A common mistake companies make is to set quotas based on what the sales team has achieved in prior years. The failure here is that there are too many variables that raise critical questions. For example:
- Are the reps selling to a prospect base of “A” grade leads that are qualified using a defined methodology?
- Is there a formal sales process in place to convert opportunities to sales?
- Do 60-75% of sales reps currently achieve quota?
- Are territories based on potential and selling capacity?
- Does your sales compensation incent behavior that aligns with your corporate objectives?
- Have your reps been properly trained to execute on the company sales strategy?
So, how should you look at properly setting quotas? Here are 5 simple steps:
- Market Analysis – What is the total available market (TAM) for your products and services? How much of that market do you currently serve and how much more can you capture? How long will it take? Knowing the overall potential by market is important in being able to begin understanding what you can reasonably capture and by when. For the following points, let’s use a TAM of $30M that will take 5 years to achieve.
- Time Management – Understanding how long it takes to convert an opportunity to a sale is a key component. If a rep works 2000 hours in a year (50 weeks X 40 hours) and it takes 15 hours to convert one opportunity, this means they can convert 133 sales at 100% efficiency. 100% selling time isn’t realistic, but conducting a time study of your sales reps to determine how long it takes to convert one opportunity to a sale is a critical component of setting quotas.
- Selling Efficiency – Of the aforementioned 2000 hours, what percent of the time are your reps spending on “selling activities?” World class organizations are between 70-75%, which is 1400-1500 hours annually. Using 15 hours to convert, we are now at 96 sales per year.
- Win Rate – What percent of opportunities does your sales team close? Let’s say they convert 25% of their opportunities to sales. This would mean they would convert 24 of the opportunities in point #3 into sales.
- Average Sales Price – What type of revenue does an average sale generate for your company? Let’s use $10K, which brings total potential revenues for one rep hitting quota to $240K for the year.
Using these 5 steps, you have determined that one rep at full quota can sell $240K in a particular territory. You can now begin align your quota setting strategy to your corporate growth objectives.