Dear Sales Management: You’re Setting Quota Wrong

Companies spend a lot of precious time and energy developing their sales strategies and programs for the coming year. Something that arguably is necessary and demands a lot of vigor and attention. As the end of the current year approaches, it’s not uncommon for the organization to have little time or resources left to plan and develop their quotas for the following year, with the same vigor as planning the strategy; and the same method becomes the default approach year over year. The problem is that this method tends to leave little time to understand and evaluate how internal and external dynamics that have occurred throughout the year demands a change to the process and approach.

For sales management what we tend to see are a less than effective methods that drive the quotas with less than effective results. Here are a few of the more common ones with their assumptions:

• Historical Trends: The company has grown 2 percent in the last few years, and it’s expected that this trend will continue. Quotas will increase by 2 percent.
• Company Expectation: The company wants to grow by 2 percent this year. Quotas will increase by 2 percent.
• Past Performance: The reps achieved or exceeded quota last year. Increasing quotas by 2% will lead to an increase in sales performance.

Each of these methods makes a quota decision based on only one very broad data point. Although all are great data points, they fall woefully short as an effective quota setting method. Sales management must expand their approach by assessing market opportunity, evaluating revenue sources, gauging sales capacity, and gaining a bottom-up view.

Evaluating 4 Quota Setting Mistakes

1. Ignoring Market Potential

About 40 percent of companies use historic information as a lead data point during the quota setting process but lack any forward-looking approach that takes into consideration general market potential and specific client potential. Market and client potential can vary greatly from territory to territory. It’s critical to look at each territory to evaluate current wallet share, the intensity of competition, and industry growth. A territory with a very high wallet share may have a lower quota whereas a territory with less competition but is high growth would be responsible for achieving a higher quota.

Some of the same logic also applies to individual clients but goes beyond wallet share and competition. Examine the demographic factors of each client such as industry, number of employees, and their go-to-market strategy. What companies fit the target customer profile? How many targets could the sales team reasonably go after? Combine this opportunity data with historical data to determine an appropriate quota.

Remember, quotas can vary by rep based on opportunity. An experienced rep assigned to a territory with high growth and low market saturation should have a quota higher than a less-experienced rep in a saturated market.

And don’t forget macro-economic impacts. The global pandemic has impacted businesses large and small not only by driving what and how we buy and sell, but it expanded to supply chain issues that impacts when and how a company can deliver what is sold.

2. Assuming Revenue Growth Only Comes From Selling More

At its heart, sales capacity is the ability of the sales organization to generate revenue and achieve its goals. There are three avenues of revenue generation: client retention, client penetration, and new client acquisition. Client retention is key to a strong revenue base. The less revenue retained the more penetration or acquisition that is needed. Client penetration is identifying opportunities within an existing client. This would include up-selling and cross-selling within the company’s portfolio. New client acquisition is winning a client from a competitor or selling them something they have not purchased before.

The first pass at sales capacity is to understand the influence of each revenue type on achieving the revenue goal. If client retention is currently 80%, penetration and new client sales would need to generate 20% in revenue to maintain 100% of the total revenue.

However, if retention improved to 85% while penetration and new client sales generated 20% in new revenue the total revenue would grow by 5% to 105%. Focusing on retaining current clients and maximizing current contracts can lead to revenue stability and pockets of growth. This is where a good defense could make or break the offense. Understanding the revenue types will determine how much quota is needed to achieve the revenue objective.

3. Overlooking Sales Capacity

Many organizations assume they need to add headcount to see growth, or they can achieve more with the same number of sellers. In the broader sense, sales capacity is defined as a sales team’s ability to deliver revenue based on expected headcount and productivity. What does the team’s capacity look like? Often the place to start is a simple mathematical equation. Sales capacity considers the number of hours each rep works in a year, the percentage of that time that is spent selling versus handling other operations and administrative activities, and the productivity of those selling hours given the time it takes to manage or close an account and close rates.

Consider this scenario, the average seller spends 60% of their 2000 hours per year selling. It takes an average of 200 hours to win a $500,000 new client. The capacity equation would indicate a realistic quota of $3M per rep.

If the current team capacity of $60M is sufficient in covering the non-retained revenue plus growth, the headcount and quota per rep is appropriate. If not, dedicate attention to the key capacity components of time, workload, and talent. First, look for ways to decontaminate a seller’s time by eliminating non-selling activities or shifting select activities to sales support. Second, examine the pipeline cadence. Are there inefficiencies in the sales process that contribute to the workload by delaying deals unnecessarily? Third, inventory the sales talent and evaluate the sales headcount. The capacity equation may indicate revenue growth will need to be generated by more sellers. If adding headcount is not part of the growth strategy then concentrate on the areas of time and workload.

4. Not Looking from the Bottom Up

Organizations that set quotas well start with a bottom-up approach. Doing this first leads to an informed corporate goal. This is not a situation where sellers “tell” leadership what their quota should be but instead it’s a dialogue around what is happening in the marketplace with both existing clients and potential clients. The temperature of the marketplace should not be a surprise if conversations are occurring during the monthly or quarterly forecasting process. Keep in mind that a thorough evaluation will undercover specific client issues like downsizing of resources, business downturn, cost-saving initiatives, or mergers/acquisitions. These issues could have a significant impact on the current revenue stream while also limiting revenue growth. Unfortunately, if this evaluation process is left to the end, there is a high chance of a gap between the company’s top-down expectation and the seller’s bottoms-up opportunity.

Areas of Caution

Avoid Setting Quota Too High

In best practice, 50-70 percent of sales organizations should be at or above quota. Having less than 50 percent of sellers hitting quota creates a problem for morale and confidence.

When evaluating the finished quota, ask these two key questions:

● Are the quotas aggressive or unrealistic?
Many times, sales management sets quota at the level required to meet the company’s financial objectives without having a realistic understanding of the actual market opportunity. If a sales rep is unable to identify opportunities within their client base to achieve their quota they are demotivated from day one. Sales reps want and need to succeed and are willing to stretch to achieve the goal. But unrealistic quotas will create a negative environment and ultimately lead to rep turnover.

● Do the quotas punish top performers?
It’s a natural tendency for sales management to rely on their A team when growth goals are high. If management is not careful they will eventually push their top performers right out the door. For example, if the excellence point of 150% earns 2X of target incentive and the top performer’s quota increases year after year they may never have the opportunity to hit the max earning. Every year they contribute more. Every year the bar is raised. Every year they earn 120% of their target incentive. Every year becomes a punishment for being a top performer.

Why would reps try to achieve a goal when the goal is set out of reach, and is believed to be unattainable?

Divert Finance From Taking the Wheel

We can all agree that setting quotas should be a team exercise. The team is made up of the usual suspects: sales, sales operations, finance, human resources, and even the marketing or product organization. Unfortunately, in some companies, the exercise turns from being team-oriented objective to a forced directive from finance.

If finance is solely at the wheel, sales can start to feel like they are serving the investors rather that serving clients. The finance organization is usually well-intentioned but unfortunately lacks understanding of the market opportunity or current client risk or potential. Do not allow finance to “handout” a number. The sales organization must be present and engaged through out the year and process. All groups should provide input along with marketplace intelligence how targets and quotas are set.

As the revenue generator for the company, sales should play an active role in the target and quota setting process. Quota setting should never be a guessing game. Avoiding these mistakes and take these steps for a more data-driven, transparent quota setting process.

SalesGlobe

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