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Arguably the biggest challenge sales leaders face, year-after-year, is sales quota allocation. Even with the absolute best sales compensation design plan, a poor quota allocation methodology can ruin it all. This means that determining accurate and effective quotas is of the utmost importance, but it is also one of the biggest pain points for many companies. You may think that after many consecutive years of quota allocation, eventually the process would be tuned to perfection and produce a mutually beneficial outcome. However, this is rarely the case.
Quota allocation is both a science and an art. It is open to criticisms and flaws from every angle and has the potential to create tense, charged work environments. This is why setting quotas must be done meticulously and deliberately. Source.
What is a quota and why is it important?
Quotas are an organization’s sales targets, which can be specified in terms of money or quantity of products. This is tracked within a period of time, generally monthly or quarterly. Quota allocation is the process of distributing specific quotas to individuals or certain groups within the company in an effort to collectively reach the overall company goals. Quotas can be allocated based on territory or product.
Although sales quotas can be tricky to execute, there is a reason it is such a popular tool among companies. Not only do these benchmarks create accountability and motivation for sales representatives, they also provide the best measure of current sales results and potential future opportunities. This data can be used to recognize success and progress, and determine opportunities for improvement.
On the other hand, if quotas are poorly set, it may actually backfire for your company. If quotas are set too high, morale within the sales organization may diminish as hope of reaching these milestones is lost. Additionally, this may cause rapid sales rep turnover and unfair influence from high performing sales reps. The relationship between risk and return becomes unbalanced.
Now, if quotas are set too low, this can also easily demotivate sales reps. Once quota is reached, there may no longer be an incentive for sales reps to continue working hard and making sales. Certain sales compensation plans are more susceptible to this flaw than others. Find out more about the different types of sales compensation plans.
How to allocate sales quotas for your business / sales team
As we have discussed, determining sales quotas needs to be done very deliberately. However, this can seem daunting, so we are here to help. Simply taking last year’s numbers and adding a flat percentage will not cut it anymore. Historical data can be a great place to begin this process, but it cannot be the only determinant. Source.
But what if you are a new company so you don’t exactly have last year’s numbers as a starting point? Most sales teams when they first begin go for a “flat quota.” This means that all sales reps are allocated the same amount. The idea is that everyone should essentially be on an even playing field at the start, and there are no pre-established limitations within a territory. At that point it is simply survival of the fittest.
Regardless of the age of your business, there are a few simple actions that should be taken each year to establish effective quotas.
1. Ask questions and collect data.
The very first step should be to nail down your company’s sales goals and be realistic about the future. Ask questions like, what is the potential for growth this year? What is a reasonable revenue goal? Where is the economy likely going? Additionally, more company specific questions should be asked: Are quotas tailored specifically to each rep? Are the roles of each rep the same as last year (if applicable) or have they changed at all? What is the potential for each territory and/or is it time to consolidate or split up certain territories?
2. Dive deep into the potential of each territory.
This concept was brought up in the questions above, but this is truly one of the most critical steps in quota allocation. Every territory is different. They have different growth potentials, challenges, and histories. Without consideration for these differences, it may create an unfair advantage for certain reps. Important qualities to look for in determining terrority potential include: number of possible accounts, number of businesses, typical sales to those businesses, and demographics.
3. Confirm your goals are aggressive but realistic.
Ideally, you want at least 60% of sales reps to meet and/or exceed their designated quota. This will keep your business progressing and striving for high revenue, without discouraging sales reps. If thresholds are set too high, as we have discussed, motivation can be destroyed. However, you also don’t want to miss out on potential areas of profit, so that is why 60% is an ideal marker for overall company wide sales goals.
4. Make sure quotas are communicated effectively to all reps.
Lastly, communication is often overlooked as an important step in sales allocation. By now, the difficult work is done, but in order for the quota system to work, reps must fully understand the details of their assignment and the reasoning behind them. Having thorough documentation will be very beneficial to do so.
In order for reps to feel their quotas are reasonable and attainable, it is crucial they know how they have been determined. Use these details to guide an open, unbiased discussion with each representative. Participation from sales reps in the quota allocation process boosts confidence in achieving quotas and promotes transparency. This in turn may also lead to adjustments in quotas, depending on the situation.
Once a quote is “determined” in many cases this is not the end result. The process of implementing a sales quota is often more of a feedback loop, than a linear practice. Typically, first a quota is created, using the concepts laid out above. This is done by the sales manager or management team. Next, the quota must be approved by the necessary personnel. This is where it often becomes a cyclic process. Feedback from these approvers may result in changes being made, or managers heading back to the drawing board. Similarly, the next step of allocating the quota to the sales reps likely will result in alterations to quotas. This is when sales reps receive a sales quota agreement which is the official documentation for their expected targets.
After review, sales reps may provide input, which again may lead to adjustments. Eventually an agreement should be reached by all. Finally, the quotas are activated and the sales team can hit the ground running.
Different types of sales quotas
Taking a step back, let’s briefly review some of the different types of sales quotas a management team may choose to implement. There are six main types that are commonly used today, each with their own advantages and disadvantages so it is important to really consider what will be most beneficial for your specific team. Source.
1. Activity Quotas
This is used as a way to track progress and productivity for salespeople who are not necessarily responsible for closing deals. Commonly used for BDRs or SDRs, this system tracks the amount of activity the employee has done. This can be anything from sending emails, scheduling emails, making phone calls, or leading demos.
2. Volume Quota
This type of quota focuses purely on quantity of sales. There is a target for the number of sales to be made within a particular time period, which the rep is striving to obtain.
3. Profit Quota
A profit quota is set so that an individual sales rep must bring in a designated amount of gross profit or margin for the company within the specified time by selling their particular product(s). This is calculated by taking the differences of the revenue made and the cost of goods sold.
4. Combination Quota
It may be beneficial for sales reps to have smaller milestones to strive for, instead of one final target. In this case a combination quota should be used, which can combine other quota types together, such as an activity quota plus a profit quota.
5. Forecast Quota
Forecast quotas take into account the historical data of a territory or a team. From this an ambitious, yet realistic revenue goal is set.
6. Revenue Sales Quota
This is similar to the profit quota, however in this case the gross revenue is considered so the cost of goods sold is not accounted for here. Unless your company is working on a very small product array, this concept will likely be a bit too simple, but can be a great starting point for a combination quota type.
Time to start allocating sales quotas
In summary, setting up sales quotas carries a lot of weight in the success of your sales team. They have the potential to drive business to new profit levels and invoke a sense of drive and urgency in salespeople. However, if not executed with care and understanding, quotas can be the downfall to your sales department. Using the tools and framework we laid out above, you should be ready to begin your sales quota allocation process.
Make sure to ask questions, collect data on the potential of each territory, make realistic but aggressive goals, and make the process collaborative between groups by considering outside feedback and being open to adjustment. Remember, sales quota allocation is a science and an art so it is rarely “perfect” but it is an extremely powerful tool to drive sales productivity when used effectively.