Sales Quota: What it is and Why it Matters

Motivation is quite similar to ‘steam’. 

When properly channeled, it can move huge objects, like a steam-powered train. But without it, that same train remains motionless, unable to advance.

Have you ever felt the same about the way your sales team functions?

Well then, you might want to consider employing sales quotas.

To help you get a better understanding, let’s take a closer look at the importance of sales quota. But first, let’s define what a sales quota is.

What is a sales quota?

A sales quota refers to a sales goal or target level that is established for a sales team. Sales managers typically assign these to a team or individual salespeople to achieve within a set period.

Moreover, they are normally time-sensitive and set to be accomplished monthly, quarterly, or yearly. 

Your sales quota can be measured in multiple ways. This includes units sold, or as specific as the number of new customers, etc. More broadly, they are often measured in terms of profits, sales or sales activity.

Next, let’s look at sales quota objectives to understand why sales quotas are set.

Sales quota objectives

Generally, sales management selects sales quota with the intention of optimizing the sales effort. Sales control is utilized to appraise the performance of the sales team or individual salespersons.

Moreover, management uses quotas to motivate sales reps to achieve desired levels of performance.

Key objectives in setting sales quotas

1. For determining the goals of a salesperson, sales team or branch office.
2. Evaluating market territories in respect to marketing situations and sales.
3. To enable the sales manager to evaluate the sales representative’s productivity. In case failure to achieve a set quota occurs, reasons why can be analyzed.
4. For the balanced growth of market territories. Efforts can be made to increase sales in territories where they are comparatively lower.
5. To manage the activities of salespeople. Also, to encourage them towards achieving the predetermined quota during the set time.
6. To allow for the development of remuneration plans for sales reps. Those that exceed quota are aptly rewarded with bonuses and commissions.
7. To control sales expenses by fixing a limit on all allotted sales quotas.
8. Sales quotas act as the basis for preparing the budget for advertising as well as sales promotion.
9. It helps maintain uniformity in workloads for each salesperson along with sale territories.
10. To allow for evaluation of the results of sales contests. A specific minimum sales quota is fixed for each salesperson to be achieved to ensure their participation.
11. Useful for estimating the future needs of every sales rep, territory or branch. In addition to this, it is also useful for estimating future requirements of office employees, sales-force, etc.

Also check out: Sales demos

Types of sales quota

Sales managers typically employ a variety of quotas to motivate employees in the sales process. 

So, how do you choose how to set sales quotas for your team? Well, first you will need to understand the main types of quotas. 

Sales quotas are often based on sales activity, revenue, volume or some kind of combination of all three. The main five types of sales quota are:

Volume Quota

A volume quota is a sales quota that believes in rewarding sales reps for the number of qualified leads generated. 

A volume-based quota can be used to appraise sales reps’ sales performance. Incentivizing them according to their sales encourages them to sell as many units as possible.

These types of quotas are normally set for teams to achieve over a given year. Based on the type of business, the quota can be further broken down by product, region or sales rep.

Revenue Quota

Revenue quota refers to a sales quota that rewards gross revenue. Each sales rep will be responsible for bringing in specific amounts of revenue, in a set time. In this way, it is not limited by quantity. 

For example, suppose a team member only makes one sale in the given period. But, the sale results in massive revenue generation. In this case, the sales rep can still meet the sales quota assigned by a manager.

While this quota may seem pretty straightforward, it can be customized to fit the needs of your business.

Activity Quota

This type of quota requires that salespeople complete a set number of activities during a specified period.

It frequently includes activities that are essential to the sales process but don’t translate directly into sales. These activities can include follow-up emails, phone calls, leading demos, scheduling meetings, etc.

Activity quota can also reward the volume of activity based on various tasks completed in your CRM system. For example, reps are expected to book a certain number of meetings every week.

Subsequently, their overall activities completed will be measured at the end of the specified period.

Profit Quota

This type of quota refers to the gross margin/ profit of a dedicated sales team, product, or salesperson.

Gross margin quota would be calculated by subtracting the cost of goods you sold from the overall revenue. 

However, for gross profit quota, you’d subtract selling expenses alongside the cost of goods sold from your final revenue.

This incentivizes your sales reps to work as efficiently as they can in sales calls and meetings.

Combination quota

A combination quota involves combining multiple sales metrics to reward various successes in the sales pipeline. 

Different companies and different managers each have their templates for a combination quota.  They often involve some aspect of both sales volume and rep activity.

For example, reps may be asked to set 8 appointments with new prospects and close 50% of those leads. This would mean acquiring four new customers.

Combination quota goals are chosen to reinforce certain skills salespeople are expected to master and constantly improve. 

These skills could include the number of customer calls, percentage of customers who repeat purchases or number of new accounts opened, etc.

Importance of a sales quota

Sales quotas allow organizations to incentivize the task of finding new customers. In addition to this, they also help increase your conversion rates in specific periods. 

Alongside paying sales commission, goal-setting sales quotas let business management teams link different aspects. For example, you can link employee compensation to the revenue that is generated by your employees.

If your sales reps can hit a target amount within a sales cycle, they can then share the rewards.

Sales quotas play an important role in helping forecast sales and monitoring rep activity. Furthermore, they also motivate and set expectations for sales reps to hit a specific level of activity.

Managers are also able to indirectly benefit through the use of sales quotas and strategies. They can learn much more about their team’s success rate, productivity as well as optimal sales processes.

Ways in which setting sales quotas can benefit your business

Setting sales quotas allows you to better manage a lot of other things concerning sales. You will be able to:

• Reveal overlooked bottlenecks or weaknesses in the sales pipeline
• Monitor as well as regulate selling expenses
• Ensure that compensation plans are effective and fair 
• Highlight the more successful reps and find ways to replicate their sales techniques
• Create achievable benchmarks and goals for your team

Also Read – The Ultimate Guide to Sales Engagement

Sales Quota Management

Often sales managers employ either a top-down or bottom-up approach when setting sales quotas for their teams. Let’s further explore both approaches of sales quota management.

Top-down sales quotas

In this approach, sales managers/executives set quotas based on company revenue needs. 

You begin by looking at quantitative trends in the marketplace and then identify needed growth. Then, you set sales quotas based on aspirations for the company and data analysis.

After this step, salespeople must meet these quotas to ensure the company generates expected levels of revenue.

Bottom-up sales quotas

Sales managers can also use a bottom-up sales approach. In this model, forecast quotas are based on a sales rep’s past performance. 

This allows the manager to set realistic goals and keep morale high, while still rewarding team sales leaders.

Bottom-up sales quotas may appear less ambitious in the short term. However, they can serve as powerful tools for long-term employee retention.

Conclusion

As you can see, sales quotas can be a valuable metric for measuring your sales team performance. Additionally, they can also act as a great incentive for employees to work harder towards specific goals.

It is important to remember that there is no one-size-fits-all quota. Instead, if you wish to maximize sales performance, you might need to utilize different quotas for different moments.

At the end of the day, all sales teams have the same objective. They wish to move deals forward and close sales to increase revenue. 

Using sales quotas may be just what you need to increase business efficiency and optimize your sales.