Many sales leaders lament the inaccuracy of quota setting. It is so commonplace that one could ask “why don’t more leaders invest in improving this process?” There are likely two reasons why quota setting issues persist:
- Lack of ROI assessment
- Subjectivity in quota setting practices
Lack of ROI assessment
Many sales and sales operations leaders recognize the benefit of improving quotas. Better goal setting helps improve territory design, performance management, and commission expense. These are impactful areas that should be monetized to attract appropriate attention… but how?
One relatively easy way to calculate the benefit of more accurately set quotas is to model the commission impact as though all sellers performed 1% closer to 100% – a proxy for quotas being set more accurately. In other words, recalculate the commission results if:
- Sellers below 100% achieved 1% better
- Sellers above 100% achieved 1% worse.
Note: this is an expense modeling exercise. If quota setting is truly deemed as suboptimal, it is reasonable to think that some underperformers and some overperformers are partly a result of poorly set quotas.
Consider how commission payouts rapidly increase as sales performance improves – see the chart below as an illustrative example of how, in many sales organizations, extreme performers earn significantly more than core performers. As a result, high performers are paid a lot more than the “savings” from paying less to low performers.
Theoretically, as the bell curve of distributive seller attainments narrows, the sales organization should pay less in commissions. To prove this, compare the actual commission expense with that of the “1% more accurate” distribution. The net result is a conservative estimate of the financial benefit of improving quota setting – a key input into the ROI analysis of investing in better quota allocation.
Quota setting is a mix of art and science
For most, the conventional wisdom has been to rely on sales management to cascade or allocate a portion of their goal based on their knowledge of the sellers and market potential. This approach puts a lot of pressure on sales managers to process many data inputs – often from disparate systems. Then, they must quickly and accurately decide how to allocate sales goals in a fair and unbiased manner. The challenge only gets tougher as territories are redesigned and books of business change.
To ease the pressure and burden on sales managers, sales leaders should approach quota settings differently. Instead of relying solely on one method, using a triangulated approach will improve accuracy. To augment the sales manager method, sales leaders can seek help from either (or both) Sales Operations and/or Finance.
- Sales Operations can improve decision making and reveal hidden insights by applying advanced analytics to the data stored in the sales ecosystem. For example, sales operations may reveal account level trends in purchasing patterns, or even shifts in anticipated performance as a result of seller capacity.
- Finance can perform sanity checks using macro-trends identified at the organization or business unit level. Managers may not recognize these broader trends since their focus is more narrowly on their territory and team. Trends in growth, attrition, pricing, etc. help detect overly optimistic or pessimistic quotas when applied at the team or seller-level.
To be clear, sales managers should stay in the driver’s seat. They just shouldn’t go it alone.
Most sales organizations will find that improving quota setting accuracy has a cascading benefit plus results in lower commission expense on the same overall performance. Sales leaders should monetize the benefits of setting better quotas and engage stakeholders to provide support to sales managers.
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