How to Establish Fair, Challenging Sales Quotas
Each year sales leaders are faced with the agonizing task of creating fair but challenging sales quotas. As a sales leader or business owner, the single task of establishing sales quotas arguably wields the biggest influence on the future success and growth of your company. The question is, how high should you set your sales quota? Aim too high and it could lead to disengaged and demotivated employees, aim to low and you miss growth opportunity, overpay for performance and fail to properly challenge and channel your sales force. You want your reps to hit their quota but you also want to challenge them.
In this blog, How to Establish Fair, Challenging Sales Quotas, I’m going to explain why you need to have sales quotas and why sales quotas are good for both management and sales reps. I’m also going to share with you how to create a fair,challenging quota for your sales team.
Why Sales Quotas are Good for Everyone
Sales leaders need to set quotas for their sales people because quotas establish expected performance levels. Sales quotas quantify how effective and to what degree of success the sales rep is performing. As with most major sports, you keep score to determine how well each team is performing and to determine a winner. Sales quotas are similar in that they let sales people know how they’re performing. Sales quotas also facilitate sales coaching and provide a benchmark for improving sales effectiveness.
I have worked with many staffing companies that don’t use sales quotas and I think this is a huge mistake. The problem this creates for the sales person is they simply don’t know where they stand. They don’t know if they’re doing a great job, an average job or if they’re about to get fired. I think it is fair to say that all employees want and expect and certainly deserve to know where they stand with their work performance. Without a sales quota sales reps loose motivation and become complacent. Coming in second place becomes acceptable.
Sales people are competitive by nature and want and need to be challenged. Sales quotas, when set properly, do just that. On the other hand, sales quotas that are set arbitrarily too high can do more harm than good. When sales quotas are set to high:
- Management is viewed negatively by the sales force
- Employees get demotivated and disengage and sales results actually decline
- Companies experience high turnover
- It can drive poor and even desperate sales behavior (who wants to hear from a desperate sales rep)?
Conversely, sales quotas set too low can also demotivate employees and cause them to disengage which can also lead to turnover. Low sales quotas also decrease sales effort and increase the likelihood for overpaying for poor or average performance.
Clearly setting sales quotas is a fine line. How do you arrive at a fair but challenging sales quota?
Methodology for Establishing Sales Quotas
As a sales rep it is important that you understand how management establishes your sales quotas. For the sales leaders out there, it is important that you’re transparent in the sales quota setting process so that your sales reps understand the logic and thought process that went into establishing their quota. After all, there is nothing worse than a sales rep that doesn’t believe in or understand their sales quota. Talk about a recipe to demotivate!
In general, there are two methodologies for determining a sales quota.
Top-Down Quota Setting:
These quotas are a direct reflection of the sales metrics that are most important to the owner, sales leader and/or board of directors. These quotas are typically set without any collaboration from the sales team. Common considerations that go into a top-down quota include:
- Past Performance: Leadership looks at the performance of each rep from the current year to establish the following year’s sales quota. For many staffing company’s, this is the only data element that is considered and for many more, this data isn’t even considered.
- Market Growth: This is often the basis for rapidly growing companies and/or companies operating in a rapidly growing market. Unfortunately historical growth rates often don’t translate into accurate or fair quotas.
- Investor or Owner Expectations: CEO’s and sales leaders (and sales performance) are judged on beating expectations set by the owners and/or investors. They expect a return on their investment within a certain time frame and therefore (right or wrong) sales quotas are set accordingly.
Bottom-Up Quota Setting:
This approach to quota setting is driven from the rep and the manager, hence the name, bottom-up. It implies that the sales leader collaborates with each of his or her reps to establish a fair but challenging quota. Following this quota setting methodology often includes tasks such as the following:
- Market Share/Territory Potential: This entails understanding the total addressable market (within a given territory) and evaluating your market share and then determining a fair and reasonable expectation for how much market share can be attained in the coming year. Territory potential can fluctuate based on your ideal target market. For instance, the Seaport district in Boston is loaded with very large, enterprise companies but just a few years ago it was mostly smaller companies or no companies at all. Depending on your target market, this territory could represent a massive increase or decrease in one’s territory potential. While this is an extreme case it illustrates the point that territories can rapidly change.
- Company/Service Maturity: How established are you in your market? How established is your staffing offering (and your staff) within that market? If you’re new to staffing and/or your market, gaining traction can take time where as a more established offering will likely have a more consistent, and predictable flow of revenue growth.
- Account Planning & Opportunity Mapping: In instances where your rep or reps are managing a large key account (or a set of large, key accounts) you will want to uncover the total spend, buying cycles and purchasing habits to establish a reasonable quota.
- Selling Time Bandwidth: Opening new accounts and driving revenue is directly related to the time available to pursue new leads, accounts and opportunities. You really need to determine how much bandwidth or capacity your sales reps have to focus on selling. Or better yet, how much time is spent on non-selling activities? If you have a rep who currently manages a large account with 500 or 1,000 different hiring managers to sell to and they personally have 60 contractors on billing, you will need to factor that into their sales quota.
The key takeaway with the bottom-up approach is that the process for establishing the quota is collaborative between the sales rep and the sales leader.
Seven Additional Components Setting Sales Quotas
1. Customized Quotas by Rep, Territory, Skill & Experience Level
No two sales reps are alike so you shouldn’t be assigning a “blanket quota” to your entire sales team. Sales quotas should be customized to each rep based on their past performance, their skill level and experience and tenure with your company and/or selling your product or service. You also need to consider their current book of business and/or their sales territory. You also need to keep in mind that sales territories have inequities. For example, your sales rep working an opportunity-rich territory or account may be your top producer bringing in big numbers but they could actually be under performing based on the additional opportunity they're missing. Conversely your chronic under-performer may actually be overachieving in a poor or weak territory (although this is mostly common with reps working a named account list). My point is, your superstar may not really be a star and your under performer might actually be one of your best reps.
2. Align Sales Quotas with Company Goals
As with your sales compensation plan, your sales quotas should be in alignment with your company goals. If your goal is to increase the bottom (net profit) than you don't want your sale quota tied to new revenue or revenue growth or total number of placements. Or, if your goal is to drive net new revenue from new clients than you just want to make sure the quota is tied to that and not total or cumulative spread (gross profit attainment). Whatever your high level company goals are, your sales quotas should follow suite.
3. Engage Your Sales Team
As I alluded to in the section above under the “bottom up” approach, it is important that you collaborate with your sales team during this process and get their input. Ask them how much they believe can be sold in each of their territories and why. Dig in and find out how much they know about their territories and their customers. The degree to which the sales rep understands or possesses territory and customer knowledge should play a role in their involvement with quota setting. The more customer knowledge the rep possess the more involvement they should have.
4. Sales Win Rates
Instead of picking a quota out of thin air, you should let your data do the work for you. If you’re not already using sales metrics to objectively assign sales quotas you should be. Sales leaders (and sales reps) should have a keen understanding of their rep’s sales effectiveness. One such metric is understanding sales win rate percentage. When establishing sales quotas sales leaders need to take into account the sales reps win rate percentage. This will give you the insight you need to determine exactly how many orders each rep will need to generate in order to meet their sales quota. Using sales win rate percentage allows you to do this objectively rather than relying on “gut feel.”
7. Sales Cycle
Similar to understanding and accounting for each of your sales rep's sale win rate percentage, I also suggest you consider the length and frequency of your sales cycle.
6. Pipeline Review
Review each of your sales rep’s sales pipeline. This data should project what their bookings revenue will be at the end of a measurement period. Be sure to factor in the sales rep’s sales win rate percentage. Analyze what deals are forecasted to close and how likely they are to close. By combining your knowledge of the rep’s effectiveness and their pipeline, you and your sales rep can make an informed decision as to what a fair but challenging sales quota should be.
What you don’t want to be doing is ask your rep “how do feel about your pipeline” or “what deals do you think will close” because this is completely subjective. Your reps will naturally be overconfident. So take the guesswork out of the process and eliminate subjectivity and instead rely on objective data.
7. Reverse Engineer Your Quota
The sales leader and sales rep need to take the time to do the due diligence to really understand the level of activity and level of effectiveness needed meet quota. Again, this should be a collaborative process. For example, imagine your rep’s quota is $500K in gross profit. You will need to determine the following:
- What is my rep’s average deal size in gross profit dollars?
- How many job orders need to be filled to hit quota (given sales win rate %, how many job orders does the rep need to generate each week)?
- To recognize that revenue for quota attainment, how soon within the calendar year does the rep need these consultants actively billing?
- How long (number of days) is the rep’s average sales cycle?
- How many unique (different) buyers (hiring managers) does the rep need to actively qualify, nurture and convert? How many of these buyers can the rep expect to get a job order from?
This is what I mean by getting into the details and reverse engineering your sales quota.
Finally, keep in mind that if your company is looking for 20% growth, it doesn’t mean every rep or every territory needs to grow by 20%. Some reps or territories may need to grow by 8% while others need to grow by 11%. But this is what the sales leader should be figuring out.
By applying these tips you can gain greater alignment between your corporate goals, your sales process and your desired sales behaviors. You can also gain genuine buy-in from your sales reps which will drive improved sales performance and employee retention.
To learn more about sales coaching and empowering your people take responsibility for their own actions and results-including their sales quota, download our eBook, How to Create a Culture of Accountability Through Coaching and Empowerment.