Sales quotas: the most important planning process

Is sales quota planning the most important process? (5 mins)

What is a sales quota?

A sales quota is the number that a sales rep, a sales manager and the sales team is expected to meet over a given period of time.  The sales quota is the most important number for the sales organization.  It is also a key factor in any organization's financial and operation planning.  Typically sales quotas are set for the upcoming year or a nearer term period.  Sales quotas can be set based on an annual number, or quarterly, or monthly and even more frequently.

Everyone in the sales organization is targetted (and highly motivated) by their sales quota.  This is the number we need to deliver, the number we are measured against, the number we compete for, compare our performance with our peers... we all want to "make the number"!

Note: Sales quotas might be a single number, or combinations, possibly with prime and secondary tier numbers, or financial and activity based numbers.  Sales quotas come in all shapes and sizes.  Bottom line, its the quota and its the number or numbers to be delivered!  

All organizations set sales quotas for their sales reps, which then consolidate into quotas for sales managers, sales teams and up through the sales organization to the total organization level.  Other supporting teams, either directly involved in the sales activities (such as sales development/call centers, sales engineering/presales, channels, partners and alliance teams) or critical contributors (such as marketing or professional services), are also allocated sales quotas. 

As organizations grow and become more complex, deciding on the right sales quota, the best balance of simplicity and the optimum structure for each level (tiers of quota such as rep, manager and team) and type (from one number to combinations) becomes ever more difficult. 

Sales targets (and coverage target) versus sales quota

A critical success measure for any organization is achieving their targets.  With respect to sales targets, this target can differ from the sales quota.  Setting the right sales quota depends on many factors, and often an uplift can occur from the sales target so that the overall, total sales quota is higher (and in some situations, maybe lower).  Here's some simple definitions:

• Sales Target.  This is the target the organization is aiming to achieve.  This is the (sometimes) "make or break" number.  The number the board, the investors, the CEO is striving and investing for.  The number which is driving and influencing all our decisions in investments like expansion, hiring and retention, new ventures, new and updated products, etc.

• Coverage Target.  The is the sales target x an uplift.  The uplift is a % and stretches the sales target to a higher number.  The coverage target is the top down target that determines the total sales quota allocated.  The sales quota is a bottom up exercise, set at the rep level and cumulating up to a total.

Setting the sales target is one process.  Determining the right coverage target another step.  And then finally the sales quotas are allocated. And, as with all target setting exercises, there is the inevitable tension of balancing the top down targets versus bottom up quotas.  

Managing sales quotas tension

Managing this tension is vital.  Why?

If sales quotas are too high:

• Morale.  Sales reps and managers (like everyone) want to feel successful. We want them to compete and win.  A sales rep has to feel that there is a reasonable (at least, ideally good or great!) opportunity to achieve their sales quota.  This indicates not just the importance of the sales quota number, but explaining the methodology to the sales rep to build comfort and credibility that the sales quota is within reach (a stretch...  but not a stretch that breaks).  Lower morale impacts productivity and commitment, and leads to attrition.

• Attrition.  If the perception is sales quotas are too high, too hard, not clear...  then sales reps will be attracted elsewhere where they believe (rightly or wrongly) that the opportunity is better.  This attrition is a sales organization killer.  Not only does the sales organization lose expertise and experience, its sales DNA and future leaders, others may be disrupted and (even if they weren't previously) wonder what opportunities might be there for them.  This is particularly dangerous if the attrition is a sales rep or manager who is popular, a high performer and influencer.

• Cost.  According to DePaul University the cost (back in 2016!) to replace a sales rep is just under $100,000.  This cost is replacement hiring time, recruiter fees if applicable, lost time in territory (inbound sales activity an be allocated throughout the remaining sales team, but there is still lost opportunity due to lower prospecting and nurturing capacity, less customer contact, etc.).

• Lost return on investment.  When a sales rep is disrupted or leaves the organization's investment no longer produces a return.  All of the sales training, management time and onboarding/ongoing skills and knowledge investments are now repeated with to the replacement sales rep.  In a Harvard Business Review article, it highlights that, “An estimated annual turnover among U.S. salespeople runs as high as 27% - twice the rate of the overall labor force.” and that “U.S. firms spend $15 billion a year training salespeople.” 

• Wasted time.  Even when the sales rep is replaced we just lost time.  Time to do other positive and value added activities.  Time to work with the existing sales reps.

• Reputation.  Organizations with high sales quotas and low achievement will eventually earn a reputation making future recruitment challenging.  Potential new sales reps (especially the top ones) will want to know historic performance levels and quota attainment, and will ask as well as research independently via sales rep forums, LinkedIn, Glassdoor, etc.  

What if sales quotas are too low:

• Cultural impact.  It would be impossible to find a sales rep who agrees their sales quota is too low?!  But there is a cultural aspect where high performance organizations that stretch will drive innovation, energy and a delight in achievement.  Lower expectations, something attained too easily, may stiffle this competitive and exciting potential being fulfilled.

• Cost of Sales.  Sales quotas are used to calculate compensation.  There is only so much we can afford to compensate our sales organization and our sales compensation plans need to reflect that reality (if your interested in sales compensation plans and commission rates there are many excellent articles, we like this one from Hubspot). If sales quotas are too low, our cost of sales is too high.  Tiers of compensation from sales reps to sales managers and leaders, combined with other support teams need to be cumulated together to plan (and subsequently manage) the total compensation cost of sales.

• Potential for sub-optimal performance.  As a general theme, sales reps will sell...  all day and every day...  relentlessly.  But, it is possible that once sales quota is achieved, some sales reps may throttle back and that (however small) impact may result in a customer not being followed up, or they sense loss or energy, or being deferred into the next period, or another form of lowered service resulting in lower performance levels.

Clearly we need to balance the sales quota.  And...  be ready to make reasonable adjustments if we feel we're off course in either a too high or too low direction.  There is no harm in revisiting sales quotas and assumptions after they've been set to review, learn and evaluate if an adjustment is appropriate.  

Setting, managing, reporting and analyzing sales quotas is a ongoing process for the entire sales team.

Invest in the sales quota planning process

Sales leaders understand the importance of setting quotas, but most of them will also admit that they do not find this a simple task. According to a recent Alexander Group survey, 61% of sales leaders said that “setting sales quotas is their number one biggest challenge” yet many will admit that they don’t spend sufficient time on this critical process.  

It’s quite common for sales leaders to accept the top down number and apply a Peanut Butter approach of spreading next year’s revenue growth expectations across their teams without considering previous sales performance and market opportunity. They also confess that they do not devote enough time and effort to develop and apply sound methodologies for setting and allocating quotas.

Creating a consistent sales quota planning process will:

• Reduce time required through consistency and automation 

• Consolidate all relevant data, assumptions, comments and decisions into one place

• Allow easy sharing and transparency

• Provide a central repository for sales quota plans, prior plans, historical and ongoing actual performance

• Deliver valuable metrics from sales rep performance through to cohort analysis

A really great sales quota planning process will then evolve from being consistent with sales targets and sales quotas aligned through the numbers flow and management, to sales team participation and awareness (from the top down to each sales rep's bottom up contribution) fro, planning and agreement, to ongoing performance measurement and refresh adjustments.

What is the right sales quota?

This is the question!  When the sales target for the total organization is determined and understood the right sales quota driven from that point is...  one where just about everyone involved and who receives a sales quota is equally happy (or unhappy).

• The executive and management team should be comfortable with the sales quota and its relative size compared to the sales and (if used) coverage targets.  There is an element of risk to planning, and setting the right sales quota is a component (a very important component) of the risk management of our planning process.

• All should be confident that the level of investment and allocated targets for the supporting teams are in line with the sales quota.  Are we investing enough in marketing?  Will our new product, new features arriving on time?  Do we have enough resources to drive and support the right activity?  Can we see a path to the sales quota? 

• Finally, can we articulate the sales quota, how it was created and allocated, and the reasons for our comfort and confidence so that each sales rep believe they can get there?  Some reps will always be optimistic, others pessimistic, but can they each feel the possibility of success?

The right sales quota is the best balance of the competing and influencing factors, that all involved are as equally comfortable as they can be based on the information they have at the time.

Know the stretch!

Sales quotas are essentially a benchmark, the benchmark that provides the motivation a sales rep needs to perform at their best while supporting the total organization's targets.  Sales reps thrive when provided challenging yet possible sales quotas, that leverage their zeal for competing to win.

Sales reps want to know and understand why there sales quota is what it is.  They want to appreciate the process, the expectations, assumptions and activities that will support them as they drive forward.  They want to know the stretch...  is it an exciting and challenging stretch?  Indeed, the entire organization should know the stretch.

Note: Thanks to Donya Rose at The Cygnal Group for "know the stretch"!

The importance of setting sales quotas

By setting sales quotas driven by a strong and solid sales quota planning process, the sales organization will buy in, align and energetically drive forward to hit their numbers.  And if the sales organization hits its numbers, then the entire organization should succeed.