Sales quotas play an essential role in sales forecasting, monitoring sales rep activities, and set expectations that motivate sales reps to reach a predetermined level of activity. This quantitative goal measures and compares the performance of reps, and eventually determines someone’s compensation.
When looking at sales quotas, the sales manager can understand how their team is doing, and also drill down into individual data to measure someone’s productivity, success rate, etc.
Individual or group quotas?
Here’s when you need to observe past data and talk to your team. Understand your company’s revenue goals, and the short-term future of the market environment your reps will be selling within.
Next, consider each rep’s role. Are they selling to a vertical market, are they in a new job role, how dense is the territory and what is the potential of each territory? If these answers vary significantly across your different reps, you should consider setting individual quotas.
Target setting methods:
Top-Down Sales Quotas
Top-down quota setting begins with setting a quarterly goal of revenue or deals closed in the past and growth goals of reps, and then assigns individual quotas to support this goal. For example, if a company wants to profit $25,000, and there are five sales reps on the team, each rep is responsible for bringing in $5,000 to hit the target.
The overarching target number is determined by the company’s overarching goals and objectives, and lets management pick the desired profit goal to work towards. While this can be determined by a number of deals closed or revenue brought in, it can also lead to setting unrealistic (and discouraging) goals for your reps.
The downside to top-down quota setting is driven by what the management wants to earn at the end of a quarter, not the abilities of the sales reps.
Bottom-Up Sales Quotas
On the other side, businesses can examine past sales data and determine an individual quota tailored for each sales rep. This will lead to an attainable, yet still challenging, the quota for your reps and won’t feel impossible to achieve.
To determine quotas using the bottom-up approach, managers should identify a target number of closed deals or revenue earned for reach rep in a single month. Next, multiply the target number of closed deals per rep per month by the average deal size to get an end-target of what your reps can reasonably produce.
By examining past performance and historical data that sheds light on what’s achievable by reps, this often produces a more attainable method of establishing quotas, and happier sales reps = high performing sales reps!
Best Practices for Setting Sales Quotas
It’s best to communicate the changes to the quotas beforehand, often so your team knows what’s expected of them and how they can maximize the commission plan. Tell your reps how you designed their quotas, and provide transparent documentation so they can see it’s unbiased and data-driven. You can even provide written agreements that identify what you want your sales reps to focus on, and how they’ll be compensated.
Make sure your plan is well-defined and extremely detailed, so there’s no room for confusion. It’s also a good idea to legally review your compensation terms before it’s in effect, so there are no conflicts down the road.
Finally, it’s not a good idea to cap commissions. When you limit how much a salesperson can earn, you’re de-incentivizing them to push their limits and close more deals. By capping this, you’re limiting your revenue per lead.