Methods and Procedure of Sales Quota Setting
There can be numerous alternative methods of setting a sales quota a company can go for. Such methods even differ significantly from one to another in procedural aspects.
Here, we will discuss the most commonly used sales quota setting methods along with their procedural step, suitability, and problems.
Territorial Sales Potential Based Method
This method of setting sales quotas focuses on the sales territorial design of the sales market. Companies use some steps to determine sales quotas by deriving sales potential in that particular territory.
Procedural Steps:
- Take, for example, the assignment of sales quotas to a specific sales territory.
- Using the poll, determine the territory’s sales potential. Maximum sales opportunities for that salesperson/territory should be interpreted as sales potentials.
- Calculate the percentage link between each territorial sales potential and all overall sales potentials.
- As a result of the percentage, divide the company’s sales projection among the employees.
Suitability:
Territorial sales potential method of setting sales quota is appropriate when,
- Territorial sales potentials are determined in conjunction with territorial design, and
- Bottom-up planning and forecasting procedures are used in obtaining the sales estimate in the sales forecast.
Problems:
- Even though the two measures are related, total sales potential is not always equivalent to sales estimates.
- Past sales, competition, changing market conditions, differences in salespeople’s abilities, anticipated changes in prices, items, promotion, and the like are all taken into account when bottom-up planning and forecasting is used to determine sales estimates. However, the final sales targets are based on statistical data rather than the original. This means that once quotas are set, they need to be reconsidered.
Total Market Estimates Based Method
There are two alternative ways to use the total market estimates-based method while setting sales quotas, they are.
i. The first way requires these steps to follow,
- Estimates sales volume of the total market through top-down planning and forecasting method.
- Break down the total company estimates for each territory, by using various indexes of relative opportunity in each territory.
- If needed, make adjustments in estimates and decide the sales quota for each territory.
ii. The second way follows these steps,
- Take into account projected changes in price, product, promotion, policies, etc. of the company.
- Estimates sales volume of the total market through top-down planning and forecasting method.
- Convert the company sales estimate into a company-wide sales quota sales.
- Break these sales estimates for each territory, by using the index of relative sales opportunities in each territory.
- Make adjustments in sales estimates considering differences in territories and sales personnel, and finalize territorial quotas.
Although these two methods of sales quota setting are similar, there is only one difference among them. In the first method, adjustment is made at the territorial level. But in the second method, it is made at the company level. Between these two methods, the first method seems better since it considers the following.
- Projected changes in price, product, promotion, and policies of the company.
- Conversion of the company sales estimates into a company-wide sales quota.
- Making adjustments by taking into consideration the differences in territorial and sales personnel.
Problems:
If there are more than two organization levels in the sales department, the sales quota goes through additional rounds of adjustments. For example, if a company has three levels of sales department – company, regional, and district level. In this case, at first sales quota is done at the company level, then at the regional level, and at last at the district level.
Basically, at the regional level, discussions take place between and among sales managers and sales personnel to reach the point of agreement regarding adjustment in the estimates of regional sales quotas. It certainly costs time, money, and effort. So happens with district sales managers and salespersons.
However, in the eye view of sales quota effectiveness, implementation remains very high because each concerned participate in the process of estimating sales quotas.
Post Sales Experience-Based Methods
To reset the new sales quota, these methods are based on each territory’s previous sales quota. The sales manager can utilize one of the two approaches to do this. The first method uses the previous year’s sales of each territory as a starting point, then adds an arbitrary percentage.
However, under the second technique, sales from the previous five years are considered. Then, using time series equations, a line is created. The resulting number is used to determine new sales quotas for a particular sales territory.
Assumptions:
- Companies using these methods of sales quotas assume that past and future sales are related. Past sales are guidelines for estimating future sales. And it seems natural in the sales forecasting procedure.
- They also assume that past sales are satisfactory, otherwise, no need to take it as a base.
Problems:
If a territory has adequate sales coverage, basing its sales volume quota on past sales ensures future inadequate sales coverage.
The average of past sales method has a unique defect in that average sales lag behind actual sales during a long period of rising or falling sales. And the chances of setting either too low or too high quotas are greater.
Executive Judgement Based Method
Companies use the executive judgment method of setting sales quotas in the following alternative situations.
- There is little information to use in setting quotas.
- There may be no sales forecast and no practical way to determine territorial sales potentials.
- The product may be new and its probable rate of market acceptance is unknown.
- The territory may not yet have been opened.
- The newly recruited salesperson may have been assigned to a new territory.
However, this method alone may not produce high-quality quotas. So, it would be better to use this method as one of several ingredients that can be combined with other methods.
Compensation Plan Based Method
Sometimes sales quotas are solely determined on the basis of the projected amounts of compensation for salespersons. Other constraints such as territorial sales potentials, total market estimates, and past sales experience are not considered in this method of setting sales quotas.
This method is appropriate when salesforce quota performance with the sales compensation plan is compared. In other words, this method relates a financial incentive to salespersons’ performance.
A salesperson receives Rs. 10,000 as monthly salary. He/She gets a 5 percent commission on all monthly sales over Rs. 2,00,000. This means, his/her sales quota is set at 2,00,000. But if, monthly sales exceed Rs. 2,00,000, the management holds his/her compensation-to-sales ration to 5 percent. To make it more clear, suppose exceeded sales over quota decided is Rs. 50,000. Then the salesperson will receive Rs 2,500 (5/100 x 50,000) as compensation under a straight-commission plait This additional amount is an incentive for the salesperson.
Sales Personnel Judgement Based Method
This method of setting sales quotas is suitable where:
- Companies run under the democratic norm.
- Sales personnel are more competent and experienced in a sales job.
- Sales personnel are placed in the position of determining their own performance standard.
- Salespersons are closest to the territories and are well known to them.
- The management turns the whole problem related to sales quota over to the sales staff, thinking that they will complain less if they set their quota standard.
Positives of the Method:
Because sales staff/persons themselves set sales quota standards they apply their every effort to meet them. As a result, the management easily achieves target sales and feels released from any problem.
Some salespersons feel that sales quotas set by the management appear high or low than their efficiency and sales experience. But when they get the opportunity to have their own self quota standard, they realize that the management is of sharing attitude and a symbol of the rational decision-maker.
Negatives of the Method:
Sometimes, the chance of unrealistic(higher low) quota setting may exist with salespersons due to their personal constraints such as insufficient information knowledge about the territory and insufficient experience of quota setting procedures.
The above facts may cause dissatisfaction and low sales force morale.
Better Way:
The salesperson should, by definition, have more knowledge and information about the sales territory. As a result, final quota decisions should be made after salespeople have established a sales quota standard. However, management must involve salespeople in such an adjustment to ensure that no problems arise afterward.