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February 24, 2020

If there’s any person that finds it almost impossible to walk away from a challenge, it’s a sales rep.

The sales field is naturally competitive, and it attracts people with personalities to match. Common igniters in an ambitious sales rep include outselling their peers or generating more revenue than a rival company.

But what about that internal battle of competing against yourself? That’s where the real fire is fueled.

This is presented to reps in the form of a sales quota.

The perfect sales quota is challenging enough to push reps to work their hardest, without being unattainable. You don’t want reps taking one look at their sales quota for the next quarter, get freaked out, toss their hands in the air and say, “Not gonna happen!”

Ideally, reps will look at their quota, recognize that it’s going to be a challenge, and instead of panicking, start strategizing the most effective way to approach it.

Importance of setting sales quotas

A primary purpose of setting sales quotas is to forecast goals.

It’s important for sales managers to get an idea of what to expect for the upcoming period so they can accurately track sales metrics, measure success, and relay that information to their higher ups. Educated sales quotas that are both challenging and attainable offer insight into how the sales team is expected to perform.

Sales quotas also help managers monitor rep activity. Depending on how sales quotas are broken down at your business (by rep, region, team, etc.), you can judge performance at multiple levels.

When asking for updates from sales reps, they might say, “I’m 75% to quota.” You can then compare that percentage to how far along they are in the designated time frame.

Lastly, sales quotas motivate the team and hold reps accountable for their work. Sales is a competitive field, meaning most people who work within it are always after the gold. There is, of course, a competitive edge brought by trying to outsell rival businesses.

However, a sales quota adds an extra layer of contest - the reps are competing against themselves, too.

Sales quota vs sales goals

Sales quotas and sales goals are often confused for one another, and rightfully so. They’re similar ideas with the same purpose, but there’s a difference.

A sales quota is a subset of a sales goal, meaning it represents only one of the series of actions that someone takes to reach their sales goal. Sales goals relate to overall company objectives, while quotas point to specific sales metrics that need to be achieved by a certain time period.

Imagine a sales goal as an entire book, and a sales quota as just a chapter within that book.

Sales Goals Sales Quotas
- Includes a series of actions - One specific action
- Relates to overarching company objectives - Relates to goals specific to sales
- Example: increase revenue streams - Example: acquire five new customers per month

Sales quota examples

Before choosing a method for setting your team’s sales quotas, you need to first pick how you’ll measure success. There are six values that are often used to measure quota: revenue, profit, activity, volume, forecasting, or a combination of these.

Revenue quotas

Revenue quotas require that a sales rep sell enough of their solution to generate a designated amount of revenue for that time period. Success is based on the monetary value that the rep’s efforts provide. Revenue-based quotas are the most common type of sales quota.

Businesses will typically set revenue-based quotas for the month or quarter, but this all depends on their average sales cycle length. If it takes an average of 90 days to convert a prospect into a buying customer, setting a revenue-based quota for the month shouldn’t be a primary indicator of a rep's progress.

Example of revenue quota:

Joe needs to sell $5,000 in revenue this month to hit quota.

Profit quotas

Profit quotas are similar to revenue quotas, except these focus more on the gross profit of a sale, not just the revenue. Revenue is the amount of money generated from a sale. Gross profit subtracts the cost of goods sold from revenue, revealing the actual money acquired from the sale.

Profit quotas are often set to shift the focus of reps from selling to profit, which are two completely different concepts. The terms "sales" and "selling" can be used interchangeably with revenue and volume. It strictly focuses on the amount sold. Profit, on the other hand, focuses on what the business actually gains once the cost of selling is taken into account.

Using a profit-based quota will shift your team’s focus from selling as much as possible to targeting high-value accounts that offer the most profit potential.

Example of profit quota:

Max needs to hit a profit quota of $1,000. If he generates $1,200 in revenue, but his selling expenses end up being $300, his total profit would be $900, leaving him short of his quota.

Activity quotas

An activity quota sets expectations for a rep to complete a certain amount of activities within the specified time frame. Success is based on whether or not the rep completed the predetermined amount of activities, such as making phone calls, sending follow up emails, or scheduling value demonstrations.

Activity quotas are typically set for sales development representatives (SDRs) or business development representatives (BDRs). SDRs and BDRs are not expected to close deals, so their performance can’t be evaluated based on revenue. Instead, their quotas make sure they’re contributing to the overall sales operation by supporting reps with their selling activities.

Example of activity quota:

Jessica needs to send 100 emails this month to hit quota.

When tracking activity quotas, you don’t need to keep a running tally of all the calls you’ve made and emails you’ve sent. Use customer relationship management software to track each and every customer interaction in real time in an organized and easy-to-access manner.

Volume quotas

A volume quota focuses on the number of units sold within a certain time period. Success for volume quotas is based on whether or not the rep sold the designated number of units.

Sales teams using volume quotas incentivize reps to sell as much as possible. The value of the product isn’t as big of a concern as the quantity at which it’s being sold.

However, some sales managers will create volume quotas around a specific product in the hopes of boosting its sales. Depending on the business and insight managers want, volume quotas might be broken down by territory or individual rep.

Example of volume quota:

Olivia needs to sell 15 units this month to hit quota.

Forecast quotas

A forecast quota is set based on historical data. Sales managers will look at that past performance of a rep or territory, and use that information to set quotas for the upcoming period.

Example of forecast quotas:

Abby and Danny both sell snowboards.

Abby, whose territory is in the Rocky Mountains, has generated about $5,000 in revenue in Q1. She might have a sales goal of increasing her revenue by 10% for the quarter, so her quota for Q2 would become $5,500.

Here's the math behind the madness:

10% of $5,000 is $500.
Add that number to Abby's Q1 quota and that number is the forecasted quota for Q2.

Situated in the Midwest, Danny sold $3,000 in revenue in Q1. The amount of opportunities (snowboarders) isn’t as significant in the Midwest than it is in the Rocky Mountains, so his forecasted quota is going to be less than Abby’s. However, if sales in the Midwest tend to spike in Q2, Danny’s manager might increase his quota.

Setting these forecast quotas requires looking at data from the past to be accurate when predicting outcomes for the next quarter. You also need to anticipate what’s coming, which is tricky without a tool like G2 Seller Solution, which allows you to identify potential buyers and direct them towards your sales funnel.

Combination quotas

There are plenty of sales teams that’ll combine two different quotas to create a more specific sales target. The two quotas can be kept separate, creating two different sales targets for the rep, or they can be combined to create a unique quota.

Example of combination quotas:

Nora needs to make 50 calls this month and sell $2,500 in revenue.

The example above simply combined two different quotas: revenue and activity. The two amounts are likely less than what is typical for that type of quota alone, since the rep needs to split their time.

The next example of a combination quota fuses two different methods together to create a unique sales target.

Chris needs to set up 15 appointments with customers and convert 40% of those leads into paying customers.

In summary: The way your business will measure its sales quotas depends on your primary sales goals. If you have a sales goal that you prioritize over others, you can craft your sales quotas to support it. 

How to set sales quotas

There are three steps in setting sales quotas: establishing a baseline, choosing a method, and setting activity goals for the quota. Remember that these sales quotas need to be fair, challenging yet attainable, and realistic.

Sensibility is perhaps the most important part of setting quotas. A common rule of thumb is that 80 percent of your reps should be able to meet quota within the given time frame. If your team hasn’t hit that 80 percent yet, it’s possible you aren’t being realistic.

When going through the following steps for setting sales quotas, keep that in mind. Also, don’t forget the type of quota you will be using.

1. Establish a baseline

A baseline is the minimum standard of performance. The baseline is often the dollar amount associated with meeting the basic needs of your business. Essentially, it’s the amount of money you need to make to stay in business.

When establishing a baseline, you can look at it from the perspective of a rep, region, or entire team. However you do this, make sure you take differentiating factors into account like available opportunities in a certain region, or the quarter you’re currently in or approaching.

Make sure to take growth into account. Don’t go too overboard, but ensure your baseline reflects the growth your business has seen and will continue to see in the coming period.

2. Choose a quota-setting method

Next, you need to choose a method for setting your quotas, and then apply it. There are two primary methods for setting quotas: the top-down approach and the bottom-up approach.

how to set sales quotas

Top-down approach

With the top-down approach to quota setting, the goal for the overall sales team is set first and then sales quotas are assigned to support that goal. Essentially, the desired result is at top-of- mind, and then sales managers will work backwards to find out what needs to be done to get there. Goals set using the top-down approach are created based on the organization’s objectives.

Here’s an example of how setting quotas using the top-down approach would work:

  1. The sales manager of a team will analyze the primary objectives of the organization for the upcoming month.
  2. Based on those objectives, a goal will be set to support them. If the focus of the month is to drive revenue, the goal will reflect that. In this example, the sales manager sets a goal of $15,000 in revenue for the month.
  3. If there are three sales reps on the team, and the goal is $15,000 in revenue, each sales rep will be given a quota of $5,000 in revenue for the month.

Quotas set with the top-down approach are often ambitious, which can motivate sales reps even further. However, they can easily become unrealistic, as they do not look at the abilities of reps and past performances.

Bottom-up approach

The bottom-up approach of quota setting does the opposite of top-down. With this method, sales managers will analyze past performance, the capabilities of sales reps, and market opportunity. Quotas will be set based on that data. Those quotas will then determine the goals for the entire sales team.

When setting quotas with the bottom-up approach, there are four sales key performance indicators sales managers will want to take a look at:

  • Average deal size
  • Number of sales reps
  • Number of qualified leads
  • Lead-to-close ratio

Using data from the metrics listed above, set a realistic quota that will still challenge your sales team. As your reps gain experience and are capable of closing more high value deals, adjust their quota to account for this progression.

Here’s an example of how setting quotas using the bottom-up approach would work:

  1. The sales manager of a team will analyze historical data, past performance, and the developing capabilities of the reps.
  2. They’ll then set quotas depending on the information gathered. In this example, for the upcoming month, one rep can handle $4,000, another will most likely muster up $5,000, and a less experienced rep is good for $3,000.
  3. Based on those quotas, an overall goal for the sales team is set. In this example, it would be $12,000 in revenue for the month.

It’s easier to be realistic when setting quotas with the bottom-up approach. However, don’t forget you still want them to be challenging. When using this approach, set quotas based on that rep’s peak performance. This way, it’s still challenging, but they can’t argue that it isn’t possible.

Whichever method you choose, don’t forget to keep that baseline in mind!

The sales quota calculator below provides a simplified way to calculate a sales quota. This tool offers a great starting point for sales leaders looking to estimate sales quotas.

3. Set activity goals

Once you have established a baseline, chosen a method, and set the quotas, it’s a good idea to accompany them with some activity goals. If you decided on the activity quota, this won’t be necessary.

Setting activity goals is by no means necessary, but providing a roadmap for reps to follow as they set out to hit their quota will prove helpful. Based on your conversion rates for each activity, give reps an estimated amount of calls they need to make, emails they need to send, and value demonstrations they need to conduct to reach their quota.

Keep track of any selling activity with sales acceleration software, which offers the ability to track calls and email, keep reps equipped with the content through every stage of the sales cycle, and analyze success rates.

These activity goals will be different for each business, so it’s important to look at your typical conversions and other data surrounding past performance and success rates.

These activity goals won’t always guarantee 100 percent success. It simply offers reps an idea of their workload for the upcoming period and provides another way to measure their efforts.

Attributes of a good sales quota plan

While following those three steps is a good start to setting sales quotas for your team, there are other things you need to take into consideration. The ideal sales quota embodies three key qualities.

Dynamic

If you keep reassigning the same quota to the same rep every single period, they won’t be inspired to grow. As reps gain experience, they can handle a more challenging quota.

For example, there’s no doubt that reps can handle a heftier quota two years into their career than they can in the first month. Maybe they’re ready for a higher revenue goal, or it might be time to transition to focusing on bigger accounts. Recognize their growth and adapt their quota accordingly.

Challenging

Sales quotas need to challenge your reps. If you set the bar too low, reps will recognize this and potentially slack off. You don’t want reps hitting their quota half way through the month and then taking it easy when they could be generating more sales.

Gain an understanding of your reps abilities and create a quota that’ll push them to work their hardest. It’s best to aim for the upper bound of the reps abilities. They can recognize the challenge but also acknowledge that it’s possible.

Realistic

While throwing a challenge at reps should always be at top-of-mind when setting quotas, it’s also necessary to be realistic. Setting the bar as high as possible might seem like a good way to produce the best results possible, but it’s rarely a good idea.

Setting unrealistically high quotas is a good way to kill sales productivity, and therefore, profits. Reps realize when the quota they’re presented with is unattainable. If they know they can’t hit it, why would they even try? Not to mention that this can cause frustration in the team, creating a toxic work environment.

If reps do decide to tackle an unrealistic quota, their success rate will struggle. They might start to feel negative pressure to sell fast, resulting in them using extremely aggressive selling tactics that won’t come off as appealing to customers.

Look at past performance and future potential of reps to find that happy medium between offering a challenge and being realistic. It’s difficult, but not impossible.

Uninformed quotas kill business

Sales quotas are meant to set reps up for success while challenging them at the same time. This isn’t necessarily easy to do.

Managers need to take company goals, data on past performances, and the rep as a seller into account. Not to mention market opportunity and business growth.

Yes, setting quotas is quite the process, but doing so accurately will pay off. Your reps will feel trusted, challenged, and motivated to go above and beyond.

Reps appreciate the challenge of hitting a sales quota, but they will also want to see a monetary reward. Learn how to build out a sales compensation plan, and find out how to pair a quota with a paycheck.

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