A friend in the process of starting a new business recently sent me an email, asking, “How in the world do I set sales quotas?” For anyone who hasn’t done this before, the answer can be fairly elusive. Setting quotas is a blend of art, experience, and data.
Before you start, make sure your sales compensation strategy is in place and properly grounded. Be crystal clear about how sales performance links to the goals of the company. There should be an appropriate balance between base salary and sales commission, with no more than 50 percent of compensation tied to base for individuals. Give plenty of “upside” for overachievement. Importantly, make sure your overall compensation plan is uncomplicated and that everyone is clear on how it works.
Typically, earned commissions are tied to attaining an annual (or quarterly) sales quota. So – how DO you set those quotas? Here are four methods to consider – a combination will probably serve your needs.
1. Examine existing sales force productivity
Look at the existing productivity of your sales force. Don’t make the mistake of expecting heroic performance much beyond that. As a reality check, understand that less than 60 percent of all sales people made their quotas in 2018, according to The 2018-2019 Sales Performance Report from CSO Insights. Your results may differ – but probably not by a lot.
If you have an internal benchmark from prior years that you’d like to use, start with that. Then set the sales goal 5-10 percent higher than existing productivity.
2. Use your P&L as a guide to setting quotas
Sales representatives should achieve the company’s goal first, on the way to their own – there’s a good balance to that.
I recommend that you set quotas at 105-110 percent of your business’ most recent profit and loss statement (P&L). Practically, that means that if your P&L requires $1M from each salesperson to achieve your “stretch goals,” you should set quotas at about $1.1M each.
3. Align quotas with your direct competitors
If you know the types of quotas that your competitors’ sales reps carry, you may want to use that data as a benchmark for your own sales team. One technology company that I’m familiar with explicitly uses competitive data as a part of its quota setting process; they set their own quotas 10-25 percent higher than competitors because of their strong value differentiation.
4. Build your sales quotas from scratch
You have plenty of data to build your sales quotas from the ground up:
- How long does it take to sell a widget?
- What does a widget sell for?
- How many proposals are generated each month?
- What’s the close rate on proposals?
- How many widgets can one guy sell given the assumptions in your KPIs?
- What is the resulting widget revenue per month, quarter, year etc.?
Set quotas as a +10 percent or so stretch on that, and adjust each quarter as results come in.
A word of caution about setting sales quotas
I’ve been in organizations where the finance folks want to crank up quotas to save on commission dollars – don’t let them persuade you that this is a good idea. Artificially high quotas will cause smart salespeople to leave. Instead, err on the more conservative side of your goals within your P&L.
Your role as a Leader
As a leader, you have to be willing to adapt. Your company may experience a blip in the market – or a coronavirus pandemic – that makes reaching sales quotas impossible. So in extraordinary circumstances, you just may need to make changes to your original plan and rethink how to set sales quotas, if you want to keep your team.
Are you having difficulty breaking through to the next level in revenue growth? Could you use an experienced, outside perspective to diagnose your sales issues and build a plan to address them?
Sometimes, you need a guide to find the right path forward.
Sales Growth Advisors provides outsourced sales leadership services for small and mid-sized businesses – so your sales engine runs the way it is supposed to.