David
Berger

Sales Manager's Guide To Establishing Sales Quotas

Accurate sales quotas can hep predict your future business, motivate your sales team and serve as the basic for a solid sales compensation plan. The key word here is "accurate," which requires that you consider the seven factors identified in this Sales Manager's Guide To Establishing Sales Quotas. 

The process of establishing normal and reasonable sales quotas can vary greatly as a function of the business, industry, type and size of the sales organization, and product and/or service being sold. However, there can often be a great deal of commonality in your approach to this important sales-generating tool.

Let's examine some of the basic criteria you need to consider to ensure the effective establishment of sales quotas:

• Corporate revenue goals
• Historical revenue performance
• Current sales coverage model
• Planned increases in sales headcount
• Introduction of new products and services
• Current market share
• Stretch targets

Corporate Revenue Goals

This seems to be the likely starting point for the establishment of sales quotas. Most often, the sum total or "roll-up" of your individual sales team members' quotas will either meet of exceed the corporate revenue goals for any given fiscal period. It is quite possible that, under certain exceptional situations, they may not. However, for our purposes let's assume that they will be on par.

One of the challenges that you will face in this process is the fair and equitable distribution of the overall corporate revenue goals, including any year-over-year increases. Over- or under-weighting any individual sales quota could produce undesirable consequences such as sales attrition, underutilization of resources and income disparity. Therefore, as you begin planning your sales quotas, it is important to have a clear understanding of your company's revenue goals and the extent to which they will affect this process. A member of your executive team can provide you with all of the necessary data.

Historical Revenue Performance

The historical performance of your individual sales team members versus quota, and the respective "roll-up," is also an important consideration to make when establishing sales goals. There will likely be a number of factors that can cause disparity including, but not limited to, their territory configuration, sales experience, job tenure and competition.

A close scrutiny of historical revenue performance data on individual sales territories will be a valuable tool for you to utilize. Not only does is afford you the opportunity to forecast future revenue trends, but it will also support the proposed methodology that you establish for the distribution of increases or decreases in individual and team quotas.

Current Sales Coverage Model

As it relates to the quota-setting process, it is important to review and understand your current coverage model on an individual-sales-territory basis, including such factors as:

• Number of territories
• Geographic size and scope
• Historical revenue performance trends
• Business potential
• Competitive presence
• Tenure and experience of the sales rep 

These, and other factors that be may unique to your business and industry, will impact how your establish sales quotas.

Due to these types of factors, it is often more desirable to create equitable quotas than equal ones. For example, it may not be realistic to expect a larger territory with greater business potential to produce revenue at the same levels and run rates as a smaller one with less potential. Likewise, a sales rep with less tenure and experience may not produce the same or better results than one who has been with your company for a number of years.

Also, the logistics associated with managing a large, multi-state sales territory as compared to one that is principally in a large metropolitan, heavily populated area will impact both sales effectiveness and quota performance. Creating the proper balance between individual sales territories and their respective quotas by keeping these factors in mind will certainly be a key component of your success with this process.

Planned Increases In Sales Headcount

Many companies, particularly those in a start-up mode that are experiencing rapid revenue-growth rates, will often plan for incremental sales headcount. Those increases may occur at the beginning of a new fiscal period or, alternatively, may be phased in at different intervals according to the overall business model. In either case, they will have a definite impact on how you plan and allocate sales quotas.

You may find yourself in the position of having to realign existing territories to create new ones, thereby impacting the sales quotas for each. In doing so, it is important that you take the appropriate steps in your planning process that will result in the "equitable versus equal" rule. Since new sales reps often manage new territories, you also have to consider the "ramp-up" issue as it relates to the attainment of the desired levels of sales effectiveness. You may also experience some loss of productivity and negative sales revenue trends as a result of introducing new territories and/or new sales reps. Be certain to consider all of these factors and that they reflect in your allocation of sales quotas.

Introduction Of New Products and Services

This area, perhaps more so than any other, could have a significant and immediate impact on revenue performance, and should therefore be a factor in establishing both individual and team sales quotas. Of course, you must also consider the timing and pacing associated with the launch of new products and services as they relate to the effect of that impact. It would be normal and reasonable to increase sales quotas concurrent with those launches.

The real issue is the extent to which they will affect revenue performance and how quickly. Experience, common sense and good judgment will allow you to make more informed decisions about the relationship between new products/services, their impact on revenue and the resulting increases that should be made in sales quotas. Your executive team, including members from product development, marketing and finance can afford you the proper direction and guidance in this area.

Current Market Share

Your company's current and projected leadership position in the space in which it operates can also be a good indicator of future revenue trends and run rates. The formula is fairly straightforward. The higher the position you hold, the more market share you command, which in turn will assist you in the quota allocation process. It is also important to understand that market share can, and usually will, vary to some extent from territory to territory. Therefore, some adjustments must be made to the percentage of quota increase that is assigned to each territory as a result of that differentiation. Product life cycles, particularly in high-tech industries such as computer hardware/software, telecommunications and biotech, will also impact revenue performance trends and should be considered.

Stretch Targets

There is probably more than one school of thought about assigning "stretch targets" to your sales reps (quotas set above expected sales levels, designed to encourage reps to try harder). On one hand, they could certainly increase the likelihood of exceeding both individual and team sales quotas. On the other, they could be set too high and result in sub-par performance, lower individual income, poor morale and sales turnover. Sales managers could likely debate this issue at great length and still arrive at no definitive conclusion regarding the potential merits of assigning stretch sales targets. Only you can decide if doing so will produce the desired results and to what extent you want to raise the quota bar.

One could certainly liken the process of establishing sales quotas to being both and art and a science. Hopefully, for you it is more of the latter than the former. Be assured, however, that by utilizing the various strategies presented in this article, you will be well on your way toward setting quotas that deliver positive sales results and keep your sales reps performing at maximum levels.

Let David Berger help your company create sales excellence