Sales quota planning is an important component of Sales Performance Management (SPM). Setting balanced sales quota is crucial to motivating sellers to do their best work, and aligning the sales team's objectives with the goals of the wider organization.
However, in a lot of organizations sales leaders report that setting the correct sales quota is one of the biggest issues they face in designing compensation programs. Due to the complexity of the process, the amount of data to be considered, and the number of stakeholders, setting sales quota can be very manual, and often ends up relying more on guesswork than data.
Using guesswork instead of a data-driven approach has rarely resulted in developing fair, well balanced quotas that motivate a sales team to do their best work. To align sales teams objectives with the needs of the business requires a considered, data-backed methodology that can be communicated clearly and transparently with sellers.
Read on to learn more about the essential aspects of sales quota planning and the benefits it entails for businesses.
What is a sales quota?
A sales quota is the expectation or target set for a seller to achieve in a specific time period. Sales quota can also be set collectively at the team level. Sales quotas are usually divided into monthly, quarterly, half-yearly and yearly targets.
Sales quotas are generally defined by sales leaders in terms of units sold, dollar amount or onboarding of a given number of new customers. In most cases, fulfilling or exceeding the sales quota earns a performance bonus for sellers.
To set sales quota, company management works with sales leadership to determine the appropriate sales quota for every seller as well as the quota for the sales team as a whole. Decision-makers leverage predictive planning and what-if scenario planning to analyze multiple sales quota scenarios to find the best possible assignment of quota. Setting the right quota requires a balance: quotas should be achievable in order to keep sellers motivated, but if a quota is set too low it can result in high costs for the company overall.
Sales quota planning is part of the sales planning process, which requires inputs from a wide range of stakeholders. The finance team need to contribute to ensure the sales quota ladder up to the organization's wider business goals. Sales and revenue leaders help to ensure sales quotas are achievable and reasonable. Quota should be optimized based on historic sales performance data as well as forecasts and targets, and they need to be aligned to an organizations territory planning and sales capacity plan.
How to set sales quota
Getting sales quota and sales territory planning right can offer a potential increase of 2% to 7% in sales without incorporating any other changes. So, by fixing your sales quota and territories, you can have a big impact on your company's ability to hit its revenue goals. But how do you go about setting quotas correctly? Here are some important considerations:
Bottom-up, or top-down?
A top-down approach to sales quota starts with the organization's sales goals, which are divided by team and then broken down by individual. The benefit of this approach is that you can ensure your sales goals are aligned to the organization's overall targets.
However, setting quotas from the top down can create unrealistic quotas which leave your sellers demotivated and burnt out, and increase the odds of reps leaving. High levels of rep churn can increase cost for your business, as hiring new reps is expensive and time consuming, and there's an opportunity cost to having an understaffed sales teams. This is why we prefer bottom-up sales planning.
In bottom-up sales planning, sales leaders identify the quotas they think are achievable and realistic for their teams based on previous performance. These individual quotas are accumulated for the executives to review, and then feedback on. The quotas are then adjusted in line with the expectations of the business.
This process is much more iterative and can be time consuming, but the resulting quotas are usually much more realistic and balanced, and are more likely to motivate the sales team. It gives you an opportunity to identify any gaps you might have in your sales team, and opportunities to hire new sellers or upskill the existing team to bridge the gaps. The collaborative process is an opportunity to make your sellers feel listened to and bought into their quotas.
Define the baseline
A baseline is the number your sales time need to hit to keep your business running. This works as the minimum threshold for your sales quotas. The best way to calculate this is by looking at historical data about your company's performance, but you also want to consider broader research into market conditions, competitor activity, and business priorities such as expansion into new markets. Another factor you may want to consider here is your sales capacity. If your team has changed in size or experience level, looking at historical performance data might not give you the best indication of what they can achieve now.
In most organizations, sales performance is likely to be seasonal. In other words, your team won't hit the same numbers month-on-month, or quarter-on-quarter. You are likely to see different performance in different geographies, where elements of regional nuance will impact your sales. Make sure your quotas account for all of these differences. You may also want to consider factors from across the business, such as where is marketing investing the most over the year?
Fix activity targets
Once the optimal quota has been defined and agreed upon, sales leadership sets the activity goals. This process involves creating a roadmap for the entire sales team to better understand the actions they must take to meet quotas. These actions can include making calls, sending emails, giving product demos etc.
Communicate and collaborate
Once your targets are set, you will need to communicate them to the wider sales team. It's important to set clear expectations with sellers about what their quota is and how it interacts with their compensation plan. They also need to know how you will be monitoring their performance and when their deadlines are. Give them an opportunity to ask any questions or air any concerns they may have about their plan. The best way to motivate teams is by being transparent about how you came to these decisions -- and sticking to your word.
After you've set your sales plan, sales leadership must actively monitor the performance of every seller to ensure that the activity targets are being met.
Sales quota vs sales goals vs sales targets
Sales quotas, sales targets, and sales goals are often confused for being alternative names of the same metric. These three are actually different concepts, with each being equally important for sales teams.
Sales quotas are the total an individual seller or group of sellers needs to hit for a particular period of time, such as a quarter or a month.
Sales goals are the overall company's goals for the entire year - which should be a sum total of the quotas.
Sales targets are the overall numbers the full sales team needs to hit to meet it's sales goals.
Although these terms might seem similar, it's important to have an understanding of the differences between them, and to make sure your teams do too.
Why is sales quota planning important for 2024 and beyond?
In turbulent economic times, it's important for organizations to be laser focussed on achieving their revenue targets. Using all the data you have at your disposal to create accurate, balanced quotas is key step for doing this. Here are some of the benefits of effective sales quotas:
- Employee motivation: Setting unrealistic quotas demotivates employees. Demotivated sellers are much more likely to leave, which burdens you with the cost of rehiring. Balanced quotas and territories, and accurate capacity planning and forecasting, are the ingredients to keeping sellers happy, engaged and productive.
- Territory Planning: Unless and until the leadership optimizes its sales territories, it is virtually impossible for the sales team to achieve their quotas. As quotas and territories work hand in hand, sales quota planning helps highlight any issues that might remain in your territory planning and lead you to redefine or redesign your sales territories. Optimal sales territory planning holds the key to the success of salespersons.
- Resource Allocation: Optimal utilization of resources can only happen when there is an optimal allocation of resources. Sellers need full support from leadership to allocate resources to help them hit their quotas. Sales quota planning helps sales leaders better understand the resources that every salesperson must be provided to achieve the desired numbers and identify any blockers their teams might be facing.
- Clarity and Transparency: Sales quota planning brings much-needed transparency to sales operations. When decisions are based on data instead of guesswork, the chances of errors in quota setting are minimized. Moreover, individual sales team members are highly involved in the planning process, so they are clear about the actions they must take to achieve their sales quotas.
Improving your sales quota planning
The sales quota planning process is iterative, and there are always ways to optimize. This is where a sales planning platform can benefit sales and revenue leaders.
Quota plans need to be completed promptly to be able to give sellers the information they need to get started at the start of the year. A sales planning platform can help to automate data processes and reduce the time teams spend on manual tasks, so you can focus on putting your data to good use.
To set fair, balanced quotas that empower your reps, it's crucial to base them on accurate, up-to-date information regarding historic sales performance, sales capacity and forecasts. A modern SPM tool can integrate easily with your other platforms to give you a view of all the most recent information from across your systems in one control center to base decisions on.
Sales quotas are based on inputs from a lot of different teams, and require sign off from a lot of individuals. A sales planning tool includes collaboration features that make it much easier for your stakeholders to communicate and iterate on plans.
Sales leaders can better understand the impact of various factors on sales quotas by running multiple what-if scenarios that allow you to assess the impact of multiple different configurations of your plan.
If you're interested in hearing more about how Pigment could help you set well-balanced sales quotas, sign up for a demo to meet with one of our experts for a 1:1 discussion of your business needs. Or, sign up for our next live tour to see Pigment's key features hear questions and answers from your peers.