When you set annual sales quotas, they always look great on paper. You go through a painstaking process with your sales leaders. You look at historical attainment levels. Review the opportunity pipeline. Even make sure you have enough reps to split the revenue goal evenly.
Throughout the process, you always feel quota setting is an inexact science at best. It’s mid-year and your quota attainment distribution looks something like the below chart. Despite your best efforts, you feel like quotas are a mystery. You’re the CEO. You don’t think of yourself as a quota setting expert. Yet it costs you money to have reps who don’t produce.
Your quota-setting process is elusive because it’s top-down. The top-down quota setting process is the most commonly used method. Determine the revenue number. Set a quota level. Divide quotas into the revenue goal. Determine the number of reps needed.
Top-down quota setting doesn’t work because it omits the most critical factor: Time. Without time, there isn’t a clear understanding of what your rep can realistically produce. To make the numbers work, you have to back into the answer. Ultimately, you end up with something that looks great on paper. But, it doesn’t work. Your sales quotas are a guesstimate. Number missed. Money wasted on sales resources. Pain and frustration for you. You need a cost effective way to make the number.
Introducing the Bottoms-Up Workload Analysis
The answer to quota setting is to conduct a bottoms-up workload analysis. It will help you understand how much revenue a single rep can physically produce. To make this easy, here is a free tool to guide you.
There are about 1850 work hours in a year. In best-in-class sales organizations, outside sales reps spend about 70% of their time selling. This means you have about 1300 available selling hours per rep.
This tool will benefit you by determining 3 things:
Accurately set sales quotas
Help make sure you don’t over or under hire
Keep your sales expense in line
A Scenario to Help You
Let’s say your current quota is $1.5M per rep. Using the tool, you learn it takes 26 hours to work a deal. This includes both wins and losses. In 1300 hours, a rep can work about 50 deals in the year. If your win rate is 30%, the rep will win about 15 deals. If each deal is worth $80K, your rep can sell $1.2M.
You’re falling short because your rep is at capacity. There are no more hours in the day to sell more.
To fix this, you can:
Increase the win rate to 38%. If each rep can sell another 3 deals, they will make the number. Not impossible, but a high win rate that depends on a number of factors.
Increase the average sales price to $100K. May be difficult based on what pricing your market will tolerate.
Increase selling time to 1625 hours/year. Unlikely you will ever hit 88% selling time with outside sales.
Add more heads. Easy option, but directly impacts your sales expense.
No matter the solution, you’re armed with information to crack the quota setting code. You’ll also learn why your reps aren’t making the number.
Why Focus on Quota Setting Now?
The reason to focus on next year’s quota now is to give you time to prepare. For example, let’s say you need to add more heads. You need to hire and onboard now to prep for next year. Otherwise, you’ll start the year with newbies who still can’t find the bathroom. Your cost of sales will increase if they don’t ramp up fast enough.
Or, let’s say you find out your reps are spending time on unproductive activities. You’ll need to shift those low priority activities off their plates now. This will help lift their performance next year.
Quotas shouldn’t be a mystery. Your annual planning process begins soon. You’ll need to know how much to invest in order to make the number. This tool will provide you with clarity.
A top-down approach is no longer sufficient. By conducting a bottoms-up analysis, you’ll unlock the secret to quota setting.