Sales quotas can make or break your sales team. Too often, sales quotas are arbitrarily set, and instead of challenging the GTM team, they tend to demotivate them as the task seems too daunting and the commission is out of reach.
Poorly set sales quotas will also affect many areas of your business like forecasting, investments, budgeting… Getting it right will create alignment across your GTM motion and the rest of your company.
Today, I want to show you the 3 ways to set your sales quotas to generate a high outcome. Each with their pros and cons so choose wisely.
Top-down quota setting:
Let’s start with probably the most popular of the 3, the top-down approach. As you guessed the top-down approach is when you start from the outcome you are targeting – e.g. we need to make $10M by the end of the year – and trickle it down to the sales teams.
The problem with this approach is that there is a good and bad way to do it.
You are sure to run into a wall if you decide on a quota and then divide it by the number of salespeople in your company. I would even argue that this is the surest way to alienate your sales team, miss target 90% of the time, and increase attrition of your team by 10 folds. So what is the right way to do this you said?
Although this approach seems one of the easiest to implement, it takes a bit of work to make it successful. You will need to understand the actual capacity of your team and resource it accordingly to meet the sales target/quota.
Bad way:
The company needs to make $10M this year and you have 10 salespeople, then they need to make $100,000 each this year. If you want to go further we can add the annual contract value (ACV). If we assume $10,000 ACV, then each salespeople need to win 10 deals during the year.
Good way:
The company needs to make $10M this year, you have 10 salespeople and ACV is on average $10,000. You will also need to know that each salesperson can only process 8 deals per year as they take a long time to set up. That means that realistically you can currently process $800,000 of the quota and need to hire 2 more salespeople.
Reality can get even more complex, based on your company and industry. There are other routes you can take regarding productivity as you can hire RevOps to increase it.
In conclusion:
Pros:
- Good approach to challenge your team
- Easy ish to implement if you do it right
- Should cover all your budgeted expenses
Cons:
- Might be out of touch with reality if done properly
- Drive motivation to the ground and increase attrition if done poorly
- You might miss on revenue if you lowball your expectations
Bottoms-up quota setting:
Going the opposite direction now, the bottoms-up approach consists of considering historical performances to set realistic quotas.
We usually set this up by taking 80% of your best month-to-date or the average of your last 3-6 months’ performance.
Several problems with this approach also I’m probably stating the obvious here:
- The target is only as good as your team and whether your team is good or not you are losing revenue by not setting the bar higher.
- This approach doesn’t take into account dependencies and there is a high chance that you will be operating at a loss.
The only time I wouldn’t veto this approach is if you are in the transition from a founder-led motion to a sales team motion. And even then I would still rather go for the top-down approach.
Pros:
- Attainable as it is based on past performance so your team should have no difficulty repeating it.
- This system is also highly motivating for the team as it makes it easier to achieve quota and unlock commission.
Cons:
- Doesn’t take into account dependencies
- Not challenging for the team
- You will miss out on revenue
Cost driven quota setting (recommended):
This approach needs a bit more work to make it work but this is the approach you need to take if you want to take your acquisition team and company to the next level.
You will have to take 3 data points into consideration for this to work: the cost of your sales acquisition team, your ACV, and the lifetime value (LTV) of your current customers.
Let’s look at your acquisition team first. If you need 1 SDR, 1 AE, and 1 CSM to your customer up and running with your product then you need to sum their cost. If it costs you $400,000/year in total then you need to at least make the same amount to break even.
But that’s not counting the remaining departments in your company that are also a cost. There are 2 approaches to solve this. The first one consists of taking the total cost and multiplying it by 2. So in this case the quota should be at $800,000/year. It is assumed that it will be enough to cover all the costs in your company. LTV and ACV are important in the second approach where we will be using a version of LTV:CAC ratio to set up the targets. It is believed that the minimum you need to run a successful company is LTV:CAC of 3:1, in other words for each dollar/euro you spend you get 3 in return. Great companies have an LTV:CAC of 5:1 or even +10:1 for the biggest ones out there.
Taking back our example with a cost for the acquisition team of $400,000. If your ACV is $20,000 with an LTV of 2 years or $40,000 then the quota should be set at:
Sales quota: $400,000 x 3 (to get to 3:1) / 2 (because the LTV is a 2-year average) = $600,000
If we break it down, you need $1.2M to reach an LTV:CAC of 3:1 based on cost, but you also know that your customers tend to renew that contract on average for a second year. That means you only need to win 30 deals that will renew for a second time. Year 1 you will get $600,000 and year 2 $600,000 again. It goes without saying that year 2 will not count in the next year target attainment.
Note that if your ACV and/or LTV is low then you want to make sure you have a group grip on your CAC and choose the right GTM motion. For very low ACV a self-serve led motion or product-led motion might be better suited.
Pros:
- Takes all dependencies into account
- Challenge the team
- Scalable
Cons:
- More difficult to implement and operate
Other things to consider when setting sales quotas
Onboarding and ramp-up period
It goes without saying but whenever you hire a new member in your acquisition team, it will take that person a bit of time to go through your company onboarding and get the habit of selling your solution. You want to make sure that this is taken into consideration in the quota-setting process.
Most companies will create a ramp-up period based on the historical ramp-up of team members and the sales cycle. If your sales cycle is 2 weeks then 1 month to 1.5 months should be enough. The longer the sales cycle the longer the ramp-up period.
There is no rule around how sales quotas should be set during this period. You can live a linear quota progression like 25%, 50%, and 75% of quota for months 1, 2, and 3. Or you can choose a more exponential approach to the ramp-up period (especially for longer ones) like 20%, 40%, and 90% for months 1, 2, and 3.
Make sure also to take into consideration the potential training period after the promotion of one of your team members if it’s part of the sales career path.
Over assign cushion
Industry standard is to make sure that you anticipate other costs and factors in your quota settings. That is why we usually advise not to spend more than 40% of the year’s revenue on CAC if your LTV is inferior or equal to a year and no more than 60% for an LTV of 2+ years.
You also need to protect the company by taking into account quota misses and team attrition to make sure costs don’t get out of control in front of never-coming revenues.