What is a Sales Quota?
November 21, 2019
A sales quota is a sales goal, sales target, or minimum sales level that a sales entity - team or individual - aims to achieve. Sales quotas are typically time-sensitive - set to be reached monthly, quarterly, or yearly - and can be measured in dollar amounts or units sold, or even as specific as number of new customers, or through activities like product demonstrations.
Types of Sales Quotas
Importantly, there isn’t a one-size-fits-all quota solution. Instead, to maximize sales performance and fit organizational strategy, quotas can take many shapes and sizes.
Direct quotas are reserved for sales reps who play a “front line” role and have the power to impact a quota in their hands, and the responsibility to achieve quota on their shoulders.
Something like new business quotas could be a direct quota (which would be set by looking at a historic average selling price and conversion rates over a period of time). Another could be existing customer quotas (which is a bottom up summary of expected revenue based on past or committed performance, such as a renewal, plus any incremental sales sold during the quota period).
As the name suggests, overlay quotas sit on top of direct quotas, but are better explained through the fact that they’re a sum of all of the direct quotas under them. For example, a sales manager has an overlay quota, which is the sum of all of the rep direct quotas under them. Likewise, a sales VP holds an overlay quota above that sales manager, and so on.
Importance of Sales Quotas
In a general sense, we all know the importance of goal-setting, and that giving someone something to shoot for usually produces better results than just having that same person roam free in their endeavors.
Sales, of course, is no different, and the sales quota is that big visible number out there for all to see. Depending on a salesperson’s pay mix, and the amount of on target earnings they have “at risk,” quota draws the line in the sand and sets the attainment expectation of where a salesperson would want to find their performance at the end of the period.
When you miss the mark with quota setting, expect channel conflict, ownership confusion, and salesperson disengagement. Further, it’s not just that the sales person isn’t motivated to sell—rather, a discouraged mindset will lead to less sales in the face of a plan perceived to be unfair and unattainable. The ultimate result is missed targets not only for the salesperson personally, but if the goals are tied to strategy as they should be, missed targets for the organization as well.
Sales Quota Tips
Given how powerful sales quotas can be, there are many ways to miss the mark. Here are a few things to keep in mind with your quota setting activities.
1. Quotas should match sales activities
Think about retail sales incentive programs, where employee motivation is a critical success factor. Tying quotas to something like gross margin wouldn’t make much since salespeople don’t have any say in markups or discounts. Thus, no matter how hard they try and no matter how many skills they possess, they might never reach their goals.
2. Quotas should reinforce positive behaviors along the way
Meaning, while quota is the ultimate end goal, salespeople shouldn’t be encouraged to cut corners to get there. Sticking with the retail example, if the quota is built around driving sales from existing customers, salespeople are encouraged to build solid customer relationships, which in turn should increase the probability of repeat buyers.
3. Quotas should be built together, not handed down
Quotas shouldn’t appear out of thin air, handed down from management after a few closed doors meetings. Instead, there should be discussions including sales about what they’re seeing and experiencing in their different territories, along with input from sales ops and finance who have the best perspective on historical trends and market conditions. When everyone knows what’s in the recipe, it becomes a lot easier for the chefs to cook.
4. Yesterday’s quota should be left with yesterday’s sales attack
“It worked last year” is not a sound strategy. Especially when there are so many variables in play, rolling quotas over from period to period without taking in the current landscape is a mistake. At the very least, an organization’s goals are going to be continuously changing - or should be - and thus, quotas should be adjusted to match.
5. Yesterday’s quota shouldn’t determine today’s quota
To go along with the above, past performance isn’t an indicator of future results. While you might think you’re doing the right thing in making your star rep’s quota incrementally more challenging, you need to stop and think about the different factors at play.
For instance, if an individual is responsible for bringing in new business in a given territory, and end up crushing it this period, it doesn’t mean they should be expected to have the same success the next. In fact, you can argue they are going to have a tougher time given that there is now less opportunity. Of course, this is a simplified example of one single variable of many, but you get the point.
In the end, setting your quotas - both the process and end result - should be a well thought out and planned process to achieve the accuracy and motivational impact you’re striving for. Sales Performance Management (SPM) technologies are key to tracking historical information on sales performance to determine appropriate and effective quotas.
For more reading on quota setting, including how to pad a quota, jump to our quota setting blog.