Building the Right Sales Quota Program for Your Business
Establishing an annual sales quota is one of the most important ways to boost the effectiveness of your sales compensation incentive program and, by extension, propel your business toward its goals. However, many businesses struggle to enact successful sales quota strategies. Year after year participants in Alexander Group’s Sales Compensation Trends Survey©₁ rank quotas as their number one sales effectiveness challenge.
The Importance of Setting Sales Quotas the Right Way
Sales quotas set performance benchmarks for sales team members to strive to achieve. A data-driven sales quota program will improve your business’s sales compensation efforts. But let’s look at quota issues beyond incentive payouts.
Consider that the process in which quotas are allocated to territories is totally separate from sales compensation. In addition to process and methodology, the ability to set company-wide goals and allocate to territories reflects the firm’s understanding of market potential.
Without good quota setting process and without adequate cognizance of territory-level market potential, skewed attainments will likely drive unfavorable sales force results. Productivity can be dashed by 5-10+% and costs can be increased by up to 20%.
Poorly set quotas can lead to several detrimental outcomes—poor rep morale, increased rep turnover, sales coverage ineffectiveness, overlay/support role strategy failure, unfair influence by high performer reps, and a general inability to provide an appropriate risk/return sales environment.
Choosing the right quota methodology to achieve quota attainment balance will facilitate the firm’s success. Balanced quota attainment means 60-65% of reps should achieve 100% of their goal or greater, and 35-40% fall short of the goal. Selecting the right inputs and quota methodology is critical.
How to Set a Sales Quota
So what is the best methodology for quota allocation? There are many from which to choose. A good place to start is knowing that the best methodologies include both top-down and bottom-up territory-based inputs.
Too often, quotas are spread evenly across territories except for a few qualitative management adjustments. In general, stable territories, those with longstanding recurring revenue customers, require less rigor. Newer territories will require more attention, more market-based analyses, as well as increased rep collaboration.
Formulating the optimal methodologies for your environment should consider several factors such as:
- Rep’s previous year’s share contribution to the aggregate territory
- Rep’s territory growth potential
- Funnel potential (especially applicable for long sales cycle environments)
- Sales rep workload capability
- Competitor Influences
- Rep tenure and/or time in territory
- Mix of recurring vs. new growth revenue expectations
- New product/service introductions
Building Your Sales Quota Program
A sales quota program is the strategy your business uses to establish, monitor, update and communicate actionable quotas. Building a sound quota program is an important part of the planning cycle to ensure quota effectiveness.
However, few sales leaders and their organizations devote enough time to building and maintaining a systematic quota program that effectively supports achieving these results on a consistent basis.
Setting correct quotas does not need to be bureaucratic or complex. Know and apply the five key elements to doing it right.
1. Quota Methodology
Effective quota programs begin with a sound methodology. Your quota methodology or formula defines the primary basis for calculating quotas.
There are many factors to consider when developing quota methodology—type and quantity of accounts, historical performance, territory potential, funnel potential, competitor threats, market share and other factors. Choosing the right methodology is very important, and equally important and critical is applying the methodology consistently across territories.
Below is just one illustration of methodology selection:
The quota process is the who, what and when of quotas. It sounds easy, but in our experience, many companies do not have a simple calendar or comprehensive guidelines around process. For example, data from our Trends Survey indicate that only 33% of respondents use any form of field sales force inputs (bottom-up) in their processes.
The root of the process challenge lies in the need for cross-functional involvement. Sales leadership, sales ops, field sales, finance and HR all need to be involved in some capacity. Also, cross-functionality helps address auxiliary issues related to quotas such as alignment to new compensation measures, account transfers, ramps for new hires, terminations and other issues.
We recently engaged with a high technology company that had several different quota approaches across the Americas, Asia and Europe. The global sales leader complained, “I really don’t know how they come up with regional goals.” Each region had developed their own methodologies and process.
To achieve alignment, Alexander Group conducted a simple exercise of mapping processes and methodologies. Then, working with a cross-region team, we agreed upon a uniform two-page set of guidelines that outlined a simple, transparent process and timeline for releasing individual and team targets. The result—The VP of Sales and the individual reps all had much better clarity on how their quotas were set.
Who should own the process? Sales management owns and leads it. However, in our experience, many sales leaders wait for finance to give them final goals before they kick off the process.
Finance delivers the top-down based on shareholder expectations and corporate strategy. But the sales leader shouldn’t wait for this to get the process started. The sales leader can begin building goals based on a bottom-up approach. That way, when the top-down numbers are ready, the sales leader can quickly and confidently reconcile the numbers and allocate quotas for the coming year.
It probably goes without saying that quotas should be communicated by sales leadership. It’s helpful to communicate any related changes to roles, territories and compensation plans at the same time.
Ideally, quota communication is done on the first day of the new fiscal year. However, , most individual sales goals are delivered late, after the start of the new fiscal year, and sometimes very late, even months into the new year. You’re probably thinking, “Yes, and I have seen even worse.”
Obviously, waiting months to communicate quota information is a bad practice. It’s not fair to the reps, and it’s unnecessary. Sales leaders can avoid interdepartmental confusion or frustration by developing a sound sales quota program that includes a well–thought–out methodology, process and timeline.
Track attainments and analyze drivers of distributions during the year. You will be well informed to make adjustments to methodology and to the overall quota program, too. However, do not change quotas mid-year.
Most companies (72% of respondents from our Trends Survey₁) change fewer than 10% of incumbent quotas. Changing more than 10% of incumbent quotas likely reflects a quota program that is poorly functioning. If you’re in this group, you may need an urgent and complete overhaul of your program.
Communicating Sales Quotas to Sales Team Members
Sales leaders should quickly build confidence in sellers that the quota development process was fair, balanced and based on a sound, quantitative input. Good communication enables constructive one-on-one conversations about individual goals. Here are a few productive ways to communicate quotas to sellers:
- Assure sellers the quota-setting process is sound: Communicate how both historical and potential data modeling—with manager input in some cases—supports the current quota.
- Communicate improvements to quota setting: Explain the formal process and how that process has improved from last year. Let sales team members know that leadership is striving to improve.
- “Pre-communicate” quota expectations: Communicate general expectations for the coming year right away. This alleviates stress and keeps sellers focused on getting off to a fast start.
- Schedule the one-on-one meetings: Ensure that all managers have a date and time with their subordinates before the annual sales kick-off meeting so they can focus on strategy and enablement of selling.
- Have a plan for HOW to communicate quotas: Ensure managers prepare thoroughly and communicate consistently. The ultimate objective here is to promote confidence and a pathway to success. Communication should cover new accounts, new measures, transparency of process around the number and other supporting elements.
Sustaining Success After Delivering the Sales Quota
Delivering actionable sales quotas on time will empower your entire sales team for success. Here‘s how you can take advantage of a timely, well-crafted quota:
Check-in With Front-Line Sales Managers (FLSMs)
Confirm that the serious one-on-one sit-down quota meetings did occur. Ensure sales managers delivered the quotas as planned and in a consistent way to all. Understand any feedback and concerns from sales representatives about hitting numbers. Sellers should understand company goals, sales strategy and associated go-to-customer motions. This is a critical starting position for the sales team.
With new quotas in hand, verify that sellers have basic enablement components such as prioritized target lists and an understanding of the selling, service or marketing motions against those targets.
Another basic enablement check is the use of sales playbooks. Make sure sellers understand activities, tools and processes that ensure optimal engagement with key decision–makers. Make sure they have the right compelling messages for opportunities within their revenue segments.
New Products or Services
Ensure that any new metric in the sales compensation plan and corresponding quota gets seller attention. Getting out of the blocks in 1Q is critical here. Sellers often ignore new product quotas in Q1 as they focus on selling the familiar first.
Collect midterm attainment data. Plot the attainment curves. If weakness exists, get ahead now with further enablement levers. For many clients, 1Q is often a weaker performance quarter. A sober look early, based on comprehensive quota diagnostics at the midpoint of 1Q, can be quite beneficial. Surprisingly, only about 40% of Alexander Group’s survey participants actively track attainment distributions by quarter throughout the year.
Partner With Alexander Group for Quota Development and Communication
Alexander Group is ready to use industry knowledge and data-driven insights to inform your sales quota program. Our team will expand your company’s growth potential by helping you establish and communicate benchmarks that drive seller performance. To get started with Alexander Group’s quota program development services, contact us today.