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How to Set Sales Quotas that Work for Your Business

January 26, 2023
January 31, 2023

Whether you're a seasoned sales professional or new to the game, you likely know a thing or two about sales quotas. But do you know the different types? The advantages and disadvantages? The best practices for setting and achieving them?

This article will dive into the world of sales quotas. We'll cover everything from the importance of quotas to the different types and examples to quota setting fundamentals.

Let’s set the stage by defining significant sales quota-related terms.

Sales quota key terms, defined.

In the world of sales commissions, there is no shortage of terms. Sales quotas. Sales targets. Quota attainment. Quota-based commission.

Here are some important definitions to lay the foundation:

Sales Quota

What is a sales quota? A sales quota is a specific, quantifiable, and time-bound goal established by an organization to measure the performance of its sales force. 

Sales quotas are set to align the sales team's efforts with the company's overall strategic goals. They are used to motivate and incentivize sales reps, often through financial rewards — bonuses and sales commissions — to further drive performance. 

Many companies will set different quotas for different products or services depending on their profit margins, market coverage, or other factors. Doing this enables them to reward employees fairly and at different levels based on how challenging the sale is or how much profit is expected from it.

Regularly monitoring sales quotas means sales leaders can proactively assess the effectiveness of sales strategies and identify areas for improvement.

Sales Target

Sales quotas and sales targets are both performance metrics used to measure the success of a sales team or individual. They are often used interchangeably but do have slightly different meanings.

Like sales quotas, sales targets are specific, measurable, and time-bound goals used to guide the sales process, track progress, and measure the success of sales strategies and efforts.

However, unlike sales quotas, salespeople often use sales targets to set their own goals and objectives. And while sales quotas are usually quarterly or annual, sales targets can be set for different timeframes — daily, weekly, monthly, quarterly, or annually.

Achieving sales quotas is critical for business success: your goals will remain out of reach without meeting or exceeding these figures.

Quota Attainment

As we know, sales folks are competitive by nature. So what is sales quota attainment? Well, it’s the ultimate test of a salesperson's mettle — all about hitting that sales goal, quarterly quota, or monthly target. 

Ideally, you reach (or attain) that number and blow through it for additional extrinsic or intrinsic rewards.

Quota-Based Commission

Quota-based commission is a type of compensation structure where sales reps are given a specific sales target or quota to meet and are then paid a commission based on their ability to meet or exceed that figure. 

For instance, say a sales rep has a $750k quota. Their commission rate will be based on variable sales compensation on target/quota. Hitting 100% of quota means they receive the full commission rate!

For some commission structures, the commission rate may vary depending on how well the salesperson does in relation to quota. This is often used to motivate salespeople to strive for higher performance levels and increase overall sales for the company.

Okay. Memorize those terms ... or just keep coming back here for reference. 

Now, why is it so essential to create these sales quotas?

What is the importance of sales quota?

Sales quotas are essential in the sales process as they provide a clear and measurable goal for the sales team to strive towards. 

The purpose of sales quota? They serve as a performance benchmark and help managers evaluate their sales strategies' effectiveness.

Sales quota objectives often include the following: 

  • Alignment: Mapping sales efforts with the overall business strategy and revenue goals
  • Motivation: Inspiring sales teams to reach (and exceed) their goals
  • Weaknesses: Identifying and addressing underperforming areas for salespeople
  • Flexibility: Tracking progress and making adjustments to sales strategies
  • Transparency: Providing transparency and accountability for sales performance
  • Focus: Encouraging salespeople to lean in on high-value activities and customers
  • Forecasting: Predicting revenue and allocating resources appropriately

By setting clear and measurable targets, managers hold salespeople accountable for their performance and provide regular feedback on how they are doing. 

Setting sales quotas ensures everyone is working towards the same goal and that the sales team is contributing to the company's overall success. How do you know whether you are setting appropriate stretch goals for your reps? 

Pro tip: A healthy sales organization should aim for about 60% of reps hitting their quota. Balance is critical because if too many reps fail to meet quota, not only does the cost of sales increase due to fixed costs, but reps increasingly mistrust management and become demotivated. However, if too many reps achieve quota, the cost of sales increases as more reps earn acceleration in the comp plan and increasingly become entitled to their payouts.

Here’s an example of a company where ~75% of reps are reaching 100% plan attainment. Sales leaders should monitor plan attainment rates quarterly to determine if it’s time to adjust quotas.

What are the pros and cons of commission based on a sales quota? 

When considering the appropriate sales quota system for your team, don’t forget about a commission-based sales quota — a powerful motivator for salespeople, but not so fast … it also has drawbacks. 

When exploring a commission-based sales quota system, note the following advantages and disadvantages:

The pros:

  • Incentivizes salespeople to optimize performance: Salespeople motivated by commission tend to work harder to hit their sales quotas and make more money. The result: increased productivity and more sales. Win-win.
  • Aligns sales reps' goals with organizational goals: When salespeople are rewarded for hitting (or exceeding) sales quotas, they are more likely to focus on the goals necessary to (and aligned with) the company. This can help ensure the sales team is working towards the same company-wide objectives.
  • Attracts top talent: The best salespeople are often drawn to commission-based opportunities as the upside can be pretty high. With this program in place, you are more likely to attract top talent.

The cons:

  • High-pressure environment: Stress and burnout can result from a salesforce under intense pressure to hit its goals.
  • Unethical behavior: With high competition (and high stress) comes the potential for unethical tactics. For example, providing customers with less-than-honest information, adjusting sales figures, and other “tactics” to hit sales quotas.
  • Income inequality: Salespeople who cannot reach their sales quotas will earn less than successful people (obviously). This can lead to income inequality (obviously), but it also can create resentment and dissatisfaction among the sales team.

Commission-based sales quotas can be a great way to motivate salespeople and increase productivity, but it's also essential to consider the potential drawbacks. 

Companies should be transparent about their commission structure and communicate clear guidelines for ethical behavior to mitigate the potential downsides. Additionally, it's essential to have a solid onboarding and training process for new salespeople and provide adequate support to help them meet their quotas.

5 common types of sales quotas (plus examples)

Do you know the different types of quotas and how they can help drive success for your team and business? 

Here are five common sales quotas:

1. Activity Quota: Keeping your sales team active and engaged is important! This type of quota is often a simple measure of a specific selling activity over a given period — in this case, it’s more about the activities that sellers need to complete rather than sales volume or output. An activity quota can help ensure individuals make the most of their time and work towards hitting their sales targets!

Examples:

  • Total number of outbound calls within a given period
  • Total number of outbound emails within a given period
  • Total number of meetings booked within a given period
  • Total number of proposals within a given period

2. Sales Volume Quota: Hitting a specific number of “units” sold is another way to measure success. Volume quota is the number of products (or services) a salesperson sells over a specific time. This type of quota helps keep a team focused on driving revenue.

Example:

  • A sales rep meets their sales volume quota by selling 50 accounts at an average of $15k ARR

3. Profit Quota: Get those margins! Profit quotas incentive reps to reach a specific profit margin — a measure of how much profit is generated in a given period. This type of quota ensures the team focuses on profitability and not just numbers and volume.

Example:

  • A sales rep meets their $60k profit quota by selling $500k ARR because the average net profit margin is 12%

4. Forecast Quota: Can you predict sales? Of course, you can. Forecast quota measures how much a salesperson is expected to sell in a future period. Planning for future growth is essential for the long-term health of any organization.

Example:

  • A new sales rep is ramping and expected to hit $50k forecast quota by the end of the quarter

5. Revenue Sales Quota: Unlike profit quota, this type looks at meeting a specific revenue target — the amount of money a salesperson produces in a particular period.

Example:

  • A sales rep meets their $1m revenue sales quota

No matter which type of sales quota you implement at your organization, the end goal is the same: ensure sales reps close new deals and help grow the company. Whether it's activity, volume, profit, forecast, or revenue, setting the right quotas can help ensure that your team is strategically working toward your company's success.

What are some recommended quota setting procedures?

Every sales leader wants their reps to be the best they can be — and they know that any clear, achievable goal encourages employees to strive harder toward success. Setting sales quotas is no different: when done right, quotas can be an effective tool for increasing productivity and results. 

Think of quotas like endzones in football — they mark the attainment point that each rep on your team needs to hit to score and get paid. 

Our friends at OpenSymmetry explain how easy it can be to miss the mark:

When you miss the mark with quota setting, expect channel conflict, ownership confusion, and salesperson disengagement. Further, it’s not just that the salesperson isn’t motivated to sell — rather, a discouraged mindset will lead to less sales in the face of a plan perceived to be unfair and unattainable. The ultimate result is missed targets not only for the salesperson personally, but if the goals are tied to strategy as they should be, missed targets for the organization as well.

Here are fundamental principles to keep in mind when designing quotas:

Align with Strategy: Quotas should be calculated and determined in a way that aligns with high-level corporate objectives. For example, are new products or features being launched, and is the quota designed to reflect that? Use quotas to reinforce and motivate strategic sales behaviors.

Consider Sales Motions: Be sure to account for the coverage model to mitigate channel conflict.

Uniform Execution: Follow the same process for all incumbents in similar roles.

Simple: Ensure that quotas can be easily followed and explained.

Equitable: Set quotas that are achievable (albeit stretch) targets to ensure confidence in the quota system. Combine top-down and bottom-up approaches. Top-down = based on company-wide goals. Bottom-up = based on the individual salesperson's abilities and past performance. The magic happens when combining both methods — more realistic and achievable quotas for each role.

Comp Model Alignment: Leverage quotas to help differentiate high and low performers (and their earned commissions).

Deploy Entire Quota: Ensure quota deployed adds up to the entire sales plan (although companies may over-allocate).

Deliver On Time: Communicate quotas to reps within two weeks of the performance period to utilize sales momentum.

Clearly Inform Recipients: Create a communication process whereby managers explain how quotas were set and help reps strategize to overachieve.

Another quota setting best practice? Change Management. Quotas evolve: Your company and market are constantly changing, so your quotas should too. Review and adjust quotas regularly to reflect changes in your company's goals, the market, and your sales team's performance.

These tips help ensure your quotas are realistic, achievable, and motivating for all. 

Remember, quotas aren't meant to be a punishment; they're a tool to help you achieve sales goals. Mix in creativity and flexibility to help ensure sales quotes are effective.

The simple formula for calculating sales quota

We now know different types of sales quotas and quota-setting best practices.

But how do you actually calculate an effective sales quota? Is there a simple formula? A calculator?

It depends, of course.

There are many sales quota calculators floating around the Internet. Each is slightly different based on what type of sales quota you are creating. For purposes of simplification, we recommend the following “standard” quota calculator: 

Total Expected Revenue ($) / Total Number of Sales Reps = Average Sales Quota Per Rep

Example: Over 12 months, your Account Executive team closes an average of 100 deals per month. The average monthly contract value of those 100 deals is $10k. You currently have 20 sales reps.

(100 X $10,000) / 20 = $50,000

Some disclaimers: 

  1. Historical data does not always predict future earnings, but it’s a good starting point.
  2. “Average” can be tricky as it does not factor in performance factors such as experience/tenure, region, product, customer segment, market coverage, etc.
  3. Figures are not set in stone and should be reviewed and adjusted regularly.

Let CaptivateIQ help you with sales quotas — and more!

Setting sales quotas can be an intimidating process, but CaptivateIQ can help. Our agile incentive compensation management system allows you to generate custom reports, such as a quota achievement report, that can help you assess performance and make the necessary adjustments.

As our Product Solutions team puts it:

You need to have Compensation Plan Effectiveness Analytics designed upfront and run with every payout cycle. Your rev ops team needs not to just administer the plan, but also, design a process by which you can frequently assess how the plan is working against the strategic goals laid out at the start. Build a mechanism to adjust, and tweak the plan with levers such as rates, accelerators, gates, and so on to bring it back in alignment.

Learn more about CaptivateIQ's reporting capabilities.

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