What is Sales Quotas? Purpose, Types, Principle

What is Sales Quotas?

Sales quotas are specific targets or goals set for individual salespeople or sales teams to achieve within a specific time frame. These targets are usually based on revenue or sales volume, and they serve as a benchmark for measuring the performance of salespeople and evaluating their effectiveness.

A sales quota is defined as a quantitative sales target assigned to a particular sales unit for a specific period. This unit may be a particular region, sales team, or individual salesperson. Sales quotas help to stimulate a sales unit to perform its best and support the sales objectives of the firm.

Apart from motivating the salesperson or team, sales quotas also act as a basis for establishing incentives, compensation plans, and standards for performance evaluation. Sales quotas enable managers to understand how productive their sales teams are and whether the sales processes are functioning optimally.

---

Purpose of Sales Quota

Sales quotas can be measured in various ways, such as net profits, sales volumes, or activity.

• Create standards for evaluating performance
• Provide targets, compensation plans, and incentives for the sales force
• Control selling activities
• Highlight successful salespersons
• Monitor and regulate selling expenses

Create standards for evaluating performance

Quotas provide achievable goals and benchmarks to measure the performance of a sales unit. Managers can compare quotas to identify which sales units are underperforming and which ones are achieving their goals.

Provide targets, compensation plans, and incentives for the sales force

Quotas ensure that fair and effective targets, compensation plans, and incentives are established for the sales force. Establishing bonuses and commissions if quotas are surpassed encourages the sales force to improve their performance.

Control selling activities

Sales quotas allow managers to guide and control the selling activities. Sales quotas define targets for selling activities that salespersons will undertake, for instance, customer calls per day, calling on new accounts, giving a minimum number of demonstrations, and realisation of the firm’s account. Managers can determine if the salespersons are not able to achieve these activities and take remedial actions.

Highlight successful salespersons

Sales quotas provide benchmarks to measure the success of sales representatives. They can, therefore, be used to highlight sales representatives who are successful and reproduce their sales techniques to improve the productivity of others.

Monitor and regulate selling expenses

Sales quotas help to monitor selling expenses and prevent wasteful expenditure.

---

Methods of Sales Quotas

Top-down Approach

In the top-down approach, the top management establishes the sales goals for the specified time that align with the overall objectives of the firm and then assigns sales quotas to support these goals. These goals are based on historical information, forecasts, competitive parity, etc. and the top-down approach works backwards from these goals to determine what the sales quotas must be to achieve these goals.

Bottom-up Approach

In contrast to the top-down approach, the bottom-up approach analyses the past sales data of each salesperson or team and uses this information to generate sales quotas. The bottom-up approach establishes a quota at the upper limit of sales that salespersons have achieved in the past and can therefore set more realistic goals.

---

Types of Sales Quota

Sales managers can use various types of quotas for their teams. Let us explore the common types of sales quotas that managers use.

• Sales Volume Quota
• Activity Quota
• Profit Quota
• Expenses Quota

Sales Volume Quota

The most widely used sales quotas are based on sales volume. Sales volume quota includes sales in terms of units sold over a specified period. It is typically established for one year and the sales force needs to achieve their assigned quotas over the year.

Depending on the industry, these quotas may be further broken down by the product line, product range, region, branch offices, outlet, or an individual salesperson. Sales volume quotas motivate salespersons to achieve certain targets over the year, for instance, register a certain number of new users.

Sales volume quotas help to even out the sales of slow-moving and fast-moving products and also the different categories of customers per sales unit. The sales volume quota may be set in monetary or sales unit terms. Sales volume quotas in terms of sales units are more suitable for products whose unit price is high or in markets where prices fluctuate significantly.

Sales volume quotas in monetary terms are more suitable when multiple products are sold to one or different categories of customers. Sometimes, sales volume quotas are set on a point basis, i.e., points are awarded when a specific level of sales in units and monetary terms is achieved per product or customer.

Let us understand the concept of sales volume quota with the help of an example.

A Delhi-based automobile dealer instructs its sales team that every person of the team should sell 10 cars each month. Shikha works in the pre-owned cars department, while Mansi works in the new car showroom.

Shikha has sold cars 10 cars ranging from ₹1, 50,000 to ₹6, 00,000, while Mansi has closed sales with 10 customers and the car prices range from ₹8, 00,000 to ₹12, 00,000. Although Mansi generated more revenue than Shikha, they both met their sales volume quota by selling 10 cars.

Activity Quota

While sales volume quotas are the most common types, another widely used alternative involves creating quotas based on activity. Activity quotas help to ensure that important sales activities are performed within a given period. The common activities on which this quota is based include the number of sales presentations made, number of prospect calls made, number of meetings, number of recovery calls made, number of sales closed, and number of new clients acquired.

Sometimes, activities that constitute the part of the sales process, but they do not translate directly into sales, are also included. In a competitive market, the sales force may also need to perform activities related to market development to build the reputation of the company.

Activity quotas are useful because they motivate the sales force to perform not only the urgent selling activities but also the non-selling market development-related activities that are important to the company, on time.

Let us understand the concept of activity quota with the help of an example.

A pest control service provider has instructed its sales persons to make 30 phone calls a day to prospective customers. Manish calls people who filled the raffle form at the national-level horticulture and floriculture trade show.

With this method, Manish is able to generate one sale for every 15 calls. On the other hand, Piyush has a random list of phone numbers for making calls. This method hardly generates one sale for about every 60 calls. As long as Manish and Piyush make 30 calls a day, they meet their activity quota regardless of how much sales generated by both of them.

Profit Quota

Profit quota is another common type of sales quota. Here, the sales force is expected to sell enough units or subscriptions to generate a specified amount of profit for the given period. This type of quota is useful for companies that have products with a range of different profit margins. Profit quotas are, therefore, suitable for multiproduct companies, for example, FMCG companies, where different products contribute to different levels of profits.

They motivate the sales force to spend more time selling high-margin items and less time on less profitable items. For example, a furniture dealer has decided a profit quota of ₹10, 00,000 per month for each sales representative. Pari has a list of customers who have bought new apartments in a particular area. They need several pieces of furniture for their homes.

Her average sale is ₹50,000 per customer; thus, to meet her monthly profit quota, she has to sell furniture to about 20 customers. On the other hand, Bhawna works at the showroom. Her customer base includes those who usually buy just one piece of furniture. Her average sale is ₹20,000 per customer. So, as to meet her profit quota, she has to close sales with about 50 customers.

Expenses Quota

There are some companies that set quotas for expenses involving different sales levels achieved by the sales team. The sales force is given a budget that is a percentage of a sales territory’s sales volume and is expected to spend only that sum as expenses. This type of quota ensures that the sales force tries to keep selling costs within acceptable limits.

These quotas are difficult to set and may also demotivate the sales force. Hence, they are usually not used as standalone quota but to supplement other types of quotas instead. For example, a pharmaceutical company has the sales volume of ₹10,00,000 in a particular region. The company may allot an expense quota of 5% of the sales as a budget for travelling and other costs incurred.

---

Principles of Sales Quota

The setting of sales quotas is a difficult process without a definite formula to follow. The key to establishing sales quotas is finding the right balance between being challenging and attainable. The principles of sales quota allow managers to create well-balanced sales quotas.

Alignment With Business Strategy

A business strategy is basically a clear set of plans, actions and goals that highlights how a business will compete in a particular market with a product or number of products or services. Sales quota fairly allocates business goals into actionable targets.

For example, the monthly sales volume quota of an automobile dealer can be to sell 20 cars a month in order to meet the annual goal of selling 240 cars. Thus, it is crucial that the sales quota is aligned with the business strategy of the organisation.

Objectivity

To be effective, sales quotas should be based on facts and objective judgement. Objectivity is necessary to get an accurate explanation of how things work. Sales quota that shows objectivity is based on facts and is free from biasness i.e. personal opinion.

Examples of sales quota that represent objectivity can be:

• Bringing in 9% more revenue each month
  
  
• Improving customer retention by 20% by the end of the year
  
  
• Reducing customer churn rate by 3% within last two quarters of the year
  
  
• Reducing customer acquisition costs by 15% in the current month

Simplicity

A sales quota must be simple that it can be easily understood by sales representative at any level and at any location. An imperfect, but simple sales quota system is likely to work better than an accurate, but a complicated one.

Accuracy

The information and facts used for setting quotas must be correct and represent respective sales territories. An accurate sales quota is the blend of skilful planning, operating information and sound judgment.

Fairness

Managers should ensure that sales quotas are allocated fairly and uniformly, keeping in mind the differences in the nature of the product and territory.

Attainability

Sales quota must be achievable and set at the optimum level. Too much higher quotas are not attainable and can demotivate the sales representatives. Setting unrealistic quotas can serve no useful purpose and make the management into wishful thinking. Therefore, sales quota must be determined after appraising changes in personnel capabilities.

Alignment With Compensation Plans

Quotas should align with compensation plans to help differentiate achievers from underperformers. For example, sales representatives that exceed their quota should be rewarded well. This in turn will motivate the other members of the sales team to outperform the expectations.

Flexibility

A business environment is subject to constant changes. Quotas should be flexible enough to incorporate any fluctuations in market situations.

Certainty

Quotas should be clear and certain. Ambiguity regarding what needs to be achieved and by whom must be avoided.

Timeliness

Quotas should be set and delivered to the salesperson on time. Quotas should be based on a particular time period; for example, closing 20 sales deals in a month. This brings in a lot of clarity to sales people in terms of what to achieve and by what time.