One of the reasons companies set quotas is to convey to sales reps what they’re expected to sell within a specific time frame and it helps the organization have more control over sales activities. Having certain expectations helps the organization determine what their marketing is going to be when setting up marketing campaigns. It helps keep everyone on the same page.
Now, let’s talk about some different types of sales quotas and the methods in which they operate. Setting an unfair quota can create confusion and angst amongst the sales people and management. It also may dissuade the mentality and confidence needed to be successful in making sales.
When setting quotas make sure it aligns with the type of business you have, otherwise, you could be setting yourself up for disaster and lost revenue on both the companies part and the sales person’s part.
Five Types of Sales Quotas & The Type of Industry They’re Suited For
1 | Volume Based Sales Quotas
This is the most common quota and is suited best for small business. It’s based on the number of units sold or money made during a specific time period. This type of quota is meant to motivate the sales reps to make as many sales as possible. For example, a health insurance agent who’s selling various insurance products. The sales and monetary values would be done on a ‘volume’ bases whereby the sales agent would make a commission and bonus from the total number of sales made during a specific time period. This type of quota can be measured by using accounting software like QuickBooks.
Formula: Divide the goal by the actual.
Example: If your company ended up selling 60,000 hula hoops, multiply 60,000 by $5 to find your actual revenue equals $300,000. Subtract your anticipated revenue from your actual revenue to find the sales volume variance.
2 | Profit Based Sales Quotas
This type of quota is based on a companies profits where by both the number of units sold is as important as controlling costs. Managers incentivize the sales reps so that they can focus on closing the deals that are the most profitable. Profit-Based Sales Quotas are best suited for reps selling in multiple markets or unique territories. It makes it easier to calculate and measure performance where variation is concerned. For example, you have two sales reps selling for the same company and selling the same item, say switches. However, one of them sells to say, the medical industry, which has low volume, but high prices and the other to the consumer electronics sector which has larger volumes but lower prices. The manager can measure performance based on the number of sales and revenue each person earns for the company.
Formula: Divide your profits by the total number of sales.
Example: Say, the company has $500,000 in revenues and $360,000 in total costs, the company has a net profit of $140,000. Divide the net profit by the total revenues to calculate the sales margin.
3 | Activity Based Sales Quotas
This particular type of sales quota is best suited for a salesperson or a sales team who are making sales that are quantifiable such as making a certain number of phone calls or setting a specific number of appointments. This type of quota has many different sales people or sales teams who are contributing to the end result. This type of quota-based system is best for industries that have long lead development cycles and little to no inventory. For example, you hire telemarketers, inside sales reps or appointment setters.
Formula: This one is more complicated:
1. Identify costly activities required to complete products.
2. Assign overhead costs to the activities identified in step 1.
3. Identify the cost driver for each activity.
4. Calculate a predetermined overhead rate for each activity.
5. Allocate overhead costs to products.
4 | Cost Based Sales Quotas
This type of quota is best used in industries that reduce costs per deal like time invested rather than focusing on revenue. For example, you have a consulting business and make revenue or sales dependent on the time it takes to close a deal or resources spent on consulting. Another example of an industry would be an HVAC service company where the technician’s performance is based on the time spent diagnosing a problem. This type of quota is based on overhead cost versus selling equipment or making repairs. The tech doesn’t have control over the revenue but he/she can control the amount of time spent on each house call visit.
Formula: Divide the cost by 1 minus the profit margin percentage.
Example: If a new product costs $70 and you want to keep the 40 percent profit margin, divide the $70 by 1 minus 40 percent — 0.40 in decimal. The $70 divided by 0.60 produces a price of $116.67.
5 | Combination Strategy
This is where the manager sets say, a volume-based quota and another one for activity. This helps the sales rep focus on both ‘quality’ and focus on ‘how’ they approach the sale. For example, a sales rep sells software as a service and they’re expected to make a number of sales calls. It’s also expected that the reps aren’t just making calls/appointments for the sake of making calls/appointments. Not only is there an activity quota there is a profit-based quota for the rep’s average cost-per-deal.
As you can see, there are a number of quota ‘systems’ you can choose from. It’s ‘critical’ that as a manager, you pick the right one for your organization. It’s also best that a CRM tool is used to measure the metrics and analyze the activity of reps and that of sales teams. One tool that can do that is SPOTIO.
Questions or comments? Contact SPOTIO at email@example.com or comment below.
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