How can sales management set effective quotas for the sales team?
That question still stumps even the most modern sales leaders. Many end up reverting to one of the traditional baselines:
- Historical growth: Your company grew at 10 percent last year, so the company will probably grow the same amount, and you increase quotas by 10 percent.
- Company needs: Your company needs to grow 10 percent this year, so you increase sales quotas by 10 percent.
- Past performance: Your reps achieved or exceeded quota last year, so you increase their quota to increase performance.
But those strategies make assumptions based on subjectivity and gut instinct. Yes, the first strategy analyzes historical performance, but that’s not enough. Sales management must also assess market opportunity and sales capacity.
“As sophisticated as our sales organizations have become – and as much as we’ve evolved over the years – we still set quotas the way we always have,” SalesGlobe Managing Partner Mark Donnolo told us.
Mark has more than 25 years of experience improving sales effectiveness at Global 2000 companies like like Accenture, Bank of America and Salesforce. He is also the author of “What Your CEO Needs to Know About Sales Compensation” and “The Innovative Sale.”
When we asked Mark about the biggest issue for the sales management teams he works with, his answer was clear: Quota setting is a mystery. We asked him to elaborate.
3 sales management mistakes when setting quotas
1. Not analyzing market potential
According to Mark, about 40 percent of companies use historic information during the quota-setting process. That data helps, but sales management must also evaluate market opportunity and sales capacity.
Examine the demographic factors of your customers. What industry are they in? How many employees do they have? What’s their go-to-market strategy?
Use that information to determine your market potential. How many existing companies fit your customer profile? How many of those could a rep reasonably go after? Combine this opportunity data with historical data to set an appropriate quota.
Quota doesn’t have to be the same for every rep. If you have an experienced rep assigned to a territory with high growth and low market saturation, you might make her quota higher than a less-experienced rep in a saturated market.
You can also grade different territories on growth rate, market share, wallet share of current accounts in that region, competitive intensity and sales rep experience in that market.
Use this exercise to find objective data for assigning sales quota.
2. Setting quota too high
Mark looks for 50-70 percent of sales organizations to be at or above quota.
“If you have less than 50 percent of people hitting quota, then you have a problem,” Mark said.
In fact, many sales organizations only hit 40 percent of quota (or less). Part of the reason is mathematical: Sales management sets quota at the level required to meet the company’s financial objectives (as opposed to actual market opportunity).
The other part is psychological – sales management wants hitting quota to be a real accomplishment for the reps. But if only 40 percent of your sales team hits quota, more than half of your reps think they have bad performance. This fosters feelings of negativity and demotivation.
Why would reps try to achieve a goal when it is purposefully set to be out of reach? Quota should be aggressive, but also achievable.
3. Letting finance take the wheel
Consider the team that sets sales compensation. Typically, it includes sales, sales operations, human resources and maybe finance. But that changes when it comes to the quota-setting process.
“Finance takes the front seat of the car. And sales starts to be driven by finance because investor expectations come from the CEO,” Mark explained.
Finance then decides on a number for the sales organization, making it very difficult to achieve. Your finance department is usually well-intentioned, but they don’t have the same understanding of the marketing opportunity that you do.
That’s why it’s imperative to have clear representation from the sales organization when quotas are being determined. Don’t just let finance give you a number. Explain the research you’ve done into market opportunity and how much you think reps can handle. Create a working agreement around how quota is set so that all departments are satisfied.
Setting quota can feel like a guessing game, but it doesn’t have to be. Use these steps for a more data-driven, transparent quota setting process.