How to set sales quotas

- Let's talk about sales quotas. A quota is a fixed amount target over a period of time. The target of a quota is typically money. Sometimes you call it bookings, but it can also refer to other things, such as the number of new customers, or even activities, such as a product demonstration. The company decides what this is. In terms of time, most quotas are for a year or less, but anything from monthly to annually is actually pretty common. Attainment against a quota results in incentive compensation to a salesperson. That makes sense, right? Usually there's a target incentive where a salesperson hits 100% of their quota, and they'll receive 100% of their incentive. This is called the on-target earning, or the OTE. But why do you even have quotas? Some people feel that in this age of modern selling, quotas are a thing of the past, and yet, most companies still put their salespeople on quotas, because they want to incentivize them to sell, both from a negative, meaning you're fired if you don't hit your target, and a positive, meaning you can make a lot of money if you over-achieve your target. Additionally, it serves as a goal for a rep to track towards in order to measure their own performance. All right, there are two main types of quotas, direct quotas and overlay quotas. A direct quota is exactly what you think it is. It's the quota you give your sales rep for which they are individually responsible. For example, $1 million dollars per year might be a typical sales rep direct quota. All other quotas are overlay quotas, and they sit on top of that direct quota, and they're a sum of all of those direct quotas. For example, a sales manager has an overlay quota, which is the sum of all of the reps under them, and a sales VP has an overlay quota above them. You can also have specialist sales people that carry overlay quotas aligned to specific products or services sold by direct reps. Of course, those folks are overlay, too. Typically, there's something called an overassign between the direct quota and the final target held by the company. So for example, let's say your company, at the company level, had a $10 million dollar goal, but you assigned out $11 million dollars of total direct quota to all of your teams. This would be a 10% overassign. Overassigning is a best practice. That being said, you have to find a balance, because you don't want to risk assigning out too much quota into the field so that your sales team can't even achieve its number. How much should a quota be? There's a couple of ways to think about this. First, your quotas should never exceed your total adjustable market that you determined through market sizing. Otherwise, your sales people will be set up for failure. Second, setting objective and attainable quotas is a key to empowering your sales force to succeed, but they're also part of your financial plan, too. Quotas should always be set starting with your direct quotas, and then direct quotas scan be broken into two different types: new business quotas, and existing customer quotas. For new business targets, you typically count them by looking at the historic average selling price and the conversion rates over a period of time. Let me give you an example. If your selling price last year was $10,000, and a typical rep closed 50 deals in a year, a quota for a year might be $500,000. And let's not forget to add in some overassignment of 10% will make it $550,000. Existing customer quotas are usually a bottoms up summary of expected revenue based on past or committed performance, such as a renewal, plus any incremental sales sold during the quota period. Here's an example of that. If you had that type of rep, we call them a farmer, that had $1 million dollars in an expected renewal for the year, and the accounts have historically grown 40% every year, a quota might be $1.6 million dollars. How do they get that? It's that $400,000 of upside, but I've also included some overassign dollars to make it $1.6 million. Setting quotas is the most important job of a sales operations team. It's part of the fundamental process that starts with market sizing and ends with sales compensation.