Sales quotas are targets set for individual salespeople and teams to measure performance, incentivize salespeople, and increase company revenue. Sales quotas are typically tied to sales volume, costs, profit, or specific sales activities like appointments or calls, and effective quotas are ones for which an average of 80% of your team or more should be able to meet.
The six steps needed to set an effective sales quota include:
1. Choose a Quota Strategy That Aligns With Your Business
There are four main types of sales quotas, each with different numbers used to measure sales performance, which include volume, profit, activity, and cost. Each type has a different purpose and is right for a specific type of business goal. For example, volume tracks sales units or revenue, profit uses profitability, activity is the number of specific actions, and cost measures expenses such as time.
The type of quota you select will be used to set your baseline, calculate your quota value, and is how performance will be measured. This is why it’s important to choose the one that most closely aligns with your company initiatives. For example, if sales volume isn’t important, then don’t choose a volume quota. Conversely, if you want your sales team to maximize company profitability, choose a profit quota.
Volume-based Sales Quota (Most Common)
Best for: Small businesses that want to focus on top-line revenue growth
A volume-based sales quota is measured based on the number of units sold or the total revenue generated for a given time period. The purpose is to motivate a salesperson to sell as many units as possible, and is best suited for businesses with short sales cycles and fixed pricing. This is one of the easiest quotas to manage since it can be measured using common inventory or sales reports found in accounting software programs such as QuickBooks.
For example, a sales manager might use a volume-based sales quota to measure a salesperson’s overall performance. It might create a quota based on the total sales revenue that it expects each sales rep to generate or based on the specific items. One additional benefit of volume-based sales quotas is that you don’t have to track different product line sales since you are only interested in the top-line numbers.
Profit-based Sales Quota
Best for: Organizations serving multiple market segments with a range of products or services
A profit-based sales quota is measured based on the net profit associated with a salesperson’s sales performance. This type of quota means that both the top-line revenue number and the cost of sales are important. Companies using a profit-based quota benefit from increased sales productivity because staff are incentivized to focus their efforts on closing deals with the greatest value.
This type is best for businesses selling a range of products or services since it allows you to measure the sales in a way that leads to the highest profit margin for the business. For example, if you sell mobile phones, you might create a profit-based sales quota to incentivize your salespeople to push high-margin accessories and service plans. These offset the lower profit that you receive on the devices, resulting in a better overall profit for the business.
Activity-based Sales Quota
Best for: Companies that have multiple consumer touchpoints or long sales cycles
An activity-based sales quota is based on a salesperson performing a measurable activity, such as making a number of phone calls or attending a set number of customer appointments. This type of quota is usually measured by keeping track of each activity in a customer relationship management (CRM) software or call log, and is beneficial for teams with multiple sales reps who contribute to a sale. It is also the best type of quota for new salespeople or territories without historical data to compare against.
When I worked as an account executive, I had a team of sales development reps (SDRs) who would make cold calls and emails and set up demos for account executives. They were measured largely on activity-based quotas including how many calls they made, how many emails they sent, and how many demos they set.
Cost-based Sales Quota (Least Common)
Best for: Businesses that want to explicitly focus on controlling expenses
A cost-based sales quota measures a team member’s ability to reduce costs per deal—such as time invested—rather than focusing on revenue. Businesses benefit from this type as it increases staff efficiency, which improves company profitability. As a result, a cost-based quota is best suited for service organizations where sales or profitability are dependent on factors such as time to close a deal or resources spent consulting on a project.
For example, an HVAC service company that sends technicians out into the field might track the average time spent diagnosing a problem, which is an overhead cost, rather than their ability to sell equipment or repair service. A volume- or profit-based sales quota would not work in this same situation because the technician doesn’t have direct control over revenue. However, they can affect the amount of time and therefore the overall cost per house visit.
Best for: Multidisciplinary sales teams in industries that anticipate long sales cycles
A combination strategy is when a manager sets more than one quota type for individuals on their team, such as setting a volume-based quota and another number for an activity-based quota. A manager does this to be sure team members are focused on both quality as well as quantity in their sales strategies.
One of the best examples of this is in business-to-business (B2B) sales where prospecting is a large part of the role of the salesperson. For example, a pharmaceutical rep might have a quota for revenue, but another for doctor office visits. The activity portion of the quota is what they are directly responsible for, and are able to influence, but they also are accountable for a total revenue number that can be expected based on their performance overall.
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2. Consider Your Target Review Period
The review period is the length of time by which sales performance is measured. A short review period, such as weekly or monthly, provides the sales manager with an opportunity to quickly address and correct performance shortcomings. However, a quarterly or annual review period is preferred by most salespeople since it provides a longer time window to make up missed numbers before they affect incentives or compensation.
The most common review period is a quarterly review, where the sales manager meets with his or her sales staff every three months and discusses their predetermined sales quota and their performance against that quota. However, your specific business will largely determine your review period. For example, if you’re a retailer with high sales volumes, a monthly review might work well, while a semi- or annual review period might be better for B2B sales with long sales cycles.
3. Establish Your Team’s Performance Baseline
A performance baseline is an average of past performance measured by reviewing past history, accounting for seasonality, and adjusting for market influences. This step is important because the baseline acts as a benchmark for setting your final sales quota, which is usually a specific percentage of the baseline you establish. For example, if the baseline for a given sales territory is $50,000 a month, you might set a quota that represents a 10% growth, or $55,000.
If you are just starting out, launching new products or services, or do not wish to use prior performance as an indicator of success, you may choose to use your sales forecast in lieu of a historical performance baseline. Still, it’s always better to use real past data whenever possible as a benchmark.
Regardless, you can establish your performance by doing the following:
Review Past History
If past history exists, look back on the last 12 to 24 months of sales data to establish your performance baseline. Using the target review period as a guide, summarize the total performance by sales volume, profit, cost, or related sales activities that took place over the same periods in the past.
For example, if you’re tying your sales quota to quarterly sales volume, you would take the entire sales volume over the past 12 months, then divide by four to get the average quarterly sales number. If you’re able to measure for 24 months, that gives you a more stable baseline, and you would simply divide by eight instead of four to get your average.
Examples of tools you could use to review past history include:
- Sales reports for volume-based performance quotas
- Margin reports or profit/loss statements for profit-based performance quotas
- Activity logs such as trip reports, call reports, or the count of leads added to the pipeline for activity-based performance quotas
- A profit/loss statement, service logs, or expense reports can be used to establish cost-based performance quotas
Example of How to Review Past History
Imagine Beth is the owner of a small boutique offering high-end attire and wants to set a sales quota for her team of three salespeople. She knows sales cycles are quick and that her salespeople are not responsible for either the original purchase costs or the product’s pricing. As a result, Beth determines that each of her salespeople should have a monthly sales quota tied to top-line revenue, based on the quick sales cycles and her team’s responsibilities.
She reviews the boutique’s sales report from the previous year. Her average monthly sales was $60,000. The simplest way to calculate a quota for her team would be to divide the total monthly sales by the number of salespeople (three in this case) for a monthly quota of $20,000 for each. However, you should not stop here when calculating the performance baseline.
Using a customer relationship management tool such as Salesforce Essentials can give you the historical data about your sales team’s past performance. Using goal setting and performance reporting features, you gain insight into how your team has performed, and use that as you create quotas for the future. Visit Salesforce for more information.
Account for Seasonality
Seasonality is the recurring spikes or dips in sales businesses experience every year. For example, retailers might have large spikes in sales during the fourth quarter that should be accounted for as you set sales quotas from one period to the next. As you look at your historical sales data and see patterns of seasonal variation, you can use that information to help forecast future sales as you set your sales quota.
You can adjust your sales quota accordingly to account for seasonality by establishing a different sales quota number for each review period. This ensures that you have set realistic sales quotas. If you expect your sales to double in the fourth quarter, your sales quota should reflect that expectation when comparing quotas from quarter to quarter.
Example of How to Account for Seasonality
Continuing with the high-end boutique example, Beth’s sales report shows a spring spike in sales of as much as 50% during her area’s prom and wedding season and another before the holidays. She expects the same seasons will result in a spike next year. Using this information, she knows she needs to account for that variance or her sales quotas won’t be accurate or attainable. She also decides to set a different sales quota target for each quarter.
Looking at her sales reports, she figures her average baseline on a quarterly basis. She looks at each quarter and divides the total sales for each quarter by the average number of sales staff during the same period, which fluctuates from one quarter to the next.
Beth’s team’s average baseline for performance, adjusted for seasonality, is:
- Q1: $50,000 per salesperson measured at the end of the quarter
- Q2: $75,000 per salesperson measured at the end of the quarter
- Q3: $50,000 per salesperson measured at the end of the quarter
- Q4: $75,000 per salesperson measured at the end of the quarter
Had she not adjusted for seasonality, the total baseline in terms of revenue for the year would have been $60,000 per salesperson. After adjusting for seasonality, Beth recognizes that each quarter should have its own specific sales quota that better reflects the variation in sales that result from different seasonal trends to ensure the quotas she sets will motivate her team.
However, while Beth’s updated performance baseline is more realistic, having included seasonality, it is still missing one more component. This brings us to market influences and their impact on quotas and sales planning.
Adjust for Market Influences
Market influences are events or changes in buying habits that cannot be tied to seasonality, such as a newly launched product line or a component shortage. In order for your baseline to be an accurate benchmark for average performance, look at what market forces might be causing an increase or decrease in sales.
For example, if your industry is currently experiencing dramatic growth or contraction, or if new competitors have moved into your market, your sales forecast will be affected by these external factors. It can be difficult to know exactly what impact market forces will have on your business, but you’ll need to consider them as you forecast sales.
Example of How to Adjust for Market Influences
Beth’s boutique is seeing overall increases, which are the result of an increase in traffic due to new development in the area. In fact, she has seen a roughly 3% increase over the year so far and wants to adjust her overall quotas to reflect this new information. As a result, she will increase her quota for each salesperson by the growth she is seeing as a result of external influences in her market.
Here are her final quotas based on this information:
- Q1: $51,500 per salesperson measured at the end of the quarter
- Q2: $77,250 per salesperson measured at the end of the quarter
- Q3: $51,500 per salesperson measured at the end of the quarter
- Q4: $77,250 per salesperson measured at the end of the quarter
4. Calculate Your Sales Quota per Review Period
To calculate your sales quota, take your baseline metric and adjust it for desired or expected growth. For example, if you are using a volume-based sales quota, you can calculate the ideal sales quota by dividing your forecasted sales target by the number of salespeople. If you have a profit-based quota, you can look at profitability over the last 12 to 24 months and then multiply it by a fixed growth rate to arrive at your quarterly profit quota.
Typically, sales quotas that are within 5% of the baseline metrics you established are considered achievable quotas. Furthermore, sales quotas should realistically be achievable by 80% of your team in order to incentivize maximum performance. Of course, your team can improve by more than 5% with additional investment, streamlining processes, or general business growth, but this figure is a good starting point to assess whether your quota is realistic.
Example of How to Calculate Your Sales Quota per Review Period
Beth’s boutique had $720,000 in total sales last year. In order to achieve her long-term sales goals, Beth would like to achieve $800,000 with the same three salespeople next year. In an ideal world, she calculates that each salesperson would need to sell a total of $267,000 for the year, or approximately $67,000 per quarter, in order to achieve sales goals.
However, Beth also knows her business is seasonal and had already decided she will assign different sales quotas to her salespeople by quarter. Taking last year’s road construction out of the equation, past history tells her that she should expect 20% of her sales to be in Q1, 30% of her sales to be in Q2, 20% of her sales to be in Q3, and 30% of her sales in Q4.
Therefore, her ideal sales quota per performance review period is:
- Q1: $53,300 per salesperson measured at the end of the quarter
- Q2: $80,000 per salesperson measured at the end of the quarter
- Q3: $53,300 per salesperson measured at the end of the quarter
- Q4: $80,000 per salesperson measured at the end of the quarter
5. Verify That Your Sales Quota Is Achievable
After you set your sales quota based on desired or expected growth, you need to verify that it’s realistic and achievable by comparing it to your baseline. An effective sales quota is typically one that is achievable by 80% of your team and within 5% of your baseline metric.
The performance baseline you establish will help you evaluate whether or not a calculated ideal quota is realistic. It allows you to compare the two values and determine if the difference between the two is achievable based on your business.
Example of How to Verify That Your Sales Quota Is Achievable
Based on this comparison, Beth is confident that her ideal performance quota is in alignment with realistic expectations for performance. To make it simple, Beth rounds her ideal performance quota to whole values, using the baseline instead of the ideal if the baseline was higher, and assigns her team the following sales quota:
- Q1: $54,000 per salesperson measured at the end of the quarter
- Q2: $80,000 per salesperson measured at the end of the quarter
- Q3: $54,000 per salesperson measured at the end of the quarter
- Q4: $80,000 per salesperson measured at the end of the quarter
For more information about how you can better anticipate swings in revenue and plan for the future, visit our more comprehensive article on sales planning, which includes a sales plan template.
6. Communicate Performance Expectations
A sales quota does not benefit anyone if a salesperson doesn’t know he or she has one. After a manager sets the quota, they should share what the number is, but also how the quota was determined and when and how it will be measured. They should then explain any bonuses or incentives the sales team might expect to earn for meeting or exceeding their quota.
The best method to communicate a sales quota and its value is with a face-to-face meeting. This allows salespeople the chance to ask questions and gives the sales manager the opportunity to better explain the reasoning behind the sales quota as well as its value to the organization.
Pro tip: If you have a remote team or remote sales reps, consider using videoconferencing software rather than a phone call for these conversations. It fosters more engagement and rapport when you are able to see one another and read body language.
What to Do After You Set Your Sales Quota
Once a quota has been set, the sales manager needs to regularly measure performance and communicate results in order to ensure that the team is demonstrating the desired behaviors. This ensures productivity is maximized and sustained over time and employees are continuously incentivized.
You should do the following after setting your sales quota:
Measure Ongoing Performance
How a sales quota is measured depends on the individual business, but must use the same type of data as used to set the quota. Results should be tallied in a spreadsheet or displayed in a dashboard report out of a CRM program. The sales manager should then compare recent performance against the previous measurement.
While this task does require administrative overhead, when done properly, the benefits to the organization can exceed the costs. In addition to sales reports, sales managers may look to use the following additional tools to help measure sales quota metrics:
- Activity logs: This can be as simple as providing telemarketers with a sheet of paper with the request that they tally up calls made each day and turn in their results.
- Trip reports: A sales manager may gauge performance on the quality or number of trip reports submitted by a salesperson.
- Pipeline reports: A sales manager may ask salespeople to enter leads and other opportunities into a central database, such as a CRM.
Communicate Ongoing Performance
A sales manager should always communicate ongoing performance with their team to ensure there are no surprises at the end of the year. While a private face-to-face meeting is always best for when the sales manager needs to discuss negative performance requiring immediate corrective action, a sales manager can choose to report on performance using a number of methods.
Methods to communicate ongoing performance include:
- Individual meetings: The sales manager may schedule regular meetings to sit down with each of their salespeople and provide feedback related to performance.
- Dashboards: Some software programs provide sales managers with the ability to display real-time performance in easy-to-digest visual aids such as graphs on salespeople’s computer screens.
- Pay stubs: A sales owner may choose to display whether or not a salesperson is on track to meet their sales quota as part of a note on their pay stub or a report that accompanies a commission check.
- Detailed report cards: Just like back in school, salespeople are given grades with their performance along with any sales manager commentary.
- Sales gamification tools: These tools turn performance measurement into a game by adding things such competitions, badges, levels, prizes, or leader boards. Businesses use them to motivate salespeople and make it easy to visualize performance through fun and interactive ways.
No matter how you choose to communicate performance, it should be done with clear intention, include accurate and up-to-date information, and communicated consistently. Use a CRM such as Salesforce Essentials that displays relevant information on an easy-to-read dashboard so that you can efficiently give quality feedback to your team. Visit their website to learn more.
How to Evaluate the Effectiveness of Your Sales Quota
A sales quota should always support larger company sales goal initiatives. If the company is growing in terms of revenue, but sales team members are consistently missing their sales quota, or if more than 80% of a sales team is regularly meeting their sales quota but the business isn’t growing, the sales quota is not effective or is otherwise not in alignment with the company’s sales goals.
If this occurs, the sales manager might consider returning to step one and selecting a different sales quota altogether, which might have a greater impact on sales results.
Frequently Asked Questions (FAQs)
What’s the difference between sales quotas & sales goals?
A sales goal is an organization’s long-term initiative, while a sales quota is a tactic used to achieve a sales goal and is used as an indicator of individual performance. For example, if you have a company revenue goal, you might set a sales quota of 50 sales per month so the company achieves that goal.
Why is past performance important to consider?
According to the Harvard Business Review, only 30% of salespeople achieve their sales quota when the numbers are based only on a company sales growth goal. The study found that salespeople were much more likely to hit their numbers when they saw their quota as being based on reality or past performance. Therefore, the best strategy for setting a sales quota involved a review of prior history while still aiming for future growth.
What if I set my team’s quota too high?
A quota that is set too high will demotivate a sales team. If a sales team does not believe they are in a position to achieve their goal, they will not spend additional effort trying to meet it. They may also hold back on closing promising deals in one reporting period in order to improve their chances of meeting their quota in the next.
What are the risks of setting my team’s quota too low?
A quota that is set too low loses its value. If a sales member regularly meets their metric without effort, the metric will be taken for granted, or simply forgotten. Without challenge, the sales member may also lose interest in their job, which results in a decrease in morale as well as staff turnover.
How do I hit my sales quota?
Sales professionals looking to hit their sales quotas can do so by regularly examining the content of their pipeline. By focusing on opportunities with the highest chance for success and following up on older leads before they grow stale, they can maximize their sales efficiency. When in front of customers, active listening for pain points helps build additional value.
Sales quotas are metrics set by sales managers that help to establish performance expectations within sales teams, reinforce company values, and support a business’ longer-term sales growth goals. Effective sales quotas are tied to sales volume, profit, activity, or cost, are realistic, are achievable with effort, and are regularly measured.