Quota Setting: Historic Based vs. Market Based

Effective quota setting is a combination of art and science. While too many companies set quotas based on historical information, quotas based on the real market potential is a much better approach. Consider the following:

1. Flat Quotas. Flat quotas are usually used when companies have unconstrained market environments. You might have wide open markets where reps could go anywhere in the country; or the markets have unconstrained potential and the reps have relatively equal capability. In this situation it could make sense to set flat quotas; for example everybody gets a $5 million number.

2. Historic Quotas. For better or for worse, most organizations use historic quotas: they take what people achieved last year and add a projected increase.  The risk is that history does not necessarily represent the future potential of the business.

3. Market Based Quotas. Moving toward a quota-setting process that is driven by market opportunity or account opportunity requires taking your historic numbers and modifying them based on relative market opportunity (e.g., relative growth rate of the market, relative growth rate by product, relative potential, competitive environment). Moving to an opportunity driven approach can incorporate market level data, account level data (customers and prospects), or a combination.

How to Get There

Most companies move toward opportunity-driven quotas in steps over time, starting with a market level hybrid solution and eventually progressing to account driven goals that are formed in a bottom-up, top-down process. Improving the quota process can be a challenge for organizations because it requires the cooperation of several different roles. Many sales organizations also have to battle the legacy factor: if quotas have been set by the finance organization using historical data for decades, it may have become a sacred process – even if it’s a bad process – and will be difficult to change.

But there are risks to maintaining those bad processes. According to a survey by SalesGlobe, 84% of sales organizations say poorly-set quotas put the motivation of their sales force at risk; 59% say that not fixing the process contributes to missed targets for the business, and one in three companies said high sales turnover was a potential consequence of poor quotas.

The End Result

The ultimate goal for most companies is account opportunity driven quotas. Account-driven quotas go down to the account level – our customers and our prospects – and find indicators or predictors of sales potential, apply those out to our entire base of customers and prospects, and use that information for quota setting. Initially, as the organization begins on the path towards account opportunity quotas, they collect this information and use it for territory design and deployment. Once they are comfortable with the data, hot spots of opportunities and markets become apparent, and they can set quotas that are much more opportunity-based.

It is critical to make sure the quota setting process works correctly because it is so closely tied to both the motivation of the sales organization and to the attainment of the company’s objectives. Over the long term, a broken quota-setting process can erode the sales performance and put the business at a disadvantage. It’s imperative that companies examine their quota setting process and develop their case for change around the kind of risks it presents for them and the potential positive impact that can be gained from making an improvement. Setting and allocating quotas effectively will ensure the sales compensation plan is motivational, help us more effectively align sales costs and revenue, and increase the predictability of the company meeting its business objectives.

If you have questions or require assistance please contact Mark Donnolo at mark.donnolo@salesglobe.com, visit us at SalesGlobe, or call (770) 337-9897.

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