Picture this: in the annual shuffle at beginning of the year, territories are assigned, accounts are assigned and quotas are assigned. If one were to watch the man behind the curtain as these machinations were being performed, I’m sure the wizard would look more like a butcher, with his sparkly robes and wild hair replaced with a bloody apron and a dangling cigarette.
Why do I say this? Because many times to the sales rep, coming up with a quota number seems to be an exercise in capriciousness. As an example, I’m reminded of one of my sales positions where I didn’t receive my quota until April. Yes, after the first quarter had already passed! Then, once I had received my number, I was puzzled. How did they arrive at this number based upon the history of previous sales and sales in the territory?
Here is where the magic came in. Using figures published in business journals, Hoovers, D&B, etc. (…some source…), my company would take the target prospect’s annual revenue and estimate the percent of that revenue which would have to be spent on our product category. For instance, if the prospect was $100MM, then 10% or $10MM was going to be spent on IT related purchases. Based upon that, quota would be set at a percentage of this estimate, and this dollar amount was additive to create my total quota.
Seems harmless, right? Well, it’s not, which is why am I mentioning this as a Sales Operation issue. At its best, it is merely hopeful. At its worst, it is inaccurate and misleading–to the company and the rep. Let’s give some examples: a form being printed for a telecom company, and computer equipment purchased by a steel manufacturer. For the first example, while many large companies still have some paper forms, most have been digitized or obsolesced so whatever historic data one is using to arrive at that figure, it is always representative in arrears of actual use. To base the revenue on a declining number will only lead to inaccurate results and the rep’s quota is being based on unachievable numbers. Let’s look at the second example. Does a steel manufacturer buy computer equipment? Yes! But where is the primary investment for the steel manufacturer? In the making of steel! Which means the percent of revenue number used for quota isn’t representative of what the customer is purchasing. Will the steel manufacturer buy computer equipment? Yes, but more than likely on a three-to-five year cycle, not on an annual basis, and it’s computer equipment related purchases will be more along production systems, not desktops.
What quota setting like this creates is false hope for the company. It is akin to looking at all the accounts in a territory and thinking about how many potential customers you have and how much money each one has to spend–kind of a land grab mentality. It doesn’t focus on the actual fact of what, dollar-wise, has the customer actually purchased in your sales vertical. In my observations, in outside sales the average rep can handle about 50 accounts. Assigning a territory of 3000 accounts with accompanying quota may seem like a favor to the rep, but what it really does is dilute effort. As a corollary which I feel is applicable, there have been psychology studies showing when a consumer has more choices it actually leads to fewer decisions. So when rep has 3000 accounts, it seems as if the world is their oyster, but in reality they will only be able to actually service a fraction of that, and of the fraction serviced, only a fraction of that will be really good customers. For example: There is a Value-Added Reseller (VAR) I’m very familiar with and know they limit their top reps to no more than six accounts. Six! But what is amazing, is the good sales reps are able to generate fantastic amounts of revenue off their six accounts because they are focused on penetrating and selling their entire portfolio of products and services. To counter this observation, I have seen a senior rep working for another VAR who was allowed to cherry picked the top producing accounts from other reps, and had more than 300 accounts in his stable. He mostly sold those accounts renewals, and because he was stretched so thin, these accounts were always being courted by other companies. Last I heard, his methodology was backfiring with the majority of his customers complaining they never saw their rep and going to other companies whose sales reps were more available and paid more attention to them.
So back to quota estimation. Looking at what the territory will potentially produce, how many Fortune 500 accounts it contains, etc. doesn’t shed any light on what the territory will actually do. It comes down to data. If the company is starting in a greenfield territory, some of the planning data and analysis can be helpful, but holding the rep to imaginary numbers is like dividing by zero. In an established territory, looking at historical performance as well as the company target will be more insightful than speculation.
The critical factor in all of this is ramp up time and traction. It has been estimated it takes a technology sales rep 9-18 months to ramp up properly and be running on all cylinders. If the company allows the rep to build their pipeline, get some wins and move towards really owning the territory, then both the rep and the company will have success. If the company saddles the rep with an unrealistic quota and a short ramp, they will be looking for a new rep in short order and be repeating the same cycle of onboarding–which means another unproductive rep (also known as an unprofitable rep).
There are more and more tools coming out every day which help companies automate the establishment of quotas and commission plans but most of these look at sales in the traditional way: set quota high, and only pay well for over achievement. They tend to look at one size fits all, and every territory is the same.
So take a step back when setting quotas and find some real data. Look at the company’s targets through realistic eyes, and then when setting a quota remember if your sales rep is successful, the company will be successful.
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