Commissions often revolve around sales quotas. Reaching quota, exceeding quota, or falling short of quota all impact how a sales rep earns. That’s why it’s important to set your team up for success with sales quotas that make sense.
Hierarchy overrides in commissions can help organizations hang onto and foster talent.
Unreasonable quotas, when the finish line seems too far in the distance, can demotivate an entire salesforce and lead to higher turnover. Any sales organization looking to invest in growing an experienced and reliable sales team should aim to provide feasible objectives.
The best way to develop reasonable quotas is to approach them with realistic expectations and a solid understanding of what the overall goals are for the organization as a whole. It’s wise to consider the ways you hope to motivate your salespeople.
Depending on an organization’s industry, size, and location, there are a number of ways to design quotas. Below we explore a few ways to propose a quota that works for your unique team.
Different Types of Sales Quotas
- Revenue: A quota based on revenue challenges sales reps to drive a set amount of income for the organization as a whole during a predetermined time frame. This type of quota can be based on a set percentage of increased revenue or a goal calculated from sales from previous periods.
- Profit: When quotas focus on profit, they take a similar direction as revenue-based quotas. However rather than aiming toward a revenue target, profit quotas consider gross profit margins, acknowledging expenses and the cost of goods sold.
- Volume: If a sales rep is assigned a volume quota, they must close a certain number of sales or reach a certain amount in sales, such as $10,000 in sales per month.
- Deal Value: This type of quota may look very similar to gross profit margin or volume-based quotas. It concentrates on the value of deals closed by a sales rep rather than the number of those deals.
- Activity: When targeting activity over dollars, a sales rep needs to complete an agreed-upon sum of sales-related activities, such as sales calls and prospecting actions.
- Combination: Many quotas may incorporate a combination of all or some of the above factors.
Before putting ink to paper on any kind of quota detail, it’s important to have a few stats and metrics to inform the strategy overall. We explore a few of those here.
Elements To Factor Into a Sales Quota
- Overall Corporate Sales Goal: If an overall sales goal for the organization has been established, it’s easy to determine the amount each individual rep needs to sell, either in dollars or number of deals, to support the entire company in achieving that goal.
- Average New Business Per Rep: Break down the rate at which a sales rep in the organization — or even in the industry — introduces new business. This may have to be broken down further by territory or level of seniority as well as how many leads are provided to a rep. This will provide a solid benchmark for any type of quota.
- Average Leads Generated Monthly (or Quarterly): Consider how many leads a salesperson gets, either from marketing or through prospecting activities, each month.
- Rate of Leads that Close or Convert: The rate at which an employee can close on those leads will also help shape the picture of reasonable performance for your team.
- Average Deal Size: If a quota is based on revenue, profit, or even specifically on deal value, understanding the most common size of a deal closed for the average rep as well as the potential for increasing those sales will be an important factor.
- Average Monthly Recurring Revenue (MRR): When it comes to subscription-based sales, a quota may take into account monthly recurring revenue. Have this metric handy when considering that type of quota.
- All Revenue-Driving Activities: Be aware of every single operation performed by a salesperson that ultimately drives revenue and how those activities can impact sales goals overall.
- Scope of Opportunity for Each Salesperson or Team: Understand the landscape that your team will face. The number of potential customers located in a sales rep’s territory will impact their performance. So will the economic big picture. For instance, if a global pandemic shuts down a number of businesses within a short period of time, that can shrink any sales rep’s scope of opportunity to sell more.
Once the factors have been set out, it’s time to calculate a quota. There are a few different ways to approach this as well.
Ways To Calculate a Sales Quota
- Top Down Quota: As mentioned earlier, if an overall sales goal is determined before quotas are assigned, this would result in a top down strategy. This means that the organization starts with the desired profit or revenue goal that’s targeted overall then breaks down the objectives each salesperson needs to meet throughout the year to uphold that big fat goal.
- Bottom Up Quota: Rather than start with the company goal, a bottom up strategy works with the individual talents and abilities of each sales rep and uses that information to determine quotas and goals throughout the year.
Once a quota is set, the next step is to resolve how the quota will correspond to sales commission earnings. Then it’s just a matter of calculating all of those complicated variables.
We can help simplify those calculations — maybe even take them off your hands altogether. Contact us or set up a free demo and we’ll happily walk you through the whole process.