How to Set Sales Quotas

Establishing sales quotas is essential for any sales team; however, quotas are often perceived as unfair, unreliable, or confusing. This guide covers the best methodologies for setting sales quotas, including common challenges and ways to overcome them.

What is a Sales Quota?

A sales quota is a number that sales reps must meet in order to achieve their performance objectives and earn sales commissions. A sales quota is often either the total number of sales deals won, or the total revenue sold by a particular rep or team; however, it can also be based on activities, improvements from the previous period, or other factors. It is time specific, usually set for a month, quarter, or year, and contributes to the company's larger sales goals during this period. 

Sales compensation is dependent upon quotas which are fair, transparent, and aligned with business objectives. Together, sales compensation structures and sales quotas are important levers in motivating sales reps and driving desired business outcomes. 

What to Think About When Setting Sales Quotas

There are a number of different methods for setting sales quotas, which we’ll explain below. However you decide to set your sales quotas they should meet some basic criteria in order to be effective. 

First, just like overall sales compensation structure, quotas should be aligned with business objectives. Quotas are intended to drive specific behaviors and outcomes from your sales reps; these should be closely linked with a larger business strategy. As business objectives change and evolve, quotas should also be reassessed. 

Next, sales quotas should be fair and transparent. Since these are such an important piece of sales team compensation and performance evaluation, sales reps deserve to understand how quotas are set, at least at a high level, and understand how their quotas compare to others at the company. There should be a clear thought process behind differences in quotas for different teams, territories, and seniority levels. 

Finally, sales quota attainment should be rewarded through the sales compensation plan. Meeting or exceeding quotas should result in higher commissions, bonuses, or other rewards. Meanwhile, failing to meet quota should typically result in reduced commissions. This ties rep outcomes to their compensation, incentivizing stronger sales performance.   

Methods for Setting Sales Quotas

The most basic way to set sales quotas is to look at the desired total sales for the company, and then split that evenly among all sales reps. Be careful; this approach, while it may appear fair on the surface, disregards the inevitable differences in the sales environment between territories, business units, and other variables that may impact sales performance. A top down approach is important, but it is only the first step in an effective quota setting process. 

In addition to a top down perspective, quotas should also take into account realities on the ground. Thus, historical performance and bottom up sales quota setting should be taken into consideration before quotas are finalized. This can help ensure that quotas are realistic and reflect what’s really going on in the market. Where there is adequate data, building models based on past performance can help isolate what areas can be changed and how much improvement the business might expect to see. This is where sales compensation analytics can also contribute to better quota setting; by understanding how tweaks the the comp plan impact quota attainment, finance teams can model out what would happen if these changes were rolled out to more teams or expanded. 

For companies selling to large accounts, taking account planning into consideration may help make quota setting more effective. For example, if there are accounts which are expected to renew, upgrade, downgrade, or churn, quotas can be adjusted accordingly in order to motivate the highest level of performance for the appropriate sales rep. Account plans and budgets, sales pipeline, and other customer intelligence can help ensure that quotas are realistic but also stretch reps, so that companies do not end up paying for work that sales reps don’t have to do. 

Types of Sales Quotas

Activity Quotas: these are based on sales reps completing a set number of tasks or activities during the quota period. Activity quotas are more common for SDRs, where they can be evaluated based on tasks such as number of outbound calls or number of meetings generated, for example. 

Example: an SDR must conduct at least 10 demos per month to meet their activity quota. 

Volume Quotas: this type of quota requires sales reps to sell a given number of products or units during the quota period. This type of quota can be useful for companies where there is simple and consistent pricing, or for companies which are looking to quickly grow market share. 

Example: a sales rep must sell 100 boxes of toner to meet their volume quota. 

Revenue Quotas: this requires sales reps to generate a certain amount of revenue during the quota period. The quota does not rely on the number of deals or customers, but rather the total dollar amount the sales rep is able to generate.

Example: the revenue quota is $100K per quarter. One sales rep meets the quota through one large deal priced at $100K, while another meets the quota with two smaller deals priced at $50K each. 

Forecast Quota: based on historical data and past performance, this type of quota typically requires sales teams to increase the amount they sell. 

Example: the SMB sales team closed $200K in new business in Q1. The business wants to grow revenues by 10% this quarter, so for Q2, the SMB sales team’s quota has been set at $220K. 

Combination Quotas: oftentimes a business needs to incorporate multiple quota types in order to properly incentivize their sales reps and maximize productivity. This can include any combination of the above quotas. 

Example: a company has high variance in the cost of its different products, and wants to ensure that sales reps are selling both high and low cost products. As a result, they implement a volume quota of at least 20 units per month, and a revenue quota of $75K per month. 

Common Problems and Challenges with Sales Quotas

Organizations which aim for simplicity when setting sales quotas often have this approach backfire. Putting time and attention into this process can pay off with better quota effectiveness, stronger sales teams, and better overall performance. Watch out for these common mistakes as you think about quota setting: 

• Quotas are unrealistic and do not reflect what can be achieved in the market.
• Quotas do not incorporate business objectives and are not closely tied to company strategy.
• Quotas are not properly tied to sales compensation, making them unenforceable.
• Historical data used to set quotas is not accurate.
• Quotas are set too late in a period, not giving sales reps adequate time to prepare.
• Quotas which provide unfair advantages by not accounting for differences; for example, differences between territories or product lines.
• Penalties for high performers; for example, continuously increasing the quota each period to the point where it becomes unfair.
• Lack of penalties for low performers, allowing them to earn full sales commissions without achieving full quotas.
• Lack of transparency around quota setting process, so sales reps do not understand how or why quotas were set.
• Poor communication around quotas, leaving sales reps with unanswered questions or misunderstandings.

Sales quotas are a major factor in sales performance and have the potential to impact revenue growth, profitability, business forecasting, sales compensation planning, team morale and attrition, company culture, and more. Taking the time to analyze, set, and communicate quotas properly is essential to a healthy sales culture. 

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