Quota Setting, Deconstructed.
November 09, 2018
What is Quota Setting?
Quota setting can be described as one part numbers, one part experience, and one part intuition. So how do you concoct the most accurate methodology of setting sales quotas in an ever-changing market, industry, and sales organization? Three major components are accurate top-down modeling, managing by exception, and padding quotas.
Top-down modeling means that companies have a topline number that they want the sales organization to reach, and managers are given the flexibility to assign quotas for the sales team to attain, based on managers’ tribal knowledge. If a company made $4.5 billion last year, the finance department may take data on market conditions as well as the company’s growth trajectory to project a goal of $5 billion for this year. Sales managers are the ones responsible for developing a plan to meet that goal.
There are three ways to set a quota based on top-down modeling:
1. Calculate percentage of Total Addressable Market (TAM)
2. Tally historicals and add an uplift
3. Roll some dice
These scenarios involve both math and gut feelings.
1. Total Addressable Market (TAM) – In this calculation, the value of the entire market for the industry or product line is calculated, and the quota is set as a percentage of the entire market that the company can capture. For example, a corporate coffee company would base their TAM number on the total amount of money they estimate office buildings would spend on coffee in the upcoming year. Based on the estimated percentage they expected to realistically capture, this company might calculate that in a $100 million market, they could realistically capture 1% or $1 million.
2. Historicals with an uplift - Often companies will use revenue or other sales data from the previous year and match it with growth goals by business unit or product line. For example, if a company made $1 million in revenue the previous year with a growth trajectory of 15%, they would calculate a sales goal of $1.15 million for the upcoming year. However, this does not mean a company has to stick with The Way We’ve Always Done It. Every year deserves a fresh look at the numbers, team, and sales landscape for context to set the right quota.
A top-down calculation may get the end goal set at a specific number. However, it’s up to the sales managers to get the sales team to hit that number. This is where managing by exception comes into play.
Managing by exception
For the most part, the top-down number is calculated by the finance department using fancy algorithms and old-fashioned number crunching. However, the magic of accurate quota-setting is very subjective and comes from the sales managers who receive these numbers. They have the knowledge to recognize and consider special situations - the ability to see from the “bottom up”, per se.
For example, it may not be realistic for everyone on a sales team to hit the same goal. There could be a duo of salespeople who made a very large sale last year, but the sales manager knows that it’s not likely to happen again this year. They would then need to spread the quota across the team instead of relying on the one-hit wonder superstars. Sales managers know the pipelines well, so they will set goals across the team that are realistic. We advise that managers set goals that accept 90% of the top-down number across sales team members and leave 10% to be set at their discretion.
For one of our B2B clients, managing by exception was their lifeline for a healthy sales trajectory because of the short lifetime value of their products. In a highly innovative and rapidly-changing industry, product lines would get phased out quickly and sales managers would avoid putting an overemphasis on products that were no longer relevant in the market. Sales managers managed by exception by holding their team members to smaller percentages of the top-down revenue goal for specific products and leaving the rest of the quota to be achieved through new products released during the pay period.
Though managing by exception gets sales managers thinking about ways to distribute quota accurately among team members, an extra measure that most (if not all) sales managers take is to pad the quota.
Padding the Quota
Once goals are set, sales managers need to determine how to get the whole team there, for the greater good of the team as well as to ensure his or her own personal performance. This is often done by over-allocating or “padding the quota” at the sales rep level. Then, even if one rep misses quota, the whole sales organization won’t miss the overall team or regional goal.
This may be done by assigning an additional amount (for example, 5%) to every individual’s quota so the team’s goal has a padding of 5%, or padding individual quotas in different amounts across the team hierarchy so that the team goal has an overall padding of a certain amount. In the second case, we often find that quota gets padded more at the bottom of the hierarchy meaning that the lower performers have the most padding, while the rainmakers are expected to make their numbers.
Setting accurate quotas and meeting them takes careful planning and the ability to move quickly, as well as the technology to acquire accurate data for precise forecasting. Sales Performance Management (SPM) technology is one of the strongest enablers of attaining quota, especially in environments with high turnover or quickly-changing markets. Consider what functionalities are needed to rapidly and accurately set quotas for optimal sales team performance, and discuss the tools out there that can meet your needs.
Some final tips:
- Fit your quota setting approach to the situation. One approach may not fit all types of accounts, teams, or market situations. Be sure to keep a pulse on the pace of change in your sales landscape to ensure that your quota setting methodology is able to adapt in time.
- Involve the right teams to set the quota. Quota setting shouldn’t just appear from a siloed team. Bring in each stakeholder to set a fair quota, including the sales management team who has a view from the ground, as well as finance and sales operations teams who may have better views of market conditions and the sales team’s historical trends.
- Consider your sales team’s capacity. Taking into account the market opportunity needs to be tempered with a realistic view of your sales team’s capacity to reach the quota. If you don’t have enough reps to cover all the total addressable market, it may be wise to consider hiring and ramp-up time into your team’s quota-fulfilling potential.
- Make your quota setting approach scalable: Whenever possible, keep your quota setting methodology simple so that as your organization grows, the quota setting approach can grow with it. Don’t make the rules so complicated that in a few years, the approach no longer works.
- Don’t over, over-allocate the quota: Padding the quota is one way to keep sales teams on track, but be sure to keep it in perspective in order to keep the sale’s team morale up. If the CFO reports that the company is on-track for revenue but the sales team is chased down for not hitting quota, discouraged sales reps may jump ship to a company with more attainable goals.
Have questions or thoughts on quota setting? We want to hear from you! Email us at firstname.lastname@example.org.