How to Set a Sales Quota

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Although closely related, sales goals and sales quotas serve different functions in your business. Goals relate to overall company objectives, while quotas are a series of small victories that help you reach your goals. Many sales organizations set their quotas arbitrarily, leading to lethargic sales teams, high turnover rates, and stifled sales performance. However, this guide will help you avoid that mistake and walk you through the process of setting a sales quota the right way.

Why Setting Accurate Sales Quotas is Worth It

Effective sales quotas are more than just stepping stones to your next big milestone achievement. While they seem simple and minuscule in the grand scheme, they can help you and your team deliver excellent customer experiences that lead to more revenue.

They serve countless other purposes as well, including:

  • Keeping your team accountable
  • Aligning team efforts to meet your objectives
  • Motivating your sales reps
  • Developing incentives and fair compensation plans
  • Setting challenging but achievable goals
  • Eliminating unethical and immoral sales tactics
  • Building long-term customer relationships

A sales quota is an excellent way to ensure your team’s aligned on working towards your company’s overarching goals and objectives. Whether those goals include revenue milestones or not, your sales team plays a direct role in what keeps your business afloat—making money.

So, it’s important to keep them aligned and motivated. Aside from that, you can also set employee expectations and monitor sales activity at a granular level with sales quotas.

According to a CSO Insights report, 45.4% of salespeople miss their quotas. Rather than looking at that as a negative, you can use that statistic as a benchmark to encourage all-in participation from your team. Accurate sales quotas can even help you develop fair and adequate compensation plans and other incentive plans that encourage the kind of activity you want to see from your team members.

As such, it’s crucial to get them right.

Lastly, accurate sales quotas help to curb unethical behavior. Overambitious targets can pressure your sales team to make promises they can’t keep, use overly aggressive sales tactics, misrepresent products and services, and engage in other unethical practices.

On the other hand, reasonable quotas offer just enough incentive for your sales team to hit their target while building long-term customer relationships.  

The Investment Needed to Create an Accurate Sales Quota

CRM software is an indispensable tool when creating sales quotas. If you don’t already have one, now’s the time to implement it.

According to a Nucleus Research report, the average ROI for CRM software is $8.71 for every dollar spent. There’s no question that it’s worth the investment since it helps you manage and streamline sales, support, and marketing workflows.

The actual cost of implementing CRM software is hard to pin down and varies on a case-by-case basis. However, there are tons of free options, and many offer affordable entry-level plans if you have a tight budget.

On average, cloud-based CRMs cost $1,800 per user over five years, which breaks down to $30 per month. Many are priced significantly lower than this, and enterprise plans can cost significantly more. So, the actual investment depends heavily on what you need. There are also hidden costs that can hike up the price, including:

  • Priority vendor support
  • Strategy consultations
  • Ongoing staff training
  • Ongoing customization
  • Minimum contract terms                       

If you’re not sure which tool is right for you, check out our review of the best CRM software on the market. In it, you’ll find tips on how to pick one, our top recommendations for different situations, and accurate pricing.

With all that said, there’s another significant investment to consider: time. Setting your sales quota can take anywhere from a few weeks to a few months, depending on your organization’s structure and complexity.

Throughout the rest of this post, we’ll walk through how to:

  1. Identify Your Resources
  2. Choose an Appropriate Sales Quota Strategy
  3. Choose How to Set Your Quota
  4. Establish a Baseline
  5. Calculate Your Sales Quota
  6. Determine Your Review Period
  7. Communicate Performance Expectations

By the end, you’ll have a sales quota that makes sense for your business, the number of resources you have, and your overall business goals.

7 Steps to Set a Sales Quota

Creating a sales quota is a simple process, but knowing what to do and the order to do them is key. After creating hundreds of our own, we figured out a tried and true process to setting sales quotas that push your team without being unreasonable.

1. Identify Your Resources

The best place to start is with a sales quota calculator and template. Rather than doing all the math and creating formulas on your own, Hubspot’s free calculator makes it easier than ever to find the numbers you need.

In just a few minutes, you’ll know your drop-off rates, conversion rates, and a full picture of your sales pipeline.

Not only that but you’ll also have more insight into how effective your team is at moving prospects through the different stages of your sales cycle. From there, you can use these numbers and the free template to set realistic monthly and quarterly goals.

When you sign up, you’ll get everything you need to identify bottlenecks and improve your processes, including:

  • Monthly & quarterly sales Goal setting template
  • Dropoff and conversion rate calculator
  • A guide to improving conversion rates
  • Deal and MRR pipeline tracker

This is also an excellent time to look into integrating HubSpot’s Sales Hub into your workflow. This powerful sales CRM comes with quote functionality, sales engagement tools, reporting and analytics, and everything you need to manage your sales pipeline.

There’s a comprehensive free plan you can start with. It’s better than many paid CRMs out there, so it’s well worth at least signing up and seeing if it’s a good fit. When you outgrow the free plan, paid plans start at just $45 per month.

2. Choose an Appropriate Sales Quota Strategy

In our experience, there are five ways to arrive at an appropriate sales quota. The best strategy for your and your team depends on various factors, including your industry, the size of your business, and your business objectives.

Your strategy also heavily depends on how you track your team’s performance. One way to ensure you’ve chosen the right strategy is to create a sales quota using all five. From there, you can gauge which one will be the best fit for you and your team.

Some strategies won’t work with the information you currently have. So, you can immediately cross those off your list and focus on the remaining viable options.

Volume-based Quota

Volume-based quotas take into account the number of units sold over a specific period of time. Alternatively, you can look at total revenue rather than units sold.

For example, a sales manager may assign each sales rep a quota of 50 units per month. In this case, the rep has to sell at least 50 units to meet their quota. To encourage and continuously motivate the team, the sales manager may offer a commission or bonus for each unit sold beyond their quota.

Alternatively, the manager could set the individual sales quota at $10,000 in generated revenue per quarter.

In practice, volume-based quotas work well for businesses with short sales cycles and fixed product pricing because a rep’s actions are directly tied to sales within the time frame. If your sales cycle takes several months, there are a lot of moving parts, and actions taken today won’t pay off until the specified period of time is over. As such, it’s difficult to set effective volume-based quotas for long-term sales cycles.

Activity-based Quota

Activity-based quotas require salespeople to complete a set number of actions such as attending a set number of customer appointments, leading a set number of demos, or making a set number of phone calls.

For example, a manager may assign a sales development representative a quota of 100 cold calls, 80 follow-up emails, and 15 product demonstrations every month. The sales manager then tracks the rep’s activity on the CRM to monitor progress.

This system works best for business development representatives (BDRs) and sales development representatives (SDRs) who aren’t directly involved in closing sales. Activity-based quotas also help ensure that everyone contributes to the sale rather than disproportionately relying on your closers.

Consider activity-based sales quotas if your business has long sales cycles or multiple customer touchpoints.

Profit-Based Quota

This quota is based on the gross or net profit of a salesperson, sales team, or product or service grouping’s performance. Profit-based quotas are best suited to organizations with a wide range of products or services. Also, this quota system works well for businesses serving multiple markets or market segments.

For example, two sales reps are assigned a profit quota. Mary focuses on selling high-end gaming computers at a high cost, while Andrew focuses his sales efforts on the cheap but fast-moving computer accessories. Both sales reps might meet their profit quota, but the number is likely to be different given the divergent approaches.

Profit-based quotas tend to push salespeople to push products or services with the highest profit margin. In turn, the organization benefits from higher profits.

Cost-based Quota

Cost-based quotas are based on the cost saved per deal. This method works best where you are solely focused on controlling expenses. You typically see this type of quota system in service industries where field agents do not directly control revenue.

For example, a plumber may have quotas based on how much time they spend diagnosing and fixing a problem. In this case, volume or profit-based quota would not be an appropriate measure of their performance. However, the time they spend on each house call factors into the cost of doing business and is something the plumber can control.

Cost-based quotas help to increase staff efficiency and subsequently improve profitability.  

Combination Strategy

As the name suggests, combination quotas combine more than one type of sales quota. A sales manager may assign both volume-based and activity-based quotas to a sales rep. This method works best for businesses with long sales cycles and multidisciplinary sales teams.

Business-to-business (B2B) sales roles also typically include prospecting and closing deals. In this case, the manager may assign a sales rep a volume-based quota in addition to an activity-based quota, such as performing product demonstrations or making a set number of cold calls.

3. Choose How to Set Your Quota

There is a distinction between the quota system you choose and how to implement it. Concerning the latter, there are two ways to go about implementing your quota system. These are the top-down and bottom-up approaches.

A VP of sales, founder, CEO, or other higher-ups set the sales quotas based on the organization’s objectives in a top-down approach. The quota is communicated to the sales manager, who then figures out what needs to be done to achieve the targets. This process will involve assigning the quotas to sales reps or sales teams.

One of the downsides of this approach is top-down quotas tend to be overambitious. This scenario can cause the opposite of the intended effect, de-motivating sales reps rather than motivating them.

The bottom-up approach is a much better option. Here, the sales manager analyzes each sales rep’s capabilities, past performance, and market opportunity. The manager then uses this data to create realistic goals for individual sales reps or sales teams.

With considerations such as the number of sales reps, average deal size, lead-to-close ratio, and the number of qualified leads, the ensuing sales quota is far more likely to be realistic than the top-down approach.

4. Establish a Baseline

As your plan starts to take shape, it’s time to establish a baseline. The baseline is the minimum number of sales you need to make to stay in business. This figure acts as the foundation to build a realistic sales quota.

Make sure that your baseline is grounded on data. Some of the factors to consider when coming up with your baseline include historical sales, seasonality, and market influences.

5. Calculate Your Sales Quota

Once you have a baseline figure, set a quota that represents growth. For example, if your baseline is $80,000 per month, 10% growth will give you a sales quota of $88,000 per month.

Another formula for calculating your sales quota is multiplying the average number of closed-won deals per month by the average contract value. Once you have the base sales quota, you can adjust it for growth like in the above example. This formula requires historical data but can be a basis for setting accurate quotas.

Remember to adjust your sales quota to historical trends, market influences, and seasonal variations.  

Market influences may be tricky to predict, but some obvious factors include a shortage of supplies, increased competition, or dramatic market growth or contraction. You can use your forecasting data to help you account for market influences.

Additionally, most businesses see a variation in revenue during different seasons. Tailor your sales quota to match this seasonality. For example, you can set individual goals for each quarter depending on your projections.  

If you don’t have historical data, a sales forecast can help you determine an accurate baseline. From here, you can calculate the sales quota to reflect your desired growth.

6. Determine Your Review Period

Your review period depends on the length of your sales cycles. Typical review periods include weekly, monthly, or quarterly. A short review period can help you identify problems and take corrective measures before the end of the quarter.

On the other hand, quarterly or more extended review periods give sales reps enough time to make up for lost sales. This is especially true for seasonal businesses. Choose the review period that makes the most sense for your type of business.

7. Communicate Performance Expectations

After a thorough review of your sales quota, communicate performance expectations to the sales reps. Share the specific number, as well as the rationale behind the figure. Additionally, speak to the sales reps about how you will measure their performance. Be sure to include your sales compensation plan in this discussion.

Ask for feedback and make adjustments where necessary. Alternatively, save the input for a future date after you have reviewed your team’s performance.

A sales quota is only useful if everyone is on board. However, a well-thought-out and articulated sales quota should go down positively with your sales reps.

Next Steps

You’ll need to measure the results of your sales quota continually. This way, you can adjust and review your allocations accordingly. There is no point in having sales quotas that your team can’t meet.

A CRM tool is crucial for tracking sales performance. Here, you can tally the results of each rep, identifying top and bottom performers.

Also, integrate reporting into your workflow. Ask reps to submit activity logs, trip reports, and pipeline reports. Consistent and accurate reporting will help you stay on top of your sales performance and provide useful data for identifying areas of improvement.

Lastly, keep an open channel of communication with your sales team. More specifically, schedule regular meetings to discuss your team’s performance. Most CRMs track reps’ performance in real-time, saving you many unnecessary meetings. You can then schedule meetings only when immediate feedback or action is required.

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