What is a Sales Quota?
Simply put, a sales quota is a specific target that sales reps need to hit within a given amount of time. Quotas are nearly always numerical, in that they must be a certain dollar amount of contracts signed, revenue generated, or count of goods sold.
Sales reps, sales managers, and sales teams all have quotas. They are the standard by which performance is measured in both B2C and B2B sales. Quotas serve as benchmarks for evaluation, performance improvement, and testing. Quotas are also typically compensated, so reps have an incentive to achieve them.
Sales quotas are set at multiple levels. C-Level executives like Chief Sales Officers or Chief Revenue Officers will work with VP’s of Sales or Revenue to determine the amount of sales needed in a given year or quarter. They then determine the sales quotas for each individual department and pass them along to the directors. Keep in mind that customer success teams can also have upsell or upgrade quotas, as well as customer retention quotas, which are both significant sources of pipeline for many organizations.
The Directors of each department determine how to best accomplish the quota requirements for their teams. They will break up the goals into monthly targets, and then individualize the sales quota for each rep. Setting an individual quota for each rep is a best practice since it is more than likely all sales teams have multiple reps in all different stages on their teams. A rep who has just onboarded will have a much different success rate than a veteran seller. That’s why quotas must be set to be achievable, yet still a reach.
Why it is important
Sales quotas define the goals and benchmarks that reps, managers, and teams need to meet in order for the entire organization to be successful. Sales quotas represent what needs to be achieved within a given time frame. Since sales teams are the primary drivers of revenue within an organization, and the goal of most organizations is to make money, quotas ultimately state what each sales rep needs to contribute to meet that goal.
Quotas act as a benchmark of performance and indicate what the sales reps, team, and manager need to do in order to support and reach the company’s overall goal. They also indicate the standards that the organization has for performance, which is useful when a rep is working towards their career goals since they understand what they need to do in order to progress within the organization and their career.
Fundamentally, a sales team cannot exist with sales quotes. They serve the very basis of everything that a sales team does. No successful sales team will ever not have some sort of benchmarks and/or goals for their reps.
In short, sales quotas provide the following benefits:
- Allow for fair and correct sales compensation
- Provide benchmarks that reveal inefficiencies or uncover successes within the sales process
- Establish achievable goals
Sales quotas and compensation
The vast majority of sales organizations are commission-based. Optimal sales compensation plans are the secret sauce to not only hiring great reps but also motivating them to peak performance. A great compensation plan can keep your best reps happy and motivated. But in order to keep reps performing at their best, it’s crucial to ensure that they know what is expected of them. Your comp plan needs to establish clear goals and guidelines. Only then can managers effectively work with reps to keep them sure-footed on the path to success. Another reason that compensation is a hot-button issue is due to retention. As competition to hire great sales reps grows increasingly fierce, great comp plans can also help you keep them.
The key to a successful sales compensation plan is well-designed sales quotas that are achievable, but still require effort to reach.
Quotas and compensation for Sales Development Reps
As previously mentioned, sales quotas are not purely for revenue numbers. Quotas are incredibly useful when establishing general sales activity numbers. Their key is to set goals around and compensate for metrics and activities that directly relate to sales success.
The 40/60 Rule
Companies find that using a 40/60 rule when it comes to SDRs’ bonuses is beneficial. In this plan, 40% of their bonus is tied to their quota for appointments, while 60% is tied to the opportunity quota. This prevents reps from setting appointments with unqualified prospects just to hit an appointment quota. Rewarding SDRs with a bonus for opps that close is another great way to motivate SDRs to source quality opportunities.
Quotas and compensation for Account Executives
Quotas are perhaps most important for account executives, since they are the ones who actively work deals and attempt to sign closed-won business for the organization.
Account executives’ compensation plans will still have the same basic elements as your SDRs’ comp plans (base, bonus, and kicker). However, in order to know how much to compensate account executives, you need to be able to predict how much revenue they’re going to drive. That’s where quotas come in. A quota refers to the amount of revenue that account executives are expected to generate for your company. You can set monthly, quarterly or yearly quotas. Some organizations set all of the above. A quota is essential because it clearly sets expectations.
To properly compensate your account executives, establish how much their on-target earnings should be. On-target earnings are the amount of money a given salesperson earns from the combined earnings of their base salary and commissions/bonuses.
However, on-target earnings should not be achieved at 100 percent of sales quota. Instead, sales experts recommend setting your base compensation and commissions to reach on-target earnings at approximately 20 percent of quota. That way reps can be fairly compensated, taken care of, and comfortable, and staff have plenty of ceiling and inspiration to continue to work and close business, regardless of how much money they have made. It is also important to never ever cap commission on quota, you want your sales reps to work to constantly exceed quota. Your reward is more revenue, theirs is higher compensation.
Setting Sales Quotas
As previously stated, revenue or new business quotas are not the only type of sales quota there is. Other types include:
Revenue/New Business Quota
This is the most popular type of sales quota and one every team will have. It is entirely based on the amount of revenue generated within a specific time period. Reps are expected to either sell a certain amount of units, generate enough contracts, or simply earn a specific dollar amount of revenue.
Due to longer sales cycles, these quotas are typically framed for more extended periods of time, such as monthly, quarterly, and yearly. However, the time period that you choose should take into context your own sales cycle, how long it takes to generate revenue, your existing sales pipeline, as well as your ability to generate new pipelines. If it takes an entire quarter to complete the sales process with a new lead, it would not make sense to assign a monthly revenue quota, as reps will not be able to properly control the outcome.
As with many B2B companies, price quotes vary, and negotiation occurs. This negotiation may or may not include a competitor who is also bidding to win the same contract. Therefore, the revenue made on each deal varies. Therefore, it may be beneficial to set an overall revenue quota for reps, rather than a deal-by-deal one. This gives them the ability to price themselves competitively and adjust as needed to bring in the necessary revenue.
Sales Activity Quota
Sales activity quotas are typically set for sales development reps who may not have direct oversight or control over how the deals that they source progress. Rather, sales quotas on activities grant development reps direct control over their compensation since they are the ones who perform the activities that they are compensated on.
It is important to not set quotas on just any sales activity, however. Only establish quotas (and compensate) on sales activities that directly relate to generating qualified leads and earning revenue.
Some examples are:
Call Volume – This refers to the total number of dials that reps make per day. As a benchmark, the SaaS Inside Sales Survey from The Bridge Group shows that reps make an average of 46 dials per day. Of course, by leveraging sales acceleration software, reps can dial far more prospects than that daily. Great sales managers don’t only tell reps what’s expected of them. They are constantly coaching their reps to help them meet (and hopefully exceed) those goals. Dials per day is an excellent number to quota and compensate for because dials per day can directly net new prospects, and it is in direct control of the sales development rep.
Email Volume – According to research from McKinsey and Company, today’s inside sales reps typically spend 28% of their day emailing prospects in addition to calling. It’s therefore important to ensure that reps are emailing prospects enough. Again, email volume can directly lead to new prospects, and the sales development rep is directly responsible for the number of emails that they send.
Follow-Up Attempts per Lead – Are reps following up with leads and opportunities (either via call or email) enough times? If, for example, you decide that you want seven touches per lead before exhausting that lead, it’s important to have visibility into how many times reps are reaching out to leads. Sales follow-up is extremely important and it may be worthwhile for development teams to establish quotas and provide compensation based on the number of follow-ups that sales reps perform. Data shows that it can take as many as 7-10 touches to contact a lead. This is even after they have engaged with your website or downloaded a piece of content. If marketing spends money to advertise to a contact, and they engage with it, sales should be fighting hard to turn them into a prospect and capture ROI.
Conversations per Day – Never mind how many dials each rep makes a day, they could make calls all day long and never talk to anyone. It may be worthwhile to set sales quotas and compensate for how many actual conversations your reps have with prospects. The Bridge Group’s Saas Inside Sales Survey shows that the average inside sales rep is having 5.8 conversations daily. This number can potentially be increased by leveraging sales acceleration technology. But, setting goals around this number can increase the number of actual quality conversations that your reps have every day, and directly contribute to the generation of quality leads and therefore more revenue.
Targeted quotas are used by sales teams as an incentive to work a specific product, service, territory, customer type, and so on. Depending on what is happening with the business, an organization may decide to put extra effort into selling a certain product, in a certain region, or to a specific type of customer to gain market share in an industry, location, or establish a new business unit. In these situations, sales teams want to incentivize reps to accomplish particular objectives around the goals they have set. The key is to make the compensation for reaching these sales quotas greater than the normal quotas they have already established. Otherwise, it will not be worthwhile for reps to adjust their normal work and gameplans to achieve it.
A typical sales team will have more than one quota in place, and often they will be complementary to one another. In fact, all teams should ensure that quotas are not contradictory, or they will struggle with sales rep frustration and experience retention issues.
When sales quotas are deliberately created to work in conjunction with one another, they are combined quotas. Often combined sales quotas have a sales volume and sales activity component.
For example, for account executives, a sales team might set a combined sales quota that requires reps to generate $20,000 in new business revenue each quarter, but that they must also close 30% of the qualified leads delivered to them.
The key is that these two quotas must be achievable in unison. You do not want your sales reps chasing one number or the other, but instead be working towards successfully reaching both at the same time.
You must also ensure that these quotas can be achieved. If you require that 30% of the leads need to be closed, you must also ensure that those leads can be closed. If your sales development or marketing teams are delivering leads that are not actually willing to purchase, or are not a good customer fit, it is unfair to your sales reps who are required to close that business.
How to Set Sales Quotas
First and foremost, all sales quotas must be realistic. You want your quotas to be achievable by most, but not incredibly easy to achieve, and also not super difficult. A common general rule is that 80 percent of your sales team should be able to meet their quota the majority of the time.
The most successful sales quotas are rooted in real-world data based on historical performance.
For the sake of this example, we will focus on setting a sales quota on revenue since it is the most common, and one every team will have, however this same process can be applied to any of the aforementioned sales quota types, even activity quotas.
Use a Bottom-Up Approach
There are two distinctly different approaches a sales team can take to establishing their sales quotas, and they both depend on the direction from which you use as your perspective. You can either use a top-down approach, or a bottom-up approach. From our perspective, one is vastly superior to the other.
A top-down approach begins when the executive decides what they want to achieve, and then passes the quota down to team managers, who then figure out what they must do to achieve that particular goal. Many times this can lead to sales quotas that are set far too high. Achievable sales quotas lead to a decrease in team morale, high turnover, and missed numbers, which reflect poorly on everyone. While lofty goals can be good, they still must be obtainable and reasonable.
A bottom-up approach bases its quota setting on the historical performance of the sales organization, and what is achievable within their capabilities. It begins with an examination of previous performance, and then adds in the amount of required organizational growth. For example, if a team achieved 1,000,000 dollars in revenue last year, and needs to gain 10% growth, the new overall quota will be set at 1.1 million. When setting this quota, you can also consider increases in organizational performance that will allow for higher goals. Examples include an increase in the number of sales reps, the purchase, and integration of sales productivity or efficiency tools, or an increase in sales effectiveness. This would increase the selling capabilities of the organization, and grant them the ability to easily outperform previous quotas.
Find your sales performance history
First, establish your company’s past standard of performance. If you are looking at a range of numbers, consider taking the lower sets, as they will provide a more realistic expectation.
Examine how much revenue the sales team closed in your fiscal year. Break it down by an annual, quarterly, and monthly basis to understand exactly how much must be made every month.
Adjust for Fluctuations
Next, take into account the seasonal fluctuations that occur, or other impacts on your business. For example, the summer months are typically very slow for B2B companies because key decision-makers or contacts in client companies tend to take vacations.
Also, take into account, how many sales reps there are, and the activity within their territories. A rep that handles New York or Los Angeles will have an easier time finding customers than one who handles Des Moines or Billings.
Establish a Quota Baseline
Establish a baseline of earnings for your reps. How much does each rep need to generate in order for the team to meet their monthly, quarterly, and annual goals? What activities do they need to do in order to accomplish those goals?
Mix in Growth
Now it’s time to take into account the fact that your goals must grow each year. If management has accounted for a 10% growth year over year, increase quotas by all by 10% to make up the difference.
Determine Activity Quotas
Once you’ve calculated a baseline quota and adjusted it for seasonality, rep ability, and growth goals, set activity goals. As discussed before, sales teams must determine the sales rep activities that directly relate to revenue. These metrics include call volume, email volume, qualified leads generated, and so on. Sales teams should also set quotas on these activities for several reasons.
They allow for a daily goal. Many sales quotas are long term goals that span a month or longer. This causes a delay in gratification for sales reps since they cannot make a significant amount of progress towards it each day. Rather, daily activity goals directly place easily obtainable metrics within the control of each rep daily. They can work towards achieving the desired call volume, for example, and be rewarded for reaching that goal.
It gives SDRs a quota to own. SDRs do not typically own metrics related to direct revenue, since they do not work to close business. Instead, they generate a pipeline for the account executives to close. So, daily activity metrics grant sales development reps a quota that they themselves can accomplish and be compensated for.
Sales engagement platforms like ringDNA allow sales managers to track and analyze individual sales rep metrics like the number of dials made, answer rates, etc, as well as progress towards overall goals. These platforms are extremely useful for not only ensuring that progress towards quota attainment is being made but also for identifying where there may be inefficiencies in the process that will cause a failure to reach those goals. With real-time data, teams can spot and diagnose these issues and react before they cause a missed goal, and allow them to correct the course of the team over time.
Sales Quotas Must be S.M.A.R.T.
One of the oldest pieces of advice about goal setting is the SMART acronym. It declares that goals must be five things: Simple, Measurable, Achievable, Realistic, and Time-Based. The same advice applies to sales quotas.
Simple – Sales quotas must be in their most basic form. This ensures that they are easily understood. This clears any questions about what exactly quota is, and most importantly, how to achieve it.
Measurable – Naturally, quotas must be based on measurable numbers that sales teams have deep insight too. Without insight, teams will not be able to replicate or improve their performance.
Achievable – 80% of sales reps should be able to achieve their individual quotas. A lofty sales quota that no one can reach does the reps, neither their managers any good, nor the company as a whole. You should want your salespeople to succeed. When they are successful, everyone is.
Realistic – Set your sales quotas on realistic expectations. Pick numbers that the majority of the team can reach, and do them for metrics that they actually have control over. Do not set quotas on things your team cannot control.
Time-Based – All quotas must be set for a given time frame. This way, salespeople know exactly what they must accomplish, and when. This gives them the ability to pace themselves and set personal goals so they can reach their quotas.
Realistic Sales Quotas
So, how can you be sure that your sales quotas are realistic? Here are a few methods that you can use to ensure that you are properly setting quotas to ensure that they are realistic and achievable for your sales team.
Use references – The Bridge Group, RAIN Sales Training, Salesforce, TOPO, ringDNA, and many more all publish industry research about sales performance. Use data and benchmarking reports from within your industry to find established standards to ensure that your goals and quotas are within reason. You can also talk to friends, peers, and mentors.
Don’t be afraid to make adjustments – What you determine is not set in stone. In fact, your team will probably be more respectful of you owning up to a mistake you may have made. A super high quota that very few reps hit will break your company culture. Your sales reps will become frustrated that they cannot reach their goals, morale will decrease, and turnover will be high. This will lead to a further decrease in the ability of the team to meet their goals, and management will face the new problem of being understaffed. Instead, adjust quotas to be realistic and achievable for the majority of the team, but do not just change it just because a few reps are underperforming.
When New Sales Reps Should Recieve a Quota
New Sales development reps and account executives should not receive quotas right away. They should not be forced into the responsibility of selling for and performing for an organization or product that they are unfamiliar with. So the question is, when should new sales reps ramp to their full quota?
Every organization and every sales team is different, so there is no true one size fits all formula for how long it takes a sales rep should take to ramp to full quota. As a general rule of thumb, teams can begin with the following formula for determining ramp.
Onboarding time + 3 Months + average sales cycle length
In practice, it might look like this:
Month 1: No Quota Requirement – Includes Onboarding Time
Month 2: 25% Quota
Month 3: 40% Quota
Month 4: 65% Quota
Month 5: 85% Quota
Month 6: 100% Quota
Naturally, as the sales person’s time at the company increases, their quota does as well.
It is during this time that the new sales rep is onboarding, learning about your sales process, tools, and value. It is also during this time they have no quota, but should be working with or learning from top performers, listening to call recordings, etc.
3 Months Ramp Time
After basic onboarding and training, add three months. This is about the minimum amount of time it would take the average rep to sell anything well. The quota should ramp incrementally during this period, while reps get better and better at helping prospects reach buying decisions. The beauty of a ramping quota is that it allows reps to start by tackling smaller deals that are easier to close as they gain experience.
Additional Ramp Time = Average Sales Cycle Length
If your average sales cycle is days (bordering on transactional), chances are that it’s going to take reps a lot less time to master selling that product. But if your average sales cycle is 1-3 months (as with so many B2B products) then it’s going to take additional time for the rep to ramp. Use your average sales cycle to help determine additional ramp time. The quota will continue to increase incrementally during this time.
One important caveat is that a ramping quota can be shorter if a rep has sold a very similar product. Basically, if they worked for one of your direct competitors. In this case, you can probably expect them to hit the ground running a lot sooner. Still, every product and sales organization is different. So even if they know how to sell a competitor’s product it doesn’t mean that they’ll be able to sell yours right away.
Sales quotas are a crucial part of sales that every sales team uses. However, you must use them correctly in order to be successful. This means choosing the right metrics to measure, properly aligning them with the compensation of your team, and measuring and improving as time goes on.