Compensation, Sales Quotas
Sales quota can be defined as the sales target, which is assigned to any sales unit for a particular duration of time; here sales unit can be a person, region, distributor etc. Sales quota provides a target to be achieved in particular duration, which increases the productivity.
Commercial firms set up sales quotas in order to improve sales volume and increase the net profit of the organization. It can also be viewed as a standard to determine the effectiveness of sales unit. Sales quota is determined using various factors such as market potential, marketing method, past sales record etc., with effective projection of market sentiments. For planning sales quota, control of sales operations can be an effective method.
Sales quota is imposed in an organization to fulfil various objectives required to increase the sales of product and maximize profit.
Sales objectives help an organization in the following ways −
- They provide a standard to measure the performance.
- They help to control sales expenses for customer acquisition.
- They help define a target; this further facilitates motivation and enhanced performance.
- These help to identify and monitor the performance of salespersons.
These are some of the primary objectives of sales quota for an organization. Further, sales quota can be divided in different types according to the requirement.
Types of Sales Quota
Sales quota is divided into four different categories according to the difference in forecasting and cost allocation procedure, management goals, selling issues and executive decision.
The following are the different types of sales quota.
Sales and Volume Quota
Sales and volume quota is allocation of sales quantity for salesperson, geographical regions, distribution outlets etc. This quota can be implemented according to sales performed or revenue earned by respective units.
The combination of both the criteria can also be used for the implementation of this quota. The quantity of sales and revenue earned can be allocated to the respective unit (salesperson, region) and it has to fulfil at least one of them.
Financial and Budget Quota
Financial and budget quota is used to determine and restrict expenses on sales to attain desired net profit planned.
It is implemented on various segment of sales organization to control the expenses accordingly. The aim of these quota is restriction of expenses for making sales so that profit can be increased.
In competitive market, the effective performance of sales group is required. It can act as a long term benefit for the organization. Organizations set up activity quota for sales force for efficient results. These can be performed by allocating sales target to salespersons.
The following are the activities listed under sales quota −
- Number of accounts opened through the salesperson
- Number of sales calls made to potential customer
- Number of demonstrations made to show the product
- Number of maintenance activities performed
Activity quota is planned on the basis of these activities performed by the salesperson. By setting quota for the activities, efficient performance and controlling can be managed.
It depends on product type and market condition, issues related to sales of product and the challenges faced during the sales of a product. Organizations set up quota with combination of sales volume and activity quota in order to increase sales.
Methods for Setting Sales Quota
Sales quota for any unit like salesperson, region, etc., should be a reasonable and an achievable goal, for it to be fulfilled at the provided time span. At the same time, quota should not be such that it doesn’t take much effort to achieve.
The following are some of the methods for setting the sales quota −
Total Market Estimate Method
Total market estimate method is used to determine sales quota in places where the management doesn’t have any data about the market potential. It can be determined by dividing the company’s sales quota with respect to regions or dividing sales quota according to relative sales opportunity as per region.
Territory Potential Method
Territory potential method directly relates territorial sales potential to sales quota. The potential here is total industry’s sales for that segment. Sales potential represents the maximum market size of the product; size of the market reflects the sales potential. This method gives precise results if territorial sales potentials are used with a combination of territorial design.
Past Sales Experience Method
Past sales experience method determines the sales quantity based on the previous year sales. Managements of organizations set this up by increasing some percentage from the previous sales record.
For more precision in the approach, managements most commonly use an average of several years as a base line for the measurement. This method is simple and doesn’t take much effort to implement.
Executive Judgement Method
In this method, sales quota volume is determined by the management, but it is more likely to be a guess. The management decides the sales quantity and no fixed procedures are involved.
This method is not precise and it’s mostly not used by organizations to determining the sales quota. This method doesn’t provide any estimate for territorial based sales volume.
Sales People Estimate Method
In this method, the sales quota is determined by the salesperson of the organization. Through this approach, a more relevant sales estimate can be maintained, which can be achieved by the salesperson.
Salesperson have better knowledge of the market conditions, so they can set the target as per their standards, and if the standards are set by the salesperson themselves rather than imposed by the management, their fulfillment is more likely possible.
Compensation Plan Method
Compensation method is based on management’s view of what a particular salesperson should receive as revenue; this method does not take into account the sales projection or territorial volume.
For example, if a salesperson has to receive 20,000 as salary, which can be received as 10 percent commission of the sales amount, then the salesperson has to sell products worth 200,000.