When developing a compensation plan for your sales representatives that’s based on on-target earnings (OTE), sales quotas play a vital role. Simply put, they show your reps what they need to do to earn their full OTE. As a result, it keeps them motivated to perform better and they’ll be far more efficient and productive.
Apart from this, sales quotas also help you because they make it easier for you to monitor the performance of your sales team and make adjustments where necessary. In addition, they also help you forecast your business’s revenue, which, in turn, makes planning easier.
However, when setting effective sales quotas, there are several aspects you need to consider. In this post, we’ll look at these aspects in more detail.
What is a Sales Quota?
In simple terms, a sales quota is a sales target, determined by management or sales leaders, that a rep or team should meet within a specific period.
These sales quotas can be determined for a specific sales team, an entire company, or even a particular region. However, you'll typically find that sales quotas refer to targets individual reps should achieve.
To illustrate the concept better, let's look at a simple example. Let's assume you work for a company and you're compensated with an on-target earnings of $80,000 per year. Regarding this on-target earnings, your base salary is $24,000 and your variable pay or commission amounts to $56,000.
Now, if you work on a commission rate of 10%, you’ll need to make sales of $560,000 for the year to earn your full compensation. As a result, your sales quota will be $560,000.
But What are Sales Goals?
Many reps refer to sales quotas and sales goals interchangeably. There are, however, significant differences between these two terms. So, when it comes to sales quotas, it's important to distinguish them from sales goals.
While sales quotas relate to the number of products reps need to sell to earn their full commission, sales goals relate to a company's objectives and long-term growth plans.
For example, if a company aims to generate a profit of $1 million per year, it will know exactly how many products it needs to sell to achieve this goal. If, for instance, every product generates a profit of $10, the company would need to sell 100,000 products.
This will then be the company's sales goal. Based on this goal, the company will then be able to set sales quotas that reps or sales teams need to meet.
This will then be the company's sales goal. Based on this goal, the company will then be able to set sales quotas reps or sales teams need to meet.
This will then be the company's sales goal. Based on this goal the company will then be able to set sales quotas reps or sales teams need to meet.
The 6 Types of Sales Quotas
Now that we’ve seen what sales quotas are, it’s time to look at the different types of sales quota that you’ll find. In addition, we’ll also see how you could tailor these quotas to meet specific goals.
Sales or Revenue Quota
One of the most basic types of sales quota, the revenue quota, determines a specific amount of revenue that reps should generate through sales during a specified period.
It's especially suitable if you have a small range of products, you want to grow your business, and your market stays relatively stable. It's also helpful when you're hiring and onboarding a new rep.
From a sales rep’s perspective, a revenue quota can give them some flexibility because they can decide what products to focus on to meet their quota.
With this basic quota, your reps will know that if they bring in X amount of revenue, they will earn X amount of commission. So, apart from the instances mentioned earlier and your specific goals, this model might be too basic. There are, however, some ways in which you can tweak it to make it more effective and drive more sales.
For example, you could use a compounding percentage target to increase sales reps’ targets and, by implication, their commission as they improve and sell more products. Here, you’ll add a certain percentage to a rep’s revenue quota if they achieve their quota easily.
For instance, if they make their quota in one month, you can increase the quota the next month by, say, 3%. In turn, this will challenge them to perform better and allow you to drive more revenue.
Revenue Quota Example
Let's assume you set a revenue quota for your reps in the amount of $10,000 per month. They then know that they need to generate revenue in this amount to meet their quotas. As such, and depending on your product range, they can decide what products to focus on.
The problem is that reps will then often focus on the most expensive products to drive revenue and meet their quotas easier, which could lead to neglecting cheaper products. So, if you want to drive the sales of all products, you could consider setting separate revenue quotas for different products.
In contrast to a revenue quota that relies on the revenue a rep must generate, volume quotas determine the amount of products a rep should sell to meet their quota. So, in its most basic form, you’ll set a quota of, for instance, 150 products your reps need to sell to meet their quotas and earn their commission.
This basic form of volume quota is an effective strategy if you want to get as much of your products in the market as possible or, in other words, when your primary goal is market penetration.
This approach does, however, have certain disadvantages. For example, if you use a basic volume quota, your reps will focus on selling more and, as such, will typically shift their attention to your lowest-priced products that are usually easier to sell. In turn, you'll make less profit because your lower-priced products often have smaller profit margins.
To combat this, you could use a differentiated approach. Here, you'll determine volumes for every product that reps need to sell to meet their quotas. For example, you’ll set a quota that involves specified volumes of all your products. In this way, your reps will focus on your entire product range and it will get more exposure in the market.
Another option is to take a differentiated approach that doesn't focus on specific products, but rather on specific market segments. So, your reps will need to focus on selling a certain number of products to a specified market. This is an effective approach if you want to find footing under a certain segment of customers.
Volume Quota Example
Considering the above, you've probably gathered that you can adjust a volume quota to suit your specific goals and requirements. Let's look at an example where you use a differentiated approach across different products.
Let's assume you want your reps to focus on the sales of your new product, X, to allow you to gain traction in the market, while still driving the sales of your older products Y and Z. Here, you'll set a quota of 80 sales of product X, 30 sales of product Y, and 25 sales of product Z.
Activity quotas are typically used as performance measures to track a specific component in your sales process. As such, they don't aim to measure the amount of sales made or revenue generated by a rep and usually form the basis of compensation plans for activities that don’t directly lead to increased revenue and for those reps who aren’t responsible for closing the sale.
For this reason, you’ll use activity quotas to measure the performance and activities of your sales development representatives (SDRs) or business development representatives (BDRs). Here, you’ll typically base your quotas on metrics such as calls made, appointments set, demos scheduled, and so on.
As is the case with both revenue and volume quotas, there are several approaches you can follow when implementing activity quotas depending on your specific goals:
Call and follow-up quotas. This is one of the most basic forms of activity quota. With it, you’ll determine a quota for follow-up calls or follow-up emails to prospects that your SDRs or BDRs should meet to earn their commission. This allows you to drive more communication, which, in turn, increases the number of qualified leads and, as such, the amount of revenue your business will can generate.
Upsell activity quotas. With these quotas, you’ll emphasize activities that increase upselling. So, SDRs will, for example, need to contact existing customers with the aim of upgrading their products or subscriptions. For this reason, it’s an affective strategy for SaaS companies that rely on subscriptions for their revenue. With this approach, you’ll be able to not only generate more revenue but also increase the lifetime value of every customer.
Next-step activity quotas. With these quotas, you’ll focus on activities that drive customers to the next step in the sales funnel. For example, an SDR might have a quota of persuading 10 prospects to schedule a demonstration of your product.
Deal-value activity quotas. These quotas are like the differentiated volume approach mentioned earlier. When setting these quotas, you’ll focus on SDRs contacting customers from different value brackets. So, they’ll need to contact and follow up with different numbers of, for example, enterprise customers and SMEs.
Activity Quota Example
Let’s look at an example of how you would implement a basic activity-based quota. Here, you’ll determine the number of follow-ups an SDR needs to do to meet their quota. So, you might determine that your SDR, who supports a team of reps, needs to do 15 follow-up calls a day and 150 follow-up emails.
As the name implies, profit quotas use the profit generated by a rep as a metric. In a sense, they’re therefore similar to revenue quotas. The difference, however, is that a revenue quota doesn't take customer acquisition costs, the cost of goods, and selling expenses into account while a profit quota does.
In other words, while a revenue quota of $10,000 dollars a month might only signify a profit of $3,000, a profit quota in the same amount signifies pure profit.
As a result, profit quotas can drive more growth and motivate your sales team to make more sales. They’re also especially helpful when you have higher costs and, therefore, lower profit margins.
When implementing profit quotas, there is something you should keep in mind. That is, you need to be completely transparent in how much profit you make on every product. In this way, your sales reps will be able to track their progress and see how many sales they need to make to meet their quotas. This, in turn, makes quota attainment a lot easier.
Profit Quota Example
Let's assume that you want to launch a new product. Due to product development, marketing, and other costs, you're able to make $75 profit on every sale to the value of $250. If you were to implement a revenue quota of $5000, your reps would need to sell 20 products per month, but you'll only make $1500 profit.
Conversely, if you implement a profit quota of $3000, your reps would need to sell 40 products. This allows you to drive more sales and growth and gain footing in the market.
When you implement forecast quotas, you’ll use historical data to determine your sales reps’ quotas. As such, you'll typically use data on your sales territory, market share, and other products’ performance to set these quotas. Forecast quotas are especially helpful when you want to gain market share in a new territory or when you're launching a new product.
The major drawback of these quotas is that they rely on vast amounts of data. This means, if you don't have this data, you won't be able to implement these quotas effectively. Moreover, because these quotas rely on so much data, forecast quotas are typically not calculated for individual reps but rather for sales departments or teams. From there, you'll be able to determine the quotas for every individual rep.
Forecast Quota Example
Let's say your sales team for a specific territory usually makes sales to the value of $50,000 during the first quarter of the year and that every rep on the team has an individual quota of $5,000 for the quarter. Your sales forecasts show you that you can expect an increase in sales of 10%.
As a result, your sales team’s quota will increase to $55,000 and the quota for every individual sales rep will increase to $5,500.
As the name implies, combination quotas are when you combine any of the specific approaches mentioned above. This is typically done when you want to reach certain sales goals that rely on different sales approaches and give your sales reps different targets to focus on, which could make it easier for them to meet their quotas.
When using combination quotas, you can define these quotas separately. When you do, your sales reps will have different quotas they need to meet. You could, however, also consider combining these quotas in a way that creates a unique quota for every sales rep.
Combination Quota Example
Let's first look at an example where you define quotas separately. Here, a sales rep would, for example, need to generate revenue in the amount of $3,000 dollars per month and make 50 follow-up calls. You’ll thus set both a revenue quota and an activity quota.
When you combine quotas, a rep would, for example, need to schedule 20 product demonstrations and convert 30% of those demonstrations into sales. Here, you combined an activity quota and a volume quota into one unique quota that your sales rep needs to meet.
How to Set a Sales Quota
By now you know what sales quotas are, you've learned about the different types of sales quotas, and you know why they are so important. Let's now look at probably the most important part - how you should go about setting sales quotas for your reps or sales teams.
Determine Your Goals
The first step in setting your quotas is determining your goals. To do this, you'll typically consider two separate figures. The first is your operating expenses. Here, you’ll need to consider how much revenue you need to generate to keep your business afloat. This is a fairly simple exercise and you'll find all the information you need in your business's financial statements.
The other figure you’ll need to consider is the growth you plan on or expect. In this case, you'll typically look at your business’s past performance to spot trends and decide what a realistic level of growth would be. For example, if your business’s revenue has traditionally grown by 10%, this would be a good starting point.
Keep in mind, however, that this figure could differ depending on your goals and the market conditions at that specific time. So, if your business has traditionally grown at 10% per year, but the market is down, you might adjust this figure downwards. Likewise, if you've launched a new product and you're experiencing increased demand, you might adjust this figure upwards.
Either way, you should ensure that these goals are realistic. When they are, you’ll be more likely to achieve them. In addition, your goals will typically give you a great indication of which quotas you’ll need to use to reach them. For example, if you want to increase revenue, you’ll use revenue quotas. Likewise, if you want to break into a new market, you’ll use volume quotas. Just make sure that the quotas you use align with your goals.
Choosing the Right Quota Setting Method
During the next step, you’ll need to decide on the right quota setting method. Here, you'll typically have one of two options.
With a top-down approach, you'll start with your goals in mind and then assign quotas to sales reps to meet those goals. In other words, you'll decide what you want to achieve and then work backwards from there to determine what you need to do to achieve those goals.
To illustrate this approach, let's look at an example. Let's assume you want to drive revenue for your business, so you decide on a goal of $20,000 for the month. If you have 5 sales reps, they’ll then need to generate $4,000 in revenue each to meet their quotas.
Likewise, if you're using a volume quota, you'll work out how many products you need to sell to reach your revenue goals and then determine the quotas based on that. For example, if every product costs $100, every rep would need to sell 40 products during the month to meet their quotas.
One of the major problems with a top-down approach is that it doesn't take into account past performances or your sales reps’ individual abilities. As a result, quotas determined by using a top-down approach can tend to be unrealistic, which could make them difficult to meet and, in turn, lead to a decrease in sales rep morale.
In contrast to a top-down approach, a bottom-up approach requires that you analyze your past performances, what your reps are capable of, and the prevailing market conditions. Based on this, you'll then determine your quotas.
Let's once again look at an example to illustrate a bottom-up approach better. Let's assume you have a team of four sales reps. An analysis of their past performances and market conditions shows you that:
The first rep can manage sales of $3,000 per month.
The second rep can manage sales of $5,000 per month.
The third rep can manage sales of $4,500 per month.
The fourth rep can manage sales of $7,000 per month.
Based on this information, you set their individual quotas in these amounts and a total quota for the entire sales team in the amount of $19,500. This also means that, if they meet their quotas, you’ll be able to generate revenue in the amount of $19,500.
When using this approach, you'll end up with quotas that are much more realistic and achievable. Keep in mind, however, to base these quotas on your sales reps’ best-performing months. In this way, achieving these quotas will still be challenging, while being achievable, and you'll still be able to drive revenue.
Setting Activity Goals
If you're not using activity quotas, you should consider incorporating some activity goals into your quotas. Although this isn't strictly necessary, it does give your sales reps a framework they can use to help them achieve their quotas.
For example, when using a volume quota, your activity goals might indicate that your reps need to make a certain number of calls, set a certain number of appointments, and give a certain number of demonstrations to meet their volume quota.
These activity goals give your reps something to track their progress against, and, because it makes achieving their quotas easier, it also ups their motivation and morale.
Things to Consider When Setting Quotas
When setting quotas, there are some things you need to consider to ensure that they’re effective. These include:
They have to be realistic. Firstly, your quotas need to be realistic. If they’re not, your reps will struggle to meet them, which dampens their motivation and decreases the morale of the sales team. And when this happens, your sales team will be less efficient and productive, which affects your bottom line.
They need to be challenging. Being realistic doesn’t mean your quotas shouldn’t be challenging. Simply put, if your reps can meet their quotas too easily, they’ll not be as motivated. To combat this, your quotas need to be achievable by about 70% of your reps.
They should be dynamic. When your reps need to meet the same quotas month after month, they’ll become stagnant. In other words, they won’t grow and they won’t be driven to perform better. As such, a sales quota needs to be dynamic and evolve as your sales reps grow, gain more experience, and become more effective.
You have to be transparent. When setting your quotas, it’s crucial that you be transparent. This means your sales reps should know exactly what they need to do to meet their quotas and earn their commission.
The Bottom Line
Setting realistic and effective sales quotas offers a variety of benefits from motivating your sales team to making it easier for you to plan your business’s finances. Hopefully, this post helped illustrate some of the things you’ll need to consider your sales quotas.
Once you’ve implemented your compensation plan that involves sales quotas, you’ll need to manage and calculate the compensation for every sales rep. This is where Performio comes in.
We automate your sales compensation processes so you can spend more time running and growing your business. We love helping businesses reduce the challenges of calculating sales commissions. If you’d like to learn more about Performio or how we can help you, let’s talk. So contact us today to find out more.