Do's and don'ts to consider while setting sales quotas?
Every incentive cycle, sales leadership and the operations teams face a difficult job of setting fair but challenging quotas. As a company, you want your sales team to meet their quotas but also push the envelope to achieve growth. Quotas play a big role in motivating sales reps to achieve broader strategic business objectives. Depending on the quality of quotas, 3 types of outcomes are possible for the rep as well as the organization.
Quotas generally are a good way to engage salespeople by providing them visibility to the target that needs to be hit. In order for an organization to set fair but challenging quotas the following requirements are critical:
- Reliable historical information at individual territory or rep level is available
- National Sales Numbers can be forecasted with reasonable accuracy
- Reasonable understanding of variation in sales potential across territories
- Selling process is reasonably well defined
Quota Setting Process
Here is a high-level view of the quota setting / target setting process
- Obtain national forecasts and review them for consistency – using historical growth information and any future market changes.
- Collect historical performance information at territory level and analyze for gauging how predictable sales results are.
- Understand incremental sales potential for individual territories (based on potential targets and external market situation) and also align sales resources if required.
Identify the appropriate goal-setting methodology based on the business situation.
- Uniform growth quota
- Equitable unit growth quota
- Potential proportional unit growth quota
- Share growth quota
- Potential proportional share growth
- Weighted index proportion quota
Calculate test period quotas using the identified methodology and estimate factor weights (latest period for which actual sales exist).
Compare test period quotas with actual sales and perform analysis for accuracy and fairness.
- Tweak factor weights after performing fairness analysis
- Set quotas for future period using finalized weights
- Identify communication channels for goal communication. Provide opportunity to front line managers to refine quotas within certain constraints based on local knowledge
Indicators that your quotas are unfair?
Quality of quotas play a big role in motivating sales reps to achieve broader strategic business objectives. For quotas to be effective, comprehensive communication strategy needs to be chalked out. Reps perceive quotas to be fair only when there is transparency around the quota setting methodology, process and local factors are considered as part of the quota setting process. As an organization, there are several indicators that your quotas may not be fair:
- Extreme performance outliers are observed on both the lower side as well as higher side.
- Significant difference between median and average performance. This may be due to performance skew in one particular direction
- Broad mismatch between nation performance and total incentive payout. As an organization, total incentive outflow is more than expected for the current national performance level
- Performance of salespeople changes drastically year over year. Top performers underperform and underperformers overachieve
- "Sales Attrition" or Attrition rate in the sales force is higher than industry standards
- Disproportionate performance such as more than 60% people missing their quotas or majority of salesforce beating their sales quota
Systematic biases such as:
- All territories with larger geographical footprint earning more.
- All territories with higher starting market share earning less.