Sales Quota: Setting It The Right Way

Sales Quota: Setting It The Right Way

In sales management, there is one task we obsess over – setting quotas. As soon as one sales period ends and another start, we cannot help but ask, how am I going to come up with sales quotas for my team? Yet for all the time we spend thinking about it, many of us do not have a game plan.

Let us walk through a planned approach towards determining sales quota.

1.Choose the Right Quota Strategy

As a Sales Manager, one of the first things you will have to determine is what type of quota you should set.  It is important to choose a quota type that best aligns with your company’s current strategy. For example, if you are following an expansion strategy, Units Sold or New Logos may be the right quota types for now. But, if your current focus is to maximize profits, choose a quota that measures margin contribution. Similarly, you can pick an Activity-based quota, if your sales reps can’t have a significant influence on customer’s purchase decisions.

Many organizations prefer using a combination of different types of quotas. It incentivizes sales reps to perform sales activities like scheduling meetings, making phone calls, and sending follow-up emails For instance, you can set a volume quota in addition to an activity quota. This way, reps are required to make a certain number of calls every week while also closing a certain number of deals.

But do not combine too many different quotas types as it will confuse your sales team and the sales reps will lose focus on what is important.

  1. Analyzing Past performance

If you feel that last year’s performance of your sales reps can predict the future, then you can rely on the past performance method. It calls for taking baseline numbers from last year and uplifting by a certain percentage as per market conditions, marketing activating, and management guidelines.

Once an estimate is made, you may divide it into sales quotas for every division, team, and individual reps. For mature companies operating in mature markets, the past performance method is a great fit. However, it is not the best method for new companies or new markets as the landscape may still be evolving rapidly.

  1. Establish a review period

Your review period is the time frame that will measure your team’s sales performance. If you have a short review period (such as monthly), you may be able to quickly correct your course. However, longer review periods (such as annually) can give you more reliable and accurate metrics for your reps’ performance. Most large enterprises go for an annual quota period. For annual quotas to be effective, you should be able to forecast annual goals with a high degree of confidence. If business situations don’t allow that, one must pick a shorter quota period. For example, someone selling a newly launched product line should not be loaded with an annual quota, until there are enough data points to predict the sales for one full year.

  1. Setting Sales Quotas that are Challenging yet Achievable

When hubris kicks in and you are a tad too ambitious with setting quotas, you risk the following:

  • A demotivated sales team
  • The wrong perception of their performance
  • No proper compensation for their performance
  • Sales reps overselling your products and services, leading to disgruntled customers and excessive amounts of pressure on the team who needs to deliver on the made promises.

Of course, sales quotas should push the sales team to do their best. It is important that the team moves forward together. Standing still is moving backward. But if you do not keep the quotas realistic, you will be setting your team up to fail as well.

  1. Reinforce your expectations

After the quota is crafted, not only should you share what the number is with your team, but also how the quota was determined and when and how it will be measured. You may then explain any bonuses or incentives the sales team might expect to earn for a meeting or exceeding their quota.

The best method to communicate a sales quota and its value is with a face-to-face meeting. This allows salespeople the chance to ask questions and gives you the opportunity to better explain the reasoning behind the sales quota as well as its value to the organization.

  1. Monitor and Evaluate Sales Effectiveness

Measuring your team’s sales effectiveness comes down to having access to the right data. Data plays a key role in every part of your sales planning, performance, and analysis. The best way to do this is to align your teams around a single source of truth. When your team has access to the same dataset, you can plan more effectively, make aligned decisions, and ultimately create a stronger organization.

Contemplating SPM Automation Tools? Is Your Organization Ready For The Road Ahead?

Sales Performance Management (SPM) involves multiple business processes, and hence, the procurement and implementation of an SPM Tool (such as Callidus, IBM, Xactly) requires a significant amount of planning and effort.

The planning must start long before you schedule vendors demos. There is no point in conducting vendor demos if your organization is not yet prepared to travel the road towards SPM automation. So how do you go about evaluating your preparedness?

To determine your organization’s readiness for an SPM tool, here are the top 10 questions you should answer:

1. What is the Business Justification?

The answer could be Cost Savings, Enhanced Reporting, Operational Efficiencies, Auditability, Calculating Payments or something related. Whatever it may be, if you can’t come up with a couple of strong business justifications, you will find it difficult to make a business case for the tool. Although it doesn’t all have to be about the financials, you have to be ready with a worksheet that shows the numbers. To learn how to build a business case, here is a link to a webinar that could be very helpful to you: http://bit.ly/2pvd1Ts.

2. Are the Executives on board?

Have you discussed your plans with your executives? Do they understand the high level budgetary needs for such a project? Do you have their verbal nod for a ballpark budget?

If your executives aren’t okay with the estimated budgets, maybe you have gotten ahead of yourself. Save yourself some time and initiate the vendor demos only after you see your executives warming up to the idea.

3. Are Compensation Plans Stable?

The most common reason for SPM implementation failure is that the compensation plans are in a state of flux, sometimes even changing while the implementation is in progress. Are your organization’s comp plans still going through significant changes because of evolving market landscapes?  If so, you will have a tough time keeping your SPM implementation on track.

Taking this into consideration, you are not ready for an SPM tool. And yes, when you are told that the tool can handle all future changes without any time or effort, take it with a grain of salt.

4. Do you have enough Time?

From vendor demos to go-live, SPM projects will take no less than 4-5 months. If you are too close to the beginning of the new Plan Year and the deadline for Pay file is already in sight, you have probably missed your window of opportunity. If you decide to move forward at this point, you will be scrambling to move fast, thereby compromising the quality of your decisions, and creating a huge risk to the project overall. You are better off planning a mid-year rollout, which will have its own challenges, but at least you have time to plan for it.

 5. Are Business Processes Mature?

When the organization is growing rapidly, HR and Finance are constantly tweaking the organizational framework. For this reason, or maybe due to a recent M&A, if the processes and policies in the organization have not yet been solidified, it is difficult for the implementation team to configure the new tool.  A lot of time and effort would go to waste in changing the tool configuration again and again.

For example, if the new hire draw policy is changing every few months, the SPM tool can’t really be successful.

6. Do you have IT Systems providing Reliable Data?

SPM tools can’t operate in a vacuum. If you don’t have HR systems providing reliable Payee data or ERP systems providing sales data, you will have huge challenges with the SPM tool. Garbage in, garbage out. For instance, if new hire notices are coming to the commission administrator on Post Its, you are not ready for an SPM tool. You must first invest in HR tools and processes.

7. Is IT Leadership ready for one more Tool?

SPM implementation projects require IT budget and resources. If the IT team has resource constraints, or there is another large IT initiative, such as an ERP upgrade planned for the year, then IT will not be very happy about supporting an SPM implementation. A quick synch up with your IT leadership would help ensure that no such major roadblocks exist.

8. Is the Cloud an option?

Almost all major SPM tools are now available only as SaaS solutions, where the software is hosted in the vendor’s Cloud. What that means is, if your organization has a strong preference for On-Premise solutions, your choice of vendors becomes very limited.

It’s better to clarify with your business leaders if Cloud solutions are an acceptable option. If not, knowing the road map for all software vendors, you may want to abort the idea of packaged solutions or wait for your organization’s mindset to change.

9. Do you have Resources to support this Project?

After the tool is implemented, you may be able to cut the headcount in commission operations. But initially, you will have to dedicate a great deal of time and energy in evaluating and implementing the tool. If you are unable to free up any of your current resources and can’t find the budget to hire external consultants, it will be extremely challenging for you to get this to the finish line.

10. Is there an M&A on the Horizon?

Last but not least, if there is an M&A on the horizon, it’s better to wait on an implementation project. The new company may already have an SPM tool, and it is almost guaranteed that your business team will want a single SPM tool catering to the joint salesforce.

If you need further assistance with getting you prepared for an SPM project, please contact us at mktg@spectrumtek.com.