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A sales quota is not the same thing as a sales goal. Although closely related, sales goals and sales quotas serve different functions in your business. Sales goals relate to your overall company objectives, while the sales quota is a series of actions that help you reach your sales goals. Many sales organizations set their quotas arbitrarily, but this guide will help avoid that mistake and ensure you don’t have to deal with a lethargic sales team, high turnover rates, and low sales performance across your business.
Why Setting Accurate Sales Quotas is Worth It
A sales quota is the minimum sales goal that individuals or teams must achieve during a set period. Setting an accurate sales quota is vital for several reasons, 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
Before we move on, let’s explore these ideas a bit further.
Firstly, the sales quota is critical for keeping sales teams accountable to the organization’s overall goals. The bottom line is crucial in any sales-driven organization.
With a sales quota, you can set employee expectations and monitor their activity to ensure that they are hitting the appropriate levels. Additionally, a sales quota helps channel the team’s efforts toward the most productive activities that help meet the organization’s objectives.
Secondly, an accurate sales quota helps to motivate your sales team. According to a CSO Insights report, 45.4% of salespeople miss their quotas. Every little thing you can do to motivate your sales force translates to a net positive for the organization. Accurate sales quotas help develop fair and adequate compensation plans and other incentive plans that encourage the kind of activity you want to see from your team members.
Furthermore, accurate sales quotas help to strike the delicate balance between setting achievable targets for your sales force and pushing them to work at their best.
Since the quota provides clear performance targets and standardizes performance, sales reps can self-supervise and course-correct over time.
Finally, 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
Customer relationship management software (CRM) is an indispensable tool when creating sales quotas. If you don’t already use a CRM, you might want to give this software top priority.
According to a Nucleus Research report, the average ROI for CRM software is $8.71 for every dollar spent. This statistic makes sense since the software helps you manage your entire sales workflow. The software also assists in other areas, including marketing and customer service.
The actual cost of implementing CRM software is hard to pin down and varies on a case-by-case basis. Still, software providers are upfront about their transparent fees, making it a little easier to set up your budget. Some of these transparent costs may include:
- Subscription costs
- Service level costs
- Cost per user
- Implementation fees
On average, cloud-based CRMs cost $1,800 per user over five years. Hidden costs that may hike up the price of implementing CRM include:
- Vendor support
- Ongoing staff training
- Ongoing customization
- Minimum contract terms
You should check out our post reviewing the best CRM software. We delve deep into what CRM software can do your business, how to pick one, and we review the seven best CRM software on the market currently. You will also get a better sense of how much the software costs to implement from reading our post.
The second most significant investment you need to develop accurate sales quotas is time. Setting your sales quota can take anywhere from a few weeks to a few months, depending on your organization’s structure and complexity.
The steps for setting a realistic sales quota include:
- Identify Your Resources
- Choose an Appropriate Sales Quota Strategy
- Choose How to Set Your Quota
- Establish a Baseline
- Calculate Your Sales Quota
- Determine Your Review Period
- Communicate Performance Expectations
7 Steps to Set a Sales Quota
Creating sales quotas doesn’t have to be rocket science. Below are the steps to help you make realistic sales quotas that your sales force can get behind.
1. Identify Your Resources
At the very least, you will need a sales quota calculator and a template to guide you along the process.
HubSpot has a free calculator to help you determine your drop-off rates and conversion rates. These numbers give you the full picture of your sales pipeline and how effective you are at moving prospects through the different stages of your sales cycle. You also get a handy template to help you set realistic monthly and quarterly sales goals. This suit of freebies includes:
- 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 software has quote functionality, sales engagement tools, reporting and analytics, and everything you need to manage your sales pipeline.
2. Choose an Appropriate Sales Quota Strategy
There are a couple of ways you could go about setting your sales quotas. The strategy you choose entirely depends on your industry and overarching business goals. Your strategy will also affect your team’s performance and how you track their performance, so think through the method that best fits your business.
Typical sales quota strategies include:
This type of sales quota is based on the number of units sold during a specific period. This quota may also apply to the total revenue generated during a particular period.
For example, the sales manager assigns each sales rep a quota to sell 50 computers each month. The sales rep must sell at least 50 computers to meet their quota. The representative likely receives a commission for each computer they sell and a bonus when they achieve their target.
Volume-based quota systems are standard for small businesses with short sales cycles. This method also works incredibly well for companies with fixed pricing. Also, consider applying this method if your main focus is growing your top-line revenue.
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.
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 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.
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.
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.