February 4, 2019

How to Set Better Sales Quotas

By Michelle Seger

Each year, senior corporate leaders set overall financial objectives and growth goals that drive top salespeople nuts.

How does this happen? Leaders usually examine sales results from the previous year. Then, they take that number and increase it slightly as a “stretch” goal. Imagine this process repeated through various organizational levels, and individual sales quotas can end up being anywhere from 5 to 35 percent higher than the corporate target.

Overall, this approach assumes salespeople will perform at the same level as the previous year, and that a growth goal is attainable. No wonder top sellers get frustrated when they’re handed substantially higher quotas year after year. They may even perceive it as a penalty for a job well done.

This cycle also incentivizes sales reps to push opportunities into the next fiscal year – particularly if they realize they won’t hit their current-year target.

How to Set Better Sales Quotas
When setting quotas, consider both market opportunity and sales team capacity.

Sales leaders should work with experts from sales, marketing, sales operations, and business intelligence departments to analyze information they have about customers and the markets in which you compete or could compete. This combined insight will help identify potential market opportunities within your existing customer base and those that exist where your company doesn’t do business today.

Understanding potential opportunities provides sales leaders important insights as they set sales quotas. It also provides important data they can share with their sales team about the opportunities that can be pursued, and provides proper motivation for salespeople.

Sales capacity is the amount of time a salesperson has available to spend on activities that drive revenue (including spending time with clients, nurturing relationships, and closing deals). Average sales organizations spend 50 percent of time on selling activity. High performing teams spend 65-75 percent. Anything less than 50 percent is a red flag. Depending on the size of a sales team, increasing the sales capacity of an individual by 5 percent – or by two hours a week (based on 40 hours) – can have a significant revenue impact.

To increase the sales capacity of your team, first  categorize all revenue-generating and non-revenue-generating activities the team conducts during a normal work week. Then, examine the amount of time spent on these activities during a given time period, either manually or using tools like our Sales Time Optimizer®. At the end of that period, the resulting number is the sales capacity of the team – for example, if 50 percent of time spent is on revenue-generating activity, your sales capacity is 50 percent. Then, divide the number of hours spent by the revenue produced to get the approximate dollars generated per hour/rep. You can quickly see if there is room to improve capacity.

Your Approach to Setting Sales Quotas Has a Direct Impact on Productivity
Understanding a team’s sales capacity helps you set sales quotas that serve as stretch goals but aren’t demotivating. Increasing capacity can have a significant impact on productivity. Assume a company has $2 billion in revenue and 500 quota-bearing reps who spend 50 percent of their time selling. Improving sales capacity by just 5 percent across the entire organization – and assuming only 20 percent more revenue per increased hour of time – the additional revenue is approximately $40 million per year. That’s an impressive increase in productivity and an excellent reason to evaluate sales capacity when setting quotas.

Michelle Seger is global sales strategy and change management leader at SalesGlobe.