A Complete Handbook to Defining Sales Quotas

Designing and setting sales quotas is one of the most significant responsibilities for the commercial leadership team of any business. Creating an effective sales quota model is critical in deciding whether a sales team will be successful. You’ll have a highly motivated, successful sales team pulling at the leash if you get it right. If you get it wrong, you’ll have constant pressure from the business and staff heading for the door.

Designing a sales quota framework may be the responsibility of the sales management, but other functions often feed into it. The finance team needs to ensure that it’s financially viable and supports the financial objectives of the business. The marketing team will want to ensure it supports the sale of the right products to the right audience. The CEO will want to ensure it keeps the business working together harmoniously and helps the company's strategic direction.

Let's look at what makes for a well-designed sales quota model.

So, What’s a Sales Quota?

This might seem an odd question to ask, but as we’ll see, the term “sales quota” can mean different things to different people. Clearly, for many, it specifies the sales revenue target for individuals over a month, quarter, or year. For others, it may cover a range of other metrics, defined by activity levels or other outputs. For some, it might be a mix of financial and non-financial targets.

The Significance of Sales Quotas

With all the activities involved in sales management, it’s easy to forget the importance of sales quotas. It’s worth taking time and care in setting them. A business’ sales function is where the “rubber meets the road” and where all the effort invested in product development, manufacturing, distribution, marketing, and much else comes together and begins to pay off.

The quota model performs an important function for sales managers too. It crystalizes how they’ll execute the go-to-market strategy and apply the sales process to their target markets.

Types of Sales Quotas

Some have argued that salespeople are “coin-operated.” While only telling part of the story, it does point to the value of enabling salespeople to create their own success that goes to the heart of having potentially extremely rewarding sales quotas in place. Quotas have the significant benefit of allowing the business to define what success looks like and showing how a salesperson can maximize their own success and development.

What options do you have?

1. Revenue Sales Quota

The revenue sales quota is probably the most common quota model businesses use. Sales reps are paid to achieve revenue goals. Here, revenue can have many definitions. It may mean any revenue that comes in from a sales territory. Alternatively, it may just be defined by the product revenues or services revenues – or a mix – from a defined territory. Other revenues, such as support or contract renewals, may not qualify for quota recognition at all, depending on the priorities in the business.

2. Volume Quota

Using volume to define sales quotas is best used when sales reps promote products and services that are clearly defined, such as automobiles, domestic appliances, or foodstuffs, for example. In this model, sales managers set sales quotas based on sales volumes instead of revenue, which is easy to understand, measure, and monitor for everyone. It offers scope for kickers and bonuses to be paid out so a sales rep can be managed and motivated in the same way as another paid under a different model.

3. Activity Quota

Setting activity levels and outcomes as a measure of sales success may seem odd, but the right sales team might be the ideal motivator. A sales organization is typically made up of a range of different sales teams, each with distinct roles and responsibilities. These can cover sales account managers who look after the existing commercial relationships. New business teams look after developing and converting new customers. Both these teams are typically quota’d on sales revenues. Business development teams support their account managers and new business sales teams by responding to sales inquiries and following up on sales leads. A business development sales rep won’t generate revenue directly but is a key person in the sales process and needs to be motivated and rewarded in a way that parallels their colleagues in the other sales teams.

Activity-based quotas will measure, for example, the number of meetings arranged or leads converted into opportunities. Other metrics might include the number of people encouraged to attend a webinar or event or who trial a product or service.

4. Profit Quota

In some sectors, sales teams are measured by margin rather than a pure revenue figure. Where an offering is made up of a range of elements from other businesses, whether it be distribution, training, or marketing, for example – all of which come with a cost – then targeting a sales rep simply on total revenue is likely to land the business with a large volume of unprofitable business. Instead, companies could focus on setting profit quotas and rewarding their salespeople based on the profit margin generated by the deals they close.

5. Forecast Quota

A forecast quota is a sales quota that uses the previous results in a given sales territory to define the sales quota. This might be used where a sales quota target is difficult to define or predict, especially if a product is subject to variables like the weather. Here, past performance is used as a guide to future business performance, and it can be a practical way to calculate sales quotas in an unpredictable world.

6. Combination Quota

A combination quota will use a mix of these metrics to set quotas for a sales team, depending on their role and objectives. It might be a mix of revenue, arranging a number of meetings, or running a series of marketing campaigns. Combination quotas might be used where sales reps wear multiple “hats,” whether account management, new business development, or marketing. This isn’t unusual in small or growing businesses.

What Kind of Sales Quota is Best for You?

Clearly, sales managers have a range of options they can use to set their sales quotas. A successful sales quota plan depends on having a solid grasp of the detail involved in designing, implementing, and managing a quota scheme for a sales team. A well-designed and well-implemented quota model is far more likely to achieve its objectives.

Let's explore the types of measures that might be detailed in a sales quota.

Input Measures: Sales Activity Metrics

As we've already touched on, sales activity metrics can be beneficial for those involved in the earlier stages of the sales process. Sales managers need to think carefully about the detail of which activities are the most valuable to the sales process and the business.

Let’s say that a business development team has the responsibility of encouraging people to attend events and webinars. Should sales managers task members of their business development team to target those who attend an event or merely register for it? Having people attend an event is more valuable to a business than having them simply register for an event - it shows more commitment from a prospect. So, it might be better to set quota based on attendees rather than registrations for events. However, you must decide how to manage the detail of activity-based metrics. They need to be clear, consistent, and easily understood. The last thing a sales manager wants to address is a host of queries and disputes about results. While it’s unwise to redesign a quota model mid-year, there’s scope to offer additional incentives throughout the year to fine-tune the model.

Output Measures: Sales Metrics

Using sales revenue metrics to assess and measure sales success is a straightforward model for motivating a sales force to push for yet greater success. But here again, the details and sales success metrics need to be biased towards the wider business needs. If the focus is on building the business, any revenue - new or recurring - will be welcomed and should be in the quota plan. If there are revenues that require little sales involvement, such as warranty or support renewals, then you might want to think about excluding those types of revenue, as the sales commitment involved should ideally be limited. But remember to be sensitive about the impact of removing some revenue definitions from the quota plan. If sales reps aren’t rewarded on some transactions, they’ll likely simply ignore them. They’re paid - and retain their jobs - based on their sales performance measured by quota achievement. Their behavior and focus will be strongly influenced by what revenues they’ll be recognized and paid on.

Input and Output Measures: Lead-to-deal Metrics

There’s scope to add sophistication to sales quota models by recognizing that it’s a process that needs to be managed well end-to-end if it’s to be successful. Modern sales management CRM systems allow for leads to be tracked throughout the sales process, from website visits through to lead, opportunity, and hopefully a successful close. Sales managers can see how long it takes for leads to be converted into opportunities and then into customers. Clearly, there’s an incentive to make this process as smooth and as slick as possible so that the sales and marketing investment can be realized as soon as possible. Putting metrics in place to reward this swift transition in a quota system will encourage sales reps to focus on converting leads into customers in the shortest time. The smart move is to recognize that deals closed in the ideal “sales window” should attract a higher quota recognition than those that take longer.

How to Set Your Sales Quota

What are the practicalities involved in setting sales quotas? What should a sales manager think about? Let's look at this in more detail.

Step 1: Determine Your Starting Point

The first step is to define your starting point, both in terms of the metrics you want to use and the absolute values that a quota attracts. We’ve already touched on ensuring you have the right metrics in your quota, which serve to align the motivation of your sales team with the needs of the business. You can use the historical values for your metrics – covering the last two or three years at most to define your quota floor for a specific metric. You can then add an uplift to these values to cover the growth you need. This historical information will be found in a range of finance, CRM, and marketing systems and will serve as the foundation of an effective sales quota creation framework.

Step 2: Start at the End and Work Backwards

With a clear view of the sales metrics and a base quota model, the next step is to understand how you want the business to develop by your sales year-end.

As we touched on at the beginning, there are strategic aspects to quota setting, so part of a quota model will feature the direction the business wishes to be taking in 12 months’ time. For example, rather than simply selling products to customers, the business may want to transition to a solution selling model, where products and services are combined to solve a business problem. Your quota model might need to reflect this.

Equally, there are tactical considerations too. The business will look to generate enough revenues to cover its costs and create a level of profit that justifies investments in previous years. There also needs to be an element of “coverage” so that if the quota isn’t achieved by senior management, then the situation isn’t detrimental to the business, merely disappointing.

A further consideration is to align territories and quotas so that each territory carries a quota that’s achievable, even if challenging. It’s all too easy for sales management to align its quota based on its sales costs, rather than the realistic opportunity in a territory. Using territory planning analytics, sales managers can be more confident that their territory coverage and their quota coverage models are both based on hard data. This makes both quota achievement and business growth more likely.

Step 3: Establish Activity Objectives

Where activity objectives are seen as key to supporting and enabling the financial metrics of the business, the same logic applies. Understand what levels of activities – meetings, events, webinars, digital campaigns, and so on – have led to the current level of success and build the activities quota model, depending on the end state the business needs. Again, this information will likely be found in your CRM platform, your marketing system, and your content management systems.

Some Practical Considerations for Quota Setting

It’s easy to think that quota, once set, merely becomes a scorecard, measuring who’s successful and not. The reality is that quota can be used as a management and development tool, much like a sales kick-off meeting, sales training and product training sessions, and a high-end Quota Club event.

Here are some considerations for getting the most of your quota model.

Sales Quotas Should Stretch but Not Demotivate

The ideal sales quota should be stretching to be challenging. It should be based on the opportunity available, supported by industry insight and analysis.

Measure, Enhance, and Reward Performance

Sales quotas can be used as a management tool to help identify and reward those who are successful. It can also identify those who need additional support. This support can come from sales training or product training but can also cover additional marketing support such as digital marketing campaigns, webinars, events, or telesales support.

Use Business Modelling to Optimize Your Quota Model

There’s a wealth of data available to you, within your own business systems and from external sources that allow you to model your sales territories and your quota plan to find out which combinations of all the variables will work best for your business. Use “what-if” scenarios to balance the conflicting demands of the business and demonstrate to your sales teams that their targets are realistic and achievable.

Varicent offers a range of proven and robust quota modeling and territory planning solutions that are designed to optimize your sales process and maximize your revenues. Learn more or book your demo now.