How to Set Quota

Community member Jeff Abbott commented on a recent post about how he’d like to better understand how quotas are set and by whom. I thought this could be a good topic, so here it goes.

The first thing you need to know about quotas is there are a lot of different ways to set them. There are rules that deviating from can be costly, but outside of that there are a lot of roads to setting the right quota.

Let’s start with the rules:

  1. Quota MUST align with the business objectives
  2. Quota MUST be perceived as achievable
  3. Quota MUST take into consideration, territory, product availability, sales cycle, sales support and market conditions
  4. Quota MUST take into consideration economic conditions

Regardless of how you set quota if these rules aren’t followed, quota won’t make a lick of difference.  Once you’ve locked these down, you can start building quota.

Start from the top.  What is the companies revenue goals? What is the organizations sales strategy? What products and services make up the sales strategy?  What territories, locations will sales come from.  Once you’ve determined this, share it with the entire organization.

Once this has been done start with a bottoms up exercise. Ask each of the territory managers to give you their revenue/margin/product goals for the year. The key here is to take the information and vet it agains the above criteria.  Challenge territory managers to understand how they came to their goals.  What criteria did they use to determine their numbers? What analysis was behind it? What is their strategy for achieving it, etc.  The objective of the exercise is to ensure as many of the rules are met.

The purpose of the bottoms up is too ensure street level insight as well as buy-in. Understanding the market and the sales challenges at the street level is critical. Get buy in at the customer or street level and map it against the corporate objectives.

Far too often quota is seen as a commissions exercise. Quota triggers commission, however quota is actually a single representation of the companies overall revenue goals. Therefore, the exercise to set quota is a business exercise, not a sales or commission discussion.

Setting good quota requires a solid grasp of the business, the market, the competition, and the organizations strategic commitments. Without them, quota isn’t aligned.

About 5 years ago, I was sitting at a sales summit and listened to the CEO state his companies growth goals. He declared the company was going to grow 15%.  What I remember most about this declaration is, it was at the end of 2007 and the financial crisis was just getting underway. The signs were everywhere.  What I also remember, is the company hadn’t seen that kind of growth in at least 5 years if not longer. What was also interesting was there was no new product, no new services, there was nothing “new” the organization could get the additional revenue from. It was purely a sales generated increase in revenue.  This meant, on average, everyones quota’s went up 15%.  Some reps more than others, but on the whole everyone saw and increase in quota.

Sitting there listening to him, I knew they were in trouble.  They weren’t following the rules.

Less than two quarters into 08, they had to lower quotas for EVERYONE. The company wasn’t hitting its number. Morale was low and the company was struggling.

Quotas are business metrics. They need to focus on the business drivers and be aligned with strategy. Anything else is like putting your thumb in the air and guessing.

Don’t put your thumb in the air. Put the time in to understand exactly what quota needs to look like and how it aligns with your overall company strategy.

As I’m writing this I’m realizing how robust a topic quota setting is. Therefore, I will address each of the rules in a series of posts over the next few days.  It should be fun.