What is Sales Quotas? Purpose, Types, Methods, Limitations

  • Post last modified:5 May 2023
  • Reading time:11 mins read
  • Post category:Human Resource
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What is Sales Quotas?

A Sales Quota is a quantitative goal assigned to a sales unit relating to a particular period of time. A sales unit may be a territory, a branch office, a region, a distributor, or a person. Sales quotas plan, direct, control and evaluate the activities of a company and their effectiveness depends upon the kind, quantity, and accuracy of marketing information used in setting them and upon management’s skill in administering the quota system.

Sales Quotas provide a source of motivation, a basis for incentive, compensation, and increasing standards of performance of sales persons and uncover the strength and weaknesses in the selling structure of the firm.

Sales persons are quota achievers and their motivation may fall off if the quotas are easy to achieve. The sales quotas are set by the sales manager for an individual salesman or a sales district. The executives who set sales quotas must have experience and should be familiar with territories.

Purpose of Sales Quotas

Sales quotas serve several purposes, the principal purposes include the following:

  • Providing Goals and Incentives to Achieve a Certain Performance Level.
  • If performance is exceeded or surpassed more incentives are given. While setting quotas, it must be ensured that they are specific, measurable, attainable, and realistic and time-bound. (SMART).

Types of Sales Quotas

There are basically four types of sales quotas and different types or a combination of them can be used depending upon their need, procedures, policies, selling problems, and executive judgment.

  • Volume of sales made by an individual.
  • Volume of sales made in a geographical area.
  • Volume of sales made in a product line.
  • Volume of sales made in a distribution outlet.

Sales Volume Quotas

These are most commonly used and are based on sales volume.
Sales volume can be measured by:

  • Volume of sales made by an individual.
  • Volume of sales made in a geographical area.
  • Volume of sales made in a product line.
  • Volume of sales made in a distribution outlet.

Sales volume quotas are also set to balance the scales of slow-moving products and fast-moving products. They may be set in terms of unit sales or rupee sales volume or both and on overall as well as product wise basis. Some companies combine these two and set pointwise basis, i.e. 1000 = 1 point. Also, different points can be given to different products – 3 for product A, 5 for product B, and so on.

Unit sales volume quotas are found useful in market situations where prices of the product fluctuate considerably or when the unit price of the product is rather high. Rupee sales volume quota is found useful for sales force selling multiple products to one or different types of customers.

Methods of Setting Sales Volume Quotas

Methods of Setting Sales Volume Quotas can be set on the following basis:

Methods of Setting Sales Volume Quotas
Methods of Setting Sales Volume Quotas

Past Sales

Sales quotas are set based solely on past sales experience. If the sales quotas are to be set for this year then we find out the sales of last year and taking the expected percentage increase in market share, we add this percentage to last year’s sales.

E.g., last year’s sales – 100 Percentage increase in market share expected is – 10% Then for this year sales quota will be – 110%.

This method assumes that the preceding year was the typical
year. We can also take the average of the past three years and add the
rate of growth.

Total Market Estimates

In this method of setting sales quotas total market estimates are made by the company for that year and sales quotas are derived from this. Two approaches are generally used.

  • Market size estimates can be had from the data available and the judgment of the executive at the head office.
  • Sales quotas can also be made from the projections made by field staff at each territory office.

Territorial Sales Potentials

Many managers derive sales volume quotas from sales potentials. Sales potential represents the maximum sales opportunities open to the same selling unit. This approach is appropriate when.

Territorial sales potentials are determined in conjunction with territorial design. In this case sales volume quotas are set by calculating the percentage relationship between each territorial sales potential and total sales potential and using the resulting percentages to apportion the company sales estimate among territories.

For example, if territory X’s sales potential is 3 per cent of the total and the company sales estimate is 10 million, then the sales volume quota for territory X is 3, 00, 000.

Compensation Plans

Companies sometimes base sales volume quotas solely upon the projected amounts of compensation that management believes sales personnel should receive. No consideration is given to territorial sales potentials, total market estimates and past sales experience and quotas are tailored exclusively to fit the sales compensation plan.

If, for instance, sales person A is to receive a 2,000/- monthly salary and a 5 per cent commission on all monthly sales over 40,000/-, A’s monthly sales exceeds 40,000/-, management holds A ‘compensation-to-sales ratio to 5 per cent. Note that A is really paid on a straight commission plan, even though it is labeled “salary and commission”.

Limitations of Sales Quotas

These are some Limitations of Sales Quotas:

  • In situations where goods are in short supply the quotas do not serve any purpose. These can only be used in buyers’ markets where goods are available in plenty and enough competition is in existence.

  • Generally quotas are set at a high level which creates frustration in sales persons.

  • It is not easy to get reliable sales estimates from the market. The collection of data is also very expensive therefore many quotas are set on past performance and by guess.

  • Some sales quotas are complicated and aren’t understood by salesmen and hence are opposed by them.

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