March 2013

VOL. 21   ISSUE 1

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Setting sales quotas has never been more difficult. Although the economy is showing signs of improvement, economic uncertainty and the sales volatility associated with it are making it more difficult than ever to set goals. Historically proven assumptions are unreliable barometers of what is to come. The challenge for organizations is to determine the best quota-setting approach in an environment in which next year’s sales may be quite different from the previous year's.

It is important to note that there is no single solution. The quota-setting process must be tailored to each company’s situation and limitations. This article offers “Ten Rules for Effective Quota Setting” (see the table below) and provides guidance for tailoring those rules to meet a variety of challenges. It will cover how to:

Gather the Data

To set accurate and effective quotas, an organization must first determine marketplace potential and identify the factors that affect sales performance. The key is to gather as much information as possible to understand and make assumptions about customer need, historic production, current capacity to sell and corporate sales objectives. Quotas are only as good as the data behind them, so the more data gathered the better. Organizations need to answer the following questions:

If certain market information is unavailable, quotas may need to be more company-centric, relying on performance or internal growth objectives and assumptions rather than customer or market considerations.

Select the Best Type of Quota

The answer to the first question in the previous section — How does the organization define sales performance? — is a key determinant of what kind of quota to establish. Quotas should be determined by the type of performance the company wants to achieve. Sales organizations typically base quotas on volume, financial results, activities or a combination thereof:

To ensure effective control and motivation, quotas work best when broken down to the most precise level, such as salesperson, district, branch or specific products or service offerings.

Choose the Proper Quota-Setting Methodology

Armed with the right information and an understanding about the types of quotas that will be most effective for its sales teams, an organization’s next step is to select the proper quota-setting methodology. There are five primary ways to set quotas (listed in order of complexity and thoroughness from least to greatest):

There is no right or wrong approach. The “best” solution depends on what an organization wants to accomplish and the type of information that is available. Neither the fixed allocation nor the historic allocation method considers the potential of individual accounts. The adjusted value, the account planning and the bottom-up/top-down methods are more strategic because they consider factors that influence performance and a region’s potential.

Although the most strategic method — bottom-up/top-down — blends a customer-centric focus with corporate expectations, it can be time consuming to determine. The simplest method — fixed allocation — applies an equal quota to everyone, but does not consider opportunity within a set of accounts.

Organizations often combine methods to accomplish specific goals.

Manage Expectations

An individual or group must be designated as the owner of the quota-setting process. Ideally, quota setting resides in a sales operations group and includes input from finance, marketing or other functions. Clearly, assigning responsibility for setting quotas and managing adjustments ensures consistency in management and accountability.

Quota setting can also improve over time if a company uses a consistent approach. If the process frequently changes, managers never have a chance to develop proficiency in allocating quotas. Finally, quotas work best when they direct behavior in one direction. Add-on compensation components (e.g., management by objective and sales contests) may lead behavior in conflicting directions.

Conclusion

While quotas are no substitute for solid sales management, they are proven tools for motivating field performance. The accuracy of quotas directly correlates to the quality of the data and the time invested in getting the quota-setting process right. The goal is not to predict outcomes, but rather to allocate responsibility for achieving the business plan in a fair and reasonable way. Organizations that take the time to follow the steps outlined above will be rewarded with more accurate and effective quotas.

 

About the author:

Joseph DiMisa is a senior vice president and leader of Sibson Consulting’s Sales Force Effectiveness Practice and author of two books on sales force effectiveness. He can be reached at 770.403.8006 or jdimisa@sibson.com.