales Cycle?
Does Seasonality come into play?
Revenue-driven, or profit-driven sales team?
Newer products/technology or legacy or combination?
What will the time period be to achieve? Annual? Quarterly? Monthly?
Let’s take a deeper look at a few:
New Company:
For new companies, you may want to focus on activity or performance benchmarks due to having no sales history. You may be a company that looks at Net Promoter Score (NPS) or another benchmark as your key measure. This will also depend on the perceived sales cycle and the type of sales teams you are starting with (inside vs outside) as well as their tenure. Another possibility is the market potential but beware of this being overblown. Everyone believes they have a million-dollar product/venture, which may be true, but what is required to achieve that versus where you are starting from, and in what period? A variable often incorporated here is a tactical dollar type of incentive for new accounts or leads generated turned to revenue downstream. Bottom line – what is the company focus and how will you measure success?
Sales History Exists:
Existing companies with some sales history have several options for determining quotas. Some areas of consideration and questions are:
What are the organizational goals? Your organization may be focused on all new sales or repeat sales, new customers, retention of existing customers, revenue, profitability, or some combination.
- First, what do you need to accomplish? What is the overall company goal to meet revenue requirements? If you have a current quota system, how old is it? Businesses and markets change and evolve, quota systems should too.
- Next, what is the Market Potential? Does it include a product/service launch? Is the business focused on legacy product(s) maintenance or rejuvenation? Is the way the customer purchases changing?
- Understand the measure you want to follow. Are you focused on profit, dollar volume, EBIDTA, or recurring revenue?
- The Sales Cycle is a key component in determining what type of quota method to implement. What is the expected recurring revenue level, and what is the current pipeline?
- Finally, but in this author’s opinion, the most critical components to consider are: what is the level of sales talent, training, cost, and availability of resources?
Another critical component is the percentage of sales reps you are budgeting to achieve quota achievement payout. (More on this later…)
Sales Cycle/Seasonality:
The quarterly quota system best allows taking product seasonality into consideration. If a particular product/service sells much better in the summer months than in the winter, there might be a higher quota or percentage adjustments that can be given during these months resulting in higher revenue without putting too much strain on the sales team. The same may apply to holiday seasons.
· Types of Sales Quotas:
There are many types, here are a few found in the industry:
Sales Volume: This can be dollars or units, by an individual, team, or geographic area to name a few options. There are pitfalls of each depending on the product or service. Higher-priced products/services may encourage salespeople to focus only on these as a way of hitting the target sooner but may not yield the best mix of profitability.
Profitability: Gross profit or gross margin is the primary measure. The advantage is that the salesperson can use their time optimally and it helps protect from the reps “giving away” the product/service just to close the deal or sell on price. In order for this to be successful, the salesperson needs to have some control over the pricing even though they may not have control over manufacturing costs.
Activity: This type is effective for new businesses and in many companies today the inside sales force for lead or demand generation then passes it over to the sales team to close the deal. It should be noted, however, that there should be an activity component to all goals and sales teams. For new companies trying to establish a realistic goal without history may not be considered by the sales team as realistic or attainable. This used to be called throwing darts at a dart board. The “watch out” here for leadership is that creative license can be taken by the salesperson on achieving these goals. (i.e., they will game the system…yes it happens...yes, I did it.)
Market Share (dollars, units, or percent growth). This will depend on the type of business, and product/service sold.
Territory Opportunity/Size with growth assumptions.
Weighted Index: combining historical sales and territory opportunity.
Companies sometimes base the quotas solely upon the projected amount of compensation that leadership believes salespeople should receive. In other words, a budget is created for the compensation plan payout and quotas are tailored exclusively to fit that. The downside here is that market conditions, talent, and sales cycle are not taken into consideration.
Additionally, a sales quota in the wrong business or in the wrong hands can be problematic as was the case with Wells Fargo between 2011 and 2015. Employees were opening fraudulent accounts to meet the company goals resulting in large fines and loss of confidence and customers. (See the note above on” gaming the system”.
Quota Setting Process/Methodology:
Quotas are determined in part by the market, the product/service, and existing performance (if there is any). They can be individual, team, company, or geographic in nature. In sales terms, these goals need to be SMART: Specific, Measurable, Accurate, Repeatable and Timely. Best-in-class companies use some combination of historical sales and territory opportunity. For a high repeat sale environment, historical sales can carry a higher weight; for more of a hunter environment, territory opportunity plays a greater role.
Start with determining if you want the goal to be: Weekly, monthly, quarterly or annually.
Annual: This is basic; you get a number and have a year to hit it. The challenge with this is you must wait a year for a bonus or commission. Benchmarks can be developed to apply a portion of the compensation plan to it prior to year-end. You can use historical data as a goal, and add a growth percent if appropriate
Quarterly: The two most common approaches in quarterly quota are using historical data (current year versus past) or a rolling four-quarter approach. Either can have a multiplier for growth. The rolling four-quarter approach can be unbalanced depending on the business. Sales cycle or seasonality may need to be considered.
Some businesses do what I call a “peanut butter spread” approach where everyone gets the same quota. This can be seen as a fairer method but may not be based on market conditions or business opportunities.
Prior year goal (annual or quarterly) multiplied by an annual growth rate
As previously stated, there should still be an activity component to the goal. This has a bearing on the company’s goodwill, influences selling and non-selling activities, and most importantly, ensure they stay on track with the activities that bring a high level of success.
Also, I believe there should be a company goal or geographic goal in addition to the individual contributor goal. This can be in the form of a stretch goal.
Capped vs Uncapped: Any salesperson worth their salt will say uncapped. But it will depend on the business, the goal, and the focus of the company. One thing we know for sure is that great salespeople are attracted to companies that offer bonuses and escalators at and beyond 100% of the goal.
In finalizing a methodology to set quotas, analytics will determine which method is best. Care needs to be taken not to undermine your compensation plan with a bad quota.
Whatever the answers to these questions are in determining the quota, one thing is for sure… If you are not in a leadership role that has input to this process, you should demand it. If your organization doesn’t have some sort of Salesperson/Manager Advisory panel, you should demand it. You and your team are the boots on the ground and have a stronger understanding or “ground reality” of the market and the customer.
Now you have The Number figured out, how will you communicate to the sales team? Stay tuned for Part Two, The Communication (and how to avoid Lazy Leadership!)