MODULE 8 : SALES QUOTAS
QUOTAS : The goals assigned to salespeople are called quotas. They help managers plan the amount of
sales and profit that will be available at the end of the planning period and also help anticipate the activities
of the sales team.
Sales potential reflects what the company could sell in the territory under ideal conditions.
Sales forecast is the best estimate of what the company san sell with a particular planned level of marketing
effort .It is an aggregate estimate that may or may not be broken down by product line, customer or territory.
The ideal forecast is one that is perfectly accurate because that facilitates planning. Thus, while a firm
would not want to reward salespeople for exceeding their forecasts, it would want to reward them for
exceeding their quotas.
Quotas are management devices. They are typically used to motivate salespeople and as such must be
reasonable. Volume quotas are typically set to a level that is less than the sales potential in the territory and
equal to or slightly above the sales forecast for the territory, although they also can be set less than the sales
forecast if conditions warrant.
Sales quotas apply to specific periods and may be expressed in dollars or physical units. Thus, management
can specify quarterly, annual, and longer-term quotas for each of the company’s field sales representatives
in both dollars and physical units. It might even specify these goals for individual products and customers.
The product quotas can be varied systematically to reflect the profitability of different items in the line, and
customer quotas can be varied to reflect the relative desirability of serving particular accounts.
The full set of quota assignments is called the QUOTA PLAN. The full specification of the quota plan
requires decisions about the types of quotas that will be used, the relative importance of each, and the target
levels for each sales person or other marketing unit.
PURPOSE OF QUOTAS
Quotas are useful in :
providing incentives for sales representatives
evaluating salesperson’s performance
controlling salespeople’s efforts
Provide incentives for salespeople
Quotas are an objective to be secured, a challenge to be met. Evidence suggests that most salespersons are
“quota achievers” rather than “dollar maximisers”, and salesperson’s motivation tends to decline when they
have easily attainable goals.
Quotas also influence salespeople’ s incentive through sales contests where those who perform best receive
prizes. Unfortunately, not all salespeople have the same opportunity to win unless some allowance is made
for differences in sales abilities and in territorial potential and workload. Thus, the company needs to design
the sales contest so that all sales reps have a chance to win. Sales quotas provide a common denominator by
which territory and personal differences can be neutralized, so all sales representatives have a relatively
equal chance.
Quotas can also create incentive via their key role in the compensation systems of most firms. In such
schemes, salespeople are paid in direct proportion to what they sell (commission plan) or they receive some
percentage increment for sales in excess of target sales (bonus plan). Typically, such plans are tied to sales
quotas. Even when salespeople are compensated with salary only, quotas can provide incentive when salary
rises are tied to quota attainment in the previous year.
Evaluate Sales Performance
Quotas provide a quantitative standard against which the performance of individual sales representatives or
other marketing units can be evaluated. Sales people who miss their quotas by some appreciable amount,
either above or below, can be singled out for more intensive investigation. Quotas localize spots that need
more investigation; these would be hard to do without these quantitative standards.
Control sales efforts
Activity quotas allow the company to monitor whether sales reps are engaging in these activities to the
extent desired. If they are not, corrective action can be taken early rather than waiting for these small
activity problems to become large sales and profit problems.
Problems with quotas
they sometimes prove to be a difficult comparative yardstick : Many sales are the result of
several people. Making it difficult to allocate credit between them.
When trhe salesperson’s influence is relatively minor in obtaining a sale
Quotas can be costly to establish, particularly if they are to be done well.
CHARACTERISTICS OF A GOOD QUOTA PLAN
For a quota to be effective, the quotas must be :
(1)
attainable
(2)
easy to understand
(3)
complete
Quota Level
Quotas should be realistic – they should represent attainable goals that can be achieved with normal or
reasonable, not Herculean, efforts. That seems to motivate salespeople most. To take advantage of the small
percentage of salespeople who might be challenged more by high “carrot” quotas, firms can consider twotier quota systems. Level 1 quotas are based on realistically attainable revenue targets. Level 2 quotas are set
higher, and salespeople can secure considerably higher bonuses for meeting them. Salespeople are allowed
to pick the level they want. However, those picking the higher level need their sales manager’s approval so
that they do not take on more than they can handle and get discouraged.
Quota complexity
To avoid conflicts, the sales manager and all sales personnel must understand the quota and the conditions.
Quota Items
A quota plan should cover the many criteria on which the sales reps are to be judged.
The bottom-up sales forecast requires each district manager to make a detailed, account-by-account
analysis, which is the basis for establishing account sales objectives with specific plans and strategies for
their achievement.
The top down forecast is prepared at the same time by the product management group, and any differences
between the two accounts are reconciled by the national sales manager who then negotiates a final quota
with each district manager in line with the company total. Sales people receive receive 80% of their bonus
for achieving their sales volume quotas. The remaining 20 % can be earned through the completion of
various nonsales quotas. These nonsales quotas are not standard but tailored to each district manager to
encourage specific growth.
THE QUOTA SETTING PROCESS
This involves the following three steps :
(i)
Select types of quotas
(ii)
Determine relative importance of each type
(iii)
Determine the level of each type of quota
(i)
Select Types of Quotas
There are three basic types of quotas :
Those emphasizing sales or some aspects of sales volume
Those that focus on the activities in which sales representatives are supposed to engage
Those that examine financial criteria such as gross margin or contribution to overhead
Sales Volume
can be related directly to market potential and thereby be made more credible
they are easily understood by those who must achieve them.
They are consistent with what most salespeople envision their jobs to be – that is, to sell.
They are consistent with the old adage “ someone must sell something before the other functions
of the business can be brought to bear.
Sales Volume Quotas can be expressed in dollars, physical units or points
Dollar Quotas
Dollar quotas are a common measure for all products. This helps to reduce communications problems when
each sales representative handles a variety of products, when establishing physical volume quotas for each
product for each salesrep can be very complex.
Dollar volume quotas permit a more direct analysis of sales person’s expense in relation to quota. The ratio
of expenses to sales in relation to quota for each salesperson can be calculated directly, and salespeople can
be compared in terms of these expense ratios.
Dollar Volume quotas are also advantageous when salespersons have some discretion over price. Sales
managers can use dollar volume quotas in this case to see if sales reps are using this discretion wisely or not.
To accomplish the same kinds of analysis with physical volume quotas, it would be necessary to estimate
the total dollars of targeted sales by assuming some average price per sale.
Physical Volume Quotas
These quotas express a salesperson’s goals in some physical unit of measurement such as number of specific
items, weight in pounds or tons or some volume measure such as gallons.
Physical volume quotas are specially attractive when sales reps handle only a few products.
Physical volume quotas are also attractive when prices fluctuate widely because of cyclical and competitive
factors. Dollar quotas in such situations can demoralize salespersons.
Physical volume quotas are also attractive when unit prices are high.
Point Quotas
Point Quotas are another variation of sales volume quotas. A certain number of points are given for each
dollar of unit sales of particular products. The total sales quota for the sales person is expressed as the total
number of points he or she is expected to achieve. The point system is typically used when a firm wants to
emphasize certain products in the line. Those that are more profitable, for example, could be assigned more
points.
Point quota system leads to the selling of a considerably more profitable mixture of products.
Point quotas can also be used to promote selective emohasis. New products might receive more points than
old ones to encourage sales reps to push them.
Point Quota systems allow managers to design quota systems that promote certain desired goals; yet, points
quotas can be easily understood by sales people.
Activity Quotas
Activity quotas attempt to recognize the investment nature of a salesperson’s efforts. For example, the letter
to a prospect, the product demonstration, and the arrangement of a display may not produce an immediate
sale, On the other hand, they may influence a future sale. If the quota system emphasizes only sales,
however, salespeople may be inclined to neglect these activities. Left unchecked, sales volume quotas can
become an obsession with salespeople and can result in a breakdown in control of other activities. Activity
quotas provide such a counterbalance.
Activity quotas are directly related to factors that sales representatives can actually control. Sales persons
cannot do sales , they can only do activities that generate sales. Although sales persons may be able to
influence sales volume, they cannot control it. Economic conditions and competitive behaviour may thwart
the salesperson’s best efforts. Yhet, sales persons can control the number of new accounts they call on, the
number of service calls they make, the call reports they complete, etc. Thus, it is reasonable to judge their
performance based on these activities. Furthermore, if these activities are important to the success of the
company, it is reasonable to judge salespeople on whether their performance meets or exceeds these criteria.
Common Types of activity quotas
calls on new accounts
letters to potential customers
proposals submitted
field demonstrations arranged
service calls made
service delivery supervised
displays arranged
dealer sales meetings held
meetings and conventions attended
past-due accounts collected
However, measuring a salesperson’s efforts in each activity takes much effort. Information on all activities
has to be developed by requiring salespeople to complete activity reports. This increases paperwork and
represents time away from the sales rep’s primary activity of face-to-face selling.
Also, since the sales reps complete the activity report themselves, there is opportunity for sloppiness and
misrepresentation unless their function is closely supervised
All these problems are reduced when a sales volume measure is used for quotas. The normal accounting
cycle reveals the figures necessary to compare performance with the established standard. The amount of
sales produced, although not perfect, is somewhat a direct measure of the quality of the effort expended on
the client. A sales volume quota decreases the amount of paperwork necessary and increases the amount of
time sales representatives have available for selling.
Financial Quotas
Financial quotas make salespersons conscious of the cost and profile implications of what they sell.
Products that are easiest to sell may be costly to produce and have a lower-than-average return. Also,
customer with whom the rep feels comfortable may not purchase much and may be less profitable than other
potential accounts. Financial quotas attempt to make salespeople aware of these conditions so that they
direct their efforts to more profitable products and customers.
Financial quotas are often stated in terms of direct selling expenses, gross margin or net profit. They are
most applicable when the firm’s market penetration approaches saturation levels and it is hard to increase
market share, sales and thus, an emphasis on selling efficiency and cost control becomes a logical
mechanism for increasing profit.
Types of Financial quotas
expense quotas
gross margin quotas
net profit quotas
Expense Quotas
A key to improve profits is to control the field selling expenses incurred in generating a given level of sales.
Expense quotas are typically stated as a certain percentage of sales although they are sometimes expressed
in absolute dollar amounts.
Expense quotas can also have some dysfunctional effects. They may cause salespeople to do other than what
they should because they are worried about the expenses. However, field sales expenses contribute
substantially to the difference in profitability of firms in the same industry, and their control is important.
Gross Margin Quotas
Gross margin quotas are useful when there are significant differences in gross margins by product, since
they can be set so salespeople can concentrate on items with higher returns. Unfortunately, gross margin
quotas are somewhat difficult to administer. Some firms simply do not wish to disclose production cost
information to salespeople. Even among those that do, it is hard for salespeople to tell how they are doing
with respect to their own gross margin quotas at any given time, and thus quotas do not produce the desired
motivation effects.
Margin information is typically not provided in the normal accounting cycle by a unit of analysis so small as
a salesperson. At the same time, the same objective can be accomplished with a well-designed quota system.
Products that bear higher gross margins can simply carry more points. Point quota systems are easier to
understand and thereby make it easier for them to monitor their progress.
Net Profit Quotas
Net profit quotas emphasise what the selling effort should be – profitable sales volume and not sales volume
for its own sake. Net profit quotas are tied directly to a major goal of top management. Also, net profit
quotas can be superior to gross margin quotas when products with high gross margins require expensive
effort and thereby produce higher field selling expenses and lower net profit.
Disadvantages of net profit quotas
they are harder than the other types for salespersons to understand, making it difficult for them to
monitor their progress. The net profit they produce depends on the product mix they sell, the
margins on those products, and the expenses they incur. Difficulty in monitoring their progress
may be frustrating for salespersons and stifle their motivation.
-
Net profit quota schemes are difficult to administer. The net profit information for a given
salesperson can be acquired but it is typically very expensive to do so.
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The profit a salesperson produces is affected by many factors beyond his or her control –
competitive reaction, economic conditions, and the firm’s willingness to negotiate on price, etc.
Thus, it is unreasonable to hold the individual salesperson responsible for all these external
influences.
(ii)
Determine relative importance of each type of quota
Although quota systems with a single basis can work well in relatively stable situations, they can prove
disastrous in dynamic environments. In such instances, the sales manager may want to use a combination of
criteria that produces the best balance of goals for each salesperson.
In order to combine the various quotas to produce a single criteria by which performance can be evaluated,
the following point may be considered :
Simple average
Weighted average
(a)
Simple Average
This involves simply averaging the ratios reflecting percentage quota achievement. One problem with
this method is that it weights all three performance criteria equally when they might not be equally
important to the firm.
(b)
Weighted Average
In situation s where the firm may want to give unequal emphasis to different quota basis, a linear
combination can provide a useful summary measure of each sales rep’s overall performance. A linear
combinations is a weighted average of the results on individual dimensions, where the weight reflects
the importance of each component of management.
The sum of the weight of each component is divided by the sum of the weights to reduce the weighted
combination to a basis of 100.
The weights should reflect the importance of each component and can be determined in a number of
ways. They might simply be set by the sales manager using his or her best judgement. They might
reflect the collective opinion of a group of top 10 managers or they might be based on some objective
analysis of the importance of each component to the firm’s long-run goals.
One attractive feature of the linear combination as a measure of overall performance versus quota is that
it allows differential weights to reflect unique territory or customer differences.
Another advantage is that it can be easily explained to salespeople.
(iii)
Determine level of each type
In establishing the level for each type of quota, the sales manager must balance a number of factors,
including the potential available in the territory, the impact of the quota on the salesperson’s motivation, the
long-term objectives of the company, and the impact on short-term profitability. When discussing quota
levels, it is useful to separate sales volume, activity and financial quotas.
(a)
Sales Volume quotas :
Using Historical Sales
Some firms simply set quotas on the basis of past sales. The most attractive feature of this
quota-setting scheme is that it is easy to administer. One does not need to engage in an
extensive analysis to determine what the quotas should be. This makes it inexpensive to
use. Also, salespersons readily understand it.
Unfortunately, such schemes forego many potential advantages of using sales volume
quotas. They ignore current conditions. It ignores territory potentials and provides a poor
yardstick for evaluating individual salesreps.
A quota based solely on last year’s performance can also demoralize salespersons and
cause undesirable behaviours.
Although sales quotas should not be based solely on prior year’s sales in prior year’ s,
historic sales should be considered when quotas are established as they provide some
indication of how competitive a firm is within a territory. By comparing historic sales
with potential sales, one can localize trouble spots and determine the problem and what
action should be taken.
Using territory potential
Territory potentials provide a useful start for establishing quotas for territory sales
volume. However, the firm should not adhere strictly to a formula relating to a potential,
but should attempt to reflect the special situations within each territory.
Determining how to set territory quotas that reflect the special situations within each
territory is often difficult. On one hand, the sales representative who serves the territory
should be involved in setting the territory quota, because he or she should have the most
intimate knowledge of the conditions in the territory. On the other hand, since the
representative will be affected by the quota established, he or she may not be impartial.
One might expect the sales rep to understate potential to generate lower, easier-to-reach
quotas.
Some firms have been able to eliminate the problem of potential bias when salespeople
are used to help set their own quotas by tying their compensation into the process. This
system seems to work well when sales persons have more information about their own
prospects than central office personnel and when significant costs are linked to underand overfulfillment of sales forecasts. Total accuracy will never happen but for practical
purposes the three main objectives of the system – sales volume, payment for
performance and good field information for planning will be brought about.
(b) Activity Quotas
The levels of activity quotas are most likely to be set according to territory activities.
They require a detailed analysis of work required to cover the territory effectively.
Activity quotas are affected by the size of the territory and by the number of accounts
and prospects the salesperson is expected to call on. The size of the reps customers
can also make a difference, as can their purchasing patterns. These factors affect the
number of times the salesperson needs to call on them in the period, the number of
service calls or calls to demonstrate the use of the firm’s services he or she must
make, etc.
The inputs for activity quotas come from at least three sources :
(i)
discussions between the salesreps serving the territory and the sales manager
(ii)
the salesperson’s reports
(iii)
marketing research
The sales manager and the territory salesperson can use past experience as a basis for
determining what activities are necessary to cover the territory effectively. Such a
discussion typically revolves around key accounts and what needs to be done to serve
them better. It may mean more frequent calls, or fewer calls. These estimations are then
combined with estimates of other activities, for example traveling, to determine the total
activity level in the territory from which a judgement can be made as to whether that
level is reasonable. If not, some modification is warranted.
The iterative process ceases when reasonable activity levels have been determined. They
must be reasonable in the sense of being consistent with the objectives of the firm for the
territory and with the time available from the salesperson.
Sometimes, the activity quotas can be established from salesperson’s reports.
The firm might also rely on marketing research to determine activity level quotas. The
firm might systematically vary the number of calls per account to determine the optimal
number to be made on each account in any time period. Alternatively, it might study past
bid behaviour to establish rules as to when the firm should bid on some equipment
request.
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Financial quotas
The levels of financial quotas are typically set to reflect the financial gols of the firm.