Sales quotas

It is a common practice for sales managers to prepare an estimate or a budget of the amount of business
which ought to be obtained from the salesman's territory. It is usually large enough to act as a constant
stimulant to the salesman, but not so large as to discourage him. As a rule it is fair and equitable and is
based upon careful comparisons and estimates. It affords a valuable check-up for the salesman and
prevents carelessness and waste of time. The ambitious salesman will welcome this opportunity to
measure his achievement against expectations and will constantly spur himself on to equal or exceed his
quota.

SALES QUOTAS
A sales quota is a quantitative goal assigned to a sales unit relating to a particular time period . A
sales unit may be a sales person, territory, branch office, region or distributor. Sales quotas are used to
plan, control and evaluate selling activities of a company. They provide a source for motivation, a basis
for incentive or compensation and standards for performance evaluation of sales persons. They also
uncover the strengths and weaknesses in the selling structure of the firm. For example, a company selling
travel services discovered that it took twice as long to sell a particular airline’s ticket than to sell other
similar service in the service line. Since the Airline was considered important by company, quotas on the
Airline were set for each sales person. The result was that a sales person in a control group, having a rigid
airline ticketing quota, outsold the uncontrolled quota group. This example shows that generally speaking
sales persons are quota achievers and their motivation may fall off if easy or no quotas are set for them to
achieve. Sales quotas serve several purposes. The principal purposes include:

a) Providing Goals and Incentives : Quotas provide sales persons, distributive outlets and others
engaged in the selling activities, goals and incentives to achieve certain performance levels. Many
companies use quotas to provide their salesforce the incentives of increasing their compensation
through commissions or bonus if the quota is surpassed and/or recognised for superior performance.
Needless to mention, to be true motivators, sales quotas set, should be perceived as being realistic and
attainable.

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b) Controlling Salespersons Activities : Quotas provide an opportunity to direct and control the selling
activities of salespersons. Salespersons are held responsible for certain activities like customer calls,
calling on new accounts, giving a minimum number of demonstrations where necessary and
realisation of company’s account. If the salespersons fail to attain these quotas, the company can take
corrective action to rectify the mistake.

c) Evaluating Performance: Quotas enable the company to evaluate performance of its sales personnel,
territory or distributive network. Performance against quotas also help identify the strong and weak
points of the sales force.

d) Controlling the Selling Expenses: Quotas are also designed to keep selling expenses within limits.
Some companies reimburse sales expenses only upto a certain percentage of sales quota. Others tie
expenses to the salesperson’s compensation in order to curb wasteful spending. Expense quotas help
companies to set profit quotas.

e) Making Effective Compensation Plan: Quotas play an important role in the company’s sales
compensation plan. Some Indian companies follow the practice that their salespersons will get
commission only when they exceed their assigned quotas. Companies may also use attainment of the
quotas in full or in part as the basis for calculating the bonus. If the sales persons does not reach the
minimum desired quota, he/she will not be entitled for any bonus.

8.3.1 How Quotas are Set?

Having understood the meaning and usefulness of sales quotas let us now discuss how quotas are set? The
quotas along with the approaches used for their determination are as follows :
1) Sales Volume Quotas: The most commonly used quotas are those based on sales volume. This type of
quota is set for an individual salesperson, geographical areas, product lines or distributive outlets or for
any one or more of these in combination. Sales volume quotas are also set to balance the sales of slow
moving products/services and fast moving products/services or between various categories of customers
per sales unit. The sales volume quotas may be set in terms of units of product sales, or rupee sales or
both on overall as well as productwise basis. Some companies combine these two and set quota on
“Point” basis. Points are awarded on the attainment of a certain specific level of sales in units and rupee
terms for each product/service/customer. For example : A company might consider Rs. 1000 equal to 1
point, Rs. 2000 equal to 2 points and so on. At the same time the company may award 3 points for unit
sales of Service A and 5 points - for unit sales of Service B. Companies use this type of approach
generally because of problems faced in implementing either rupee sales volume or unit sales volume
quota. Unit sales volume quotas are found useful in market situations where the prices of the products
fluctuate considerably or when the unit price of the product is rather high. Rupee sales volume quotas are
found suitable in the case of salesforce selling multiple products to one or different types of customers.
The methods for setting sales volume quotas are as follows :
a) Past Sales : One of the earliest methods of setting sales volume quotas is to base them solely on past
sales experience. The method in this case would be to determine the percentage by which the company’s
market share is expected to increase and then add this into last year’s quota. For example, if a company
expects an increase of 8 per cent this year then the new quota for each sales unit would be last years quota
plus 8 per cent or 108 per cent of last year’s quota. This method assumes that the preceeding year was a
typical year, and if not, it suffers from the limitations of being based on unrealistic figures. An improved
method is to take the average of say past three years and then add to it to the planned rate of growth.
b) Total Market Estimates: The other method is to derive sales quotas from the total market size
estimates made by the company for the year. Two approaches are used to arrive
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at such market estimates. One approach is to estimate the market size in an aggregate manner as per the
data available as well as the judgement of the executives at the head office. The other is to build estimates
based on projections made by the field staff at each territory office of the company. In either case the
market estimates need moderation to be realistic as well as to match with the company’s sales objectives.
2) Financial Quotas: Financial quotas are determined to attain desired net profit as well as to control the
sales expenses incurred :
a) Net Profit Quota: Net profit quota is particularly useful in multi-product/multi-service companies
where different products/services contribute to a varying level of profit. It emphasises on the sales force
to make right use of their time. Table-1 depicts a selling situation in which salespersons optimally
balance their time between high and low profit yielding products. Let us look at Table-1.
Table-1
Ratio of Sales Volume to Net profit
Product/ Volume per month Net Profit per month
Service
Sale Price Profit Margin Ms. A Mr. B Ms. A Mr. B
Per Unit Per unit (%)
Service X Rs. 200 Rs.140 20,000 60,000 14,000 42,000
(70%)
Service Y Rs. 100 Rs. 40 (40%) 35,000 25,000 14,000 10,000
Service Z Rs. 50 Rs. 10 (20%) 75,000 10,000 14,000 2,000
Total 125,000 95,000 42,000 54,000
This Table illustrates how important it is for the management to ensure that its sales persons do not spend
more time on less profitable products, because the salespersons are costing the company the opportunity
of earning higher profits from their high margin products. In other words, it should ensure that its
salespersons spend their maximum time on more profitable customer. The objective can be achieved by
setting a quota on net profit for its salesforce, and thus encouraging them to sell more of high margin
products and less of low margin products.
b) Expense Quota : In order to make the salesforce conscious of the need to keep selling costs within
reasonable limits, some companies set quota for expenses linked to different levels of sales attained by
their salesforce. And to ensure its conformity they even link compensation incentives to keep expenses
within prescribed limits. Since sales are the result of the selling tasks performed, which vary across sales
territories, it is not easy to determine expense quotas as percentage of sales in a uniform manner. Also,
very strict conformity to expense quota norms result in demotivation of the salesforce. As such expense
quota is generally used as a supplement to other types of quotas.

3) Activity Quotas: Good performance in competitive markets requires the salesforce to perform the
sales as well as market development related activities. The later activities have long terms implications
on the good will of the firm. To ensure that such important activities get performed, some companies
set quota for the salesforce in terms of the various selling activities to be performed by them within a
given period. Finally the company must set a target level of performance for the salespersons. Some of
the common type of activity quotas prevalent in companies are as under:

• Number of prospects called on,

• Number of new accounts opened,

 • Number of calls made for realising company’s account,

• Number of dealers called on,

• Number of service calls made, and

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 • Number of demonstrations made, etc.

The chief merit of activity quota lies in its ability to direct the salesforce to perform the “urgent” selling
activities and “important” non-selling but market development related activities in a balanced and regular
manner.
4) Combination Quotas: Depending upon the nature of product/service, market selling tasks required
to be performed as well as selling challenges facing the company, some companies find it useful to set
quotas in combination of the two or three types discussed above. Rupee sales volume and net profit
quotas or unit sales volume and activity quota in a combined manner are found in common use in a
large number of consumer and industrial product companies.

8.3.2 Attributes of a Good Sales Quota Plan

Once the overall targets of the company have been decided at the top level, usually, the sales department
is responsible for fixing the sales quota. Though no review or approval of a higher executive is needed,
the targets set are passed on to the higher ups and also fed in the MIS Channels. Within the sales
organisation, the task may rest with any of the several executives, depending on the size of the company,
the degree of centralisation in the sales force management and the method used to determine the quotas.
The chief sales executive may be responsible for setting the total company quota, but the individual
breakdown may be delegated down through the regional and branch district managers. Territorial sales
potential’s can also be given to the branch or territory managers, and they set the salespersons’ quotas.
However, directives can be sent to them as a part of company’s policy fixing the minimum levels.
There are several characteristics of a well-designed quota structure. Many of these attributes are the same
attributes found in good compensation plans, territorial design, organisational structures and other aspects
of sales management :

1) Realistic Attainability: If a quota is to do its intended job of spurring a person to the efforts that the
management wants, the goal must be realistically attainable. If it is too high or out of reach, the
salesperson may loose initiative.

2) Objective accuracy: Regardless of whether a firm is using volume, profit, expense or activity quotas,
they should be related to potentials. Obviously, executive judgement is also required, but it should
not be the sole factor considered. If the persons are to have faith in the performance goal, they
must be convinced it was set impartially and based on factual and qualitative market assessment.

3) Ease of understanding and administering: A quota must be simple and easy for both management
and the sales force to understand. A complex plan probably will cause friction and make the
salespersons resentful and even suspicious. Also, from management’s point of view, the system
should be economical and cost effective, to administer.
4) Flexibility: No quota ordinarily is good unless there is adequate flexibility in its operation.
Particularly if the quota period is as long as one year, the management may have to make
adjustments because of changes in the market conditions. At the same time, caution must be
exercised to avoid unlimited flexibility, which may result in confusion and destroy the ease with
which the system is understood.

5) Fairness: A good quota plan is fair to the persons involved. As much as possible, the work load
imposed by quotas should be comparable, but this does not mean that quotas must necessarily be
equal for all persons. Differences in potential, competition and salesperson’s abilities exist and,
therefore, the performance goals may not be comparable by absolute measures. They can be
compared but only in relative terms.

Objective of Fixing Sales Quota

The basic objective is that a sales management has in mind in using quotas is to control
the sales efforts. A skilled management uses quotas to motivate personnel to achieve
desired performance levels, apart from these there are some other objectives also
which are as follows:

 To provide quantitative standards

 To obtain tighter sales and expense control.
 To motivate desired performance.
 To use in connection with sales contents.

Fixing Sales Quotas

Fixing Sales Quotas/targets for individual sales territories/salesman

Sales Quotas are quantitative objectives assigned to sales organizational units i.e., to individual
sales personnel. In some company’s, sales management sets quotas for middlemen, such as
agent, wholesalers and retailers.

Quotas set for sales regions or other marketing units are broken down and assigned to lower
level units like sales districts, or to individual sales personnel. All quotas have time dimension-
they quantify what management expects with in a given period.

Sales Quotas : Overview

Sales quotas are a way of life for the sales force. All
activities of the sales force revolve around the fulfillment
of sales quotas. Sales quotas are targets assigned to sales
personnel. They signify the performance expected from
them by the organization. Sales quotas help in directing,
evaluating and controlling the sales force. They form an
indispensable tool for sales managers to carry out sales
management activities. Sales quotas are prepared on the
basis of sales forecasts and budgets. Sales quotas serve
various purposes in organizations.

They provide targets for sales personnel to achieve, act as

standards to measure sales force performance and help
motivate the sales force. Compensation plans are
invariably linked to quotas. The commission and bonuses
given to sales persons are based on their meeting quotas
set for them. The four categories of sales quotas widely
used are -- sales volume quotas, expense quotas, activity
quotas and profit quotas. A sales quota should be fair,
challenging yet attainable, rewarding, easy to understand,
flexible and must satisfy management objectives.
It must also help in the coordination of sales force activities. Setting motivating and easy to
understand quotas is essential to obtain the cooperation of the sales force. Various methods
are used to set sales quotas, among which, quotas based on sales forecasts and market
potential are the most common. Skilful administration by sales managers is required for
effective implementation of quotas. Convincing salespeople about the fairness and accuracy
of quotas helps the sales management to successfully implement quotas.

Sales quotas have certain limitations such as being time consuming, difficulty in
comprehending if complicated statistical calculations have been used and focusing on
attaining sales volumes at the cost of ignoring important non-selling activities. Quotas may
reduce risk-taking among sales personnel and may influence them to adopt unethical selling
practices. With changes in the competitive environment and variations in customer
expectations, many companies have started developing compensation plans that are
increasingly based on non-traditional aspects, thereby reducing dependency on quotas.

Conclusions

Sales quota is a critical aspect of the selling profession that impacts the selling firm and the individual seller.
Consequently, sales quotas have historically been reported as being key to the success of the sales
organization. Despite this importance, however, only very limited information about sales quotas is available
[8, 12].

This lack of understanding of sales quotas provides the basis of this article. Accordingly, this article
investigated key issues relating to the application of sales quotas, including an examination of sales quotas in
evaluating performance, and the linkage between performance and sales quotas. Interestingly, the results of a
survey of professional salespeople found that inconsistencies exist in the application of sales quotas, as well as
some common themes in usage of quotas. On the positive side, many salespeople report that their sales
manager is willing to work with them when they fail to achieve quota. Moreover, a majority of respondents
report that termination will not result unless 50 percent or less of quota is attained.

Quotas can serve to motivate and direct the salesforce. To enhance the motivational element of quotas, they
should be set at levels attainable by average performers in the salesforce. Those who reach beyond quota
should be considered strong performers. Quotas also direct performance expectations. Sales managers should
consider the consequences associated with quota failure to determine whether their quota is adequately guiding
the salesforce in the intended direction. Providing guidance upon goal failure is a start, but it may not serve as
a strong enough incentive to direct salespeople's behavior.

How to Set Sales Quotas

Setting accurate quotas will help you achieve sales goals.

A sales quota is the target or minimum sales volume expected from a sales employee, sales team
and/or department, during a defined period. Sales quotas are frequently set in monthly, quarterly
and annual allotments and commonly expressed in sales dollars or sales units. When quotas are
set effectively, the consistent attainment of quotas will directly and positively impact a
company's ability to achieve its overall sales budget or plan. Most sales commission payouts are
linked to the attainment of quotas. It is common for sales quotas to increase year over year.

1. How To Set Sales Quotas

o 1

Review future, company and department performance goals and budgets.

Understand what the sales department must deliver monthly, quarterly and
annually in order to achieve its goals.

o 2

Analyze sales trends for the past two years including dollars, units and
product/service information. Understand the causes for sales growth, sales
declines and seasonal fluctuations. Examine quota attainment at the
representative, team and department level. Consider changes to sales resources
and staffing levels.

o 3

Compare the prior year's performance trends with the future, company and
department goals. Determine what growth or decline is expected. Quantify the
overall gap between last year's performance and the future, expected performance.
Determine the revenue expected from existing customers versus new business.

o 4
 Complete an opportunity analysis. Identify where the best sales opportunities are
within your existing customer base and with prospects. Look externally at
geographic and industry trends that may impact future sales performance.
Familiarize yourself with internal changes that could help or harm sales such as
new product introductions or changes.

o 5

Review the sales expense budget. Determine if your full time equivalents (FTEs)
will grow, decline or remain flat. Understand the budget for sales commission
expense and cost of sales.

o 6

Determine if you will "over assign" quota dollars. This is the process of adding a
buffer between the sum of your sales quotas and the sales budget. For example, if
your sales budget is $10 million, you could set sales quotas to sum $11 million, to
add a $1 million buffer. Some sales leaders consider the over assignment, as
insurance to improve their chances of achieving sales goals.

o 7 Determine how you will spread the sales growth or decline including the "over
assignment," if applicable, across your sales team. Some sales leaders hold all sales
representatives to the same level of quota growth, regardless of territory, skill set or
geography. Other leaders tailor the sales quota amounts to individual employee or
territory needs.
o 8 Build a quota model that will allow you to create "what if" scenarios for different
quota amounts. Some of the data inputs and outputs will include number of FTEs, sales
dollars, expected quota attainment, commission dollars and cost of sales. (Quota
models are often built using Microsoft Excel or Access.) It may be helpful to include
finance and human resources experts in the quota modeling process.
o 9

Set reasonable quotas that will lead to the achievement of the overall sales
revenue budget while also meeting your sales expense goals.