Sales Quota – Meaning
Sales quotas are the sum of the total sales of a future period and duties to achieve the component of total sales by each salesperson are handed down to them at the beginning of the period.
According to Philip Kotler, ‘A sales quota is the sales goal set for a product line, company division, or sales representative. It is primarily a managerial device for defining and stimulating sales effort.’
It is an expected performance objective. Quotas are routinely assigned to the sales units, such as departments, divisions, and individuals, and they proceed to reach these quotas in their respective domains. They are sales assignments or goals, which are to be achieved in a specific period of time.
Sales quotas are the sum of the total sales of a future period and duties to achieve the component of total sales by each salesperson are handed down to them at the beginning of the period. According to Philip Kotler, ‘A sales quota is the sales goal set for a product line, company division, or sales representative. It is primarily a managerial device for defining and stimulating sales effort.’
They are sales assignments, or goals and expectations of the top management expressed in volume or in rupee sales for a specific future period. It is a part of the company’s total expected market share that is assigned to the salespeople in each territory, a branch, a distributor, a selling agent, a dealer, or any other selling unit as a target to be achieved in a specific future period of time.
It is a quantitative goal assigned to a specific marketing unit such as a salesperson or a territory for a time period. So, a sales quota is a standardized method of evaluating the effectiveness and performance of salespeople. Quotas are based on sales but there is a difference between sales potential and quota. A sales forecast is an estimate of what a firm expects to sell during a time period using a particular marketing plan.
Sales quotas may be set equal to, above, or below the sales forecast. Sales potential is the maximum share of the market demand that a firm can obtain under the legal environment. Sales potentials help the firms for long-term and strategic planning, but sales quotas are used for different reasons.
Sales Quota – Definitions
In the words of Kirkpatric, “Sales quotas are sales assignments or goals, they are management’s expectations in dollars or units for a specific future period.”
In the words of Philip Kotler, “A sales quota is the sales goal set for a product line, company division, or sales representative. It is primarily a managerial device for defining and stimulating sales effort.”
In the words of Paul H. Nystrom, “A sales quota is that part of the share of a company’s total estimate sales assigned to a salesman, a territory, a branch house, a distributor, a dealer or to some other selling unit, as a goal to be attained in a designated future period of time.”
In the words of Cundiff and Stiff, “Sales quota is a quantitative goal assigned to a specific marketing unit, such as to a salesman or territory.”
In the words of Stanton and Buskirk, “A sales quota is a sales performance goal. It is assigned to a marketing unit, a salesperson, branch, middlemen, or customer.”
It is thus, clear that sales quotas are a standardized method of evaluating the effectiveness and performance of salesmen.
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 a particular duration, which increases 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 units. A sales quota is determined using various factors such as market potential, marketing method, a past sales record, etc., with an effective projection of market sentiments. For planning sales quota, control of sales operations can be an effective method.
A sales quota is imposed in an organization to fulfill various objectives required to increase the sales of products and maximize profit.
Sales objectives help an organization in the following ways −
- They provide a standard to measure 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 the sales quota for an organization. Further, the sales quota can be divided into different types according to the requirement.
Types of Sales Quota
A sales quota is divided into four different categories according to the difference in forecasting and costs allocation procedures, management goals, selling issues, and executive decisions.
The following are the different types of sales quotas.
Sales and Volume Quota
Sales and volume quota is the allocation of sales quantity for a 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 criteria can also be used for the implementation of this quota. The number of sales and revenue earned can be allocated to the respective unit (salesperson, region) and it has to fulfill at least one of them.
Financial and Budget Quota
A financial and budget quota is used to determine and restrict expenses on sales to attain desired net profit planned.
It is implemented in various segments of the sales organization to control the expenses accordingly. The aim of these quotas is to restrict expenses for making sales so that profit can be increased.
In a competitive market, the effective performance of the sales group is required. It can act as a long-term benefit for the organization. Organizations set up activity quotas for the sales force for efficient results. These can be performed by allocating sales targets to salespersons.
The following are the activities listed under the sales quota −
- Number of accounts opened through the salesperson
- Number of sales calls made to a 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 a quota for the activities, efficient performance and control can be managed.
It depends on product type and market condition, issues related to sales of a product, and the challenges faced during the sales of a product. Organizations set up quotas with a combination of sales volume and activity quota in order to increase sales.
Methods for Setting Sales Quota
Sales quota for any unit like a salesperson, region, etc., should be a reasonable and achievable goal, for it to be fulfilled within the provided time span. At the same time, the 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
The 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 the sales quota according to relative sales opportunities as per region.
Territory Potential Method
The territory potential method directly relates territorial sales potential to sales quota. The potential here is the total industry sales for that segment. Sales potential represents the maximum market size of the product; the size of the market reflects the sales potential. This method gives precise results if territorial sales potentials are used with a combination of territorial designs.
Past Sales Experience Method
The past sales experience method determines the sales quantity based on the previous year’s sales. Managers 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 baseline 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 determine 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.
Salespersons 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
The 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.
Sales Quota – 7 Main Characteristics
- It is the sales goals set for a product as well as for a salesman.
- There is a time dimension of a sales quota.
- Sales quotas are assigned to salesmen, middlemen, or a branch.
- It requires a desired level of performance.
- It is a managerial tool for the direction and control of sales activities.
- Sales quotas are determined on the basis of sales forecasting, sales potential, estimates of costs, and other market studies.
- The success of the sales quotas system will depend on the accuracy of data and information used for forecasting.
Sales Quota – A Brief Detail of Objectives in Setting Sales Quotas
The general objective that sales management has in mind is to control the sales effort. Sales control is facilitated through the use of appraising performances of sales organizational units, such as sales units or an individual sales force. The management also uses quotas to motivate personnel to achieve desired performance levels.
A brief detail of objectives in setting quotas are as follows
- For determining the goals of a salesman, sales territory, sales department, or branch office.
- For evaluating the market territories in respect of prospects of sales and marketing situations.
- For balanced growth of market territories. In the territories where the sales are comparatively lower, efforts can be made for increasing the sales.
- To motivate the salesman towards achievements of the prescribed quota within the prescribed time.
- For facilitating the sales manager to evaluate the salesman’s productivity. In case of failure to achieve the set quota, the reasons for which can be analyzed.
- For the development of effective remunerative plans for the salesman. Those who achieve more than the prescribed quota are provided with a commission or bonus.
- To control the activities of a salesman and to encourage them to achieve the prescribed quota within the prescribed time limit.
- For controlling sales expenses by fixing a limit on every sales quota allotted.
- For facilitating to evaluate of the results of sales contests. A certain minimum sales quota is fixed for each salesman to be achieved, to ensure his participation in sales contests.
- Sales quotas serve as the basis for preparing the budget for advertising and sales promotion.
- It is the basis to define the rights and duties of every salesman, sales department, or branch.
- It is the basis to avoid the duplication of activities as the rights and duties of every salesman, sales department, or branch office are clearly defined in advance.
- It determines uniformity in workloads between each salesman and sales territories.
- For estimating the future needs of every salesman, territory, branch, or middlemen and also to estimate future requirements of sales-force, office employees, and other requirements if any, in advance.
- To establish coordination with other departments, such as production, purchase, warehousing, finance, etc. These departments will be able to undertake their respective functions in accordance with the sales quotas allotted to each territory.
Sales Quota – Importance
There are essentially three reasons for the use of sales quota. The sales managers use the sales quota for motivating salespeople. People with a mind to achieve higher things like the concept of sales quota due to its objectivity in measurement and subsequent linking with the reward system.
They also get feedback on their performance through the achievement of quota in the organization. In a multi-product situation, the salespeople are directed to put their efforts into specific product categories that enable them to know where to concentrate for achieving the organizational goal.
Quotas always lead organizations towards management by exception. This means that the management focuses attention on the people who are highly performance-oriented and takes care of their interests in the organizational policies. Similarly, managers can devote more time to people who are poor performers, and attention can be given to their knowledge and skill-building to improve their efficiency.
The management can also spend more time on high-performance individuals to learn the basic elements for which they outperform others and try to bring the same elements within others for improving their sales performance.
Sales quota also helps in giving directions to the salespeople’s efforts and resources for specific ends and targets the organization sets as important. It is seen in organizations that the attainment of sales quotas is tied to the incentives and financial rewards of the organization. This rewards the desired type and level of corporate behavior to reach organizational goals.
These represent the manager’s expectations about the activities to be accomplished and the level of accomplishment targeted for the time being. Quotas help in providing a means for measuring performance through the measure of individual activity in the organization. Management compares the achievement of individuals with their targets and thus, quotas become the primary basis for evaluating performance.
Quotas serve as guidelines and direct the behavior of salespeople because it also assigns authority as a formal right to exercise control. It gives the power to augment accountability and punish for noncompliance. The salesperson’s acceptance of this provides the organization with a control mechanism for smooth management.
This kind of control also serves as a self-supervisory mechanism in the organization where the salesperson can always measure his performance with the quota as they are set on sales volume, individual product line’s sales volume, number of new accounts, and also expenses. Therefore, the salesperson confines his activities only to these measurable activities.
Quotas provide performance targets, standardize performance, and control the individual’s performance, thereby directly influencing the level of motivation within the salespeople. Fixing a believable quota for the sales staff, linking it with the reward system, and then allowing people to perform towards achieving the quota within the specific time period constitutes an effective process of performance management.
Sales Quota – 11 Important Principles of Setting Sales Quotas
The setting of sales quotas is a difficult and skillful activity. As such, it is not possible to determine any formula and follow it. But, with the help of certain principles, sales quotas can be set skillfully.
These principles are:
- Objectivity – Sales quotas should be set on the basis of facts and figures while applying skills and intelligence.
- Simplicity – The simplest method of quota setting should be sued so that the salesmen and other related persons may understand it easily. Professor White has rightly stated that “An imperfect, but simple quota system is likely to work better than an accurate, but a complicated one.”
- Fairness – There should be fairness in allocating sales quotas. This means that there should be uniformity in the allotment between salesmen. But keeping in view of the nature of territory, competition, and the ability of the salesman, there can be few differences in the quota allotment.
- Achievable – The sales quota should be achievable without much difficulty. If the higher quota is fixed to achieve, it would be difficult even for an average salesman to achieve it and it will not motivate the salesman. The quota should be of optimum level.
- Flexibility – Stanton, and Buskirk were of the view that no sales quota is good so far as it has not the quality of flexibility.
- Definiteness – It means that there should be definiteness in the quotas fixed, either the quotas may be fixed on a geographical basis, on monetary value, or on units of product. It should be definite to every salesman that, which object is to be achieved by him.
- Follow-up – For the successful achievement of sales quotas it is essential to follow up or evaluate the sales quotas. It is the duty of the managers to compare the sales quotas with the sales results regularly. Evaluation of performance will be helpful to determine the remuneration plan, motivational schemes, and promotion to salesmen.
- Stability – Stability should be maintained in quota fixation. It means that the base and the method of quota setting should not be changed frequently. Frequent changes in the methods of quota setting may create confusion among the salesman and brings an end to the goodwill of managers.
- Participation – Participation of all the salespersons is needed to achieve sales quotas successfully.
- Motivational – The quotas should have a motivating effect on the salesmen. Those who have achieved the sales quotas should be given incentives so as to motivate and encourage them in the future.
- Accuracy – Accuracy should be maintained while setting sales quotas. The information and facts used for setting quotas must be accurate and representative of respective sales territories.
Sales Quota – Need for Quotas Setting
- Accurate, Fair, and Attainable Quotas
Good quotes are accurate, fair, and attainable. Obtaining accurate quotas is a function of the quota-setting procedure – the more closely quotas are related to territorial potentials, the greater the chances for accuracy.
But, in addition, regardless of the type of quota – sales volume, budget, activity, or combination – sound judgment is important in analyzing market data, adjusting for contemplated policy changes (and for conditions unique to each territory), and appraising changes in personnel capabilities, as well as in setting the final quotas. Accurate quotas result from the skillful blending of planning and operating information with sound judgment. Setting a fair quota involves determining the proper blend of sales potential and previous experience.
If management believes that its quota-setting procedure produces accurate quotas and is confident that fair quotas are being assigned, then they should be attainable. Most quota-setting errors are those of judgment, most traceable to setting quotas above each salesperson’s expected performance to provide an incentive for improvement. Quotas that some sales personnel fail to attain are not necessarily unfair – whether they are or not depends on who fails to attain them.
Thus, in ascertaining fairness, management faces a possible dilemma because the quotas themselves are the performance standards most used for appraising the quality of sales personnel. Clearly, subjective evaluations of sales personnel according to quantitative performance criteria are required to ascertain whether quotas are fair.
- Securing and Maintaining Sales Personnel’s Acceptance
Management must make certain that sales personnel understand quotas and the quota-setting procedure. Conveying this understanding is a critical step in securing staff acceptance of quotas. If sales personnel do not understand the procedure used in establishing quotas, they may suspect. This attitude destroys the quota’s effectiveness as an incentive.
It is important that sales personnel understand the significance of quotas as communicators of “how much for what period,” but, if they also understand the quota-setting procedure, they are more likely to consider their quotas accurate, fair, and attainable. The quota-setting method should be simple enough for sales personnel to understand, yet sufficiently sophisticated to permit acceptable accuracy.
Sometimes, this means that management, faced with choosing between two quota-setting procedures, may choose the less sophisticated because it can be more easily explained to, and understood by, the sales staff.
- Participation by Sales Personnel in Quota Setting
If sales personnel participate in quota setting, the task of explaining quotas and how they are determined is simplified. With sales personnel helping to set their own quotas, management has more assurance that the procedure will be understood. How much staff participation is solicited depends upon management philosophy, types of quotas, information available, the sophistication of the quota-setting procedure, and the caliber of the sales force.
It is not advisable to turn the whole quota-setting job over to the sales staff, but some salesforce participation can obtain more accurate and realistic quotas. Sales personnel have some information about their territories that management does not have, and it can contribute to quota accuracy.
- Keeping Sales Personnel Informed
Effective sales management keeps sales personnel informed of their progress relative to quotas. Sales personnel receive frequent reports detailing their performance to date. This permits them to analyze their own strong and weak points and take corrective action.
Of course, sales personnel need encouragement, advice, and occasionally, warnings, in deciding to take measures to improve their performance. Reaping full benefits from keeping sales personnel informed requires frequent personal contact by supervisors, as well as regular reports.
- Need for Continuous Managerial Control
In administering any quota system, there is a need for continuous monitoring of performance. Arrangements must be made to gather and analyze performance statistics with minimum delay. Chart recording each salesperson’s performance against quota on a monthly, or even weekly, basis facilitates this analysis. Keeping sales personnel informed at frequent intervals, at least monthly, requires subdividing the year.
Generally, the annual quota is divided by the number of reporting periods, but, of course, this can be misleading, when random fluctuations in sales occur. For products with seasonal sales patterns, it is more logical to apportion annual quotas relative to either the proportion of sales made in each reporting period during the previous year or the proportions made in “normal” years.
Sales Quota – Procedure for Setting Quotas in Organizations
A successful procedure for setting quotas in organizations is a process built on one-to-one discussion between the sales managers with each salesperson serving a territory. This procedure is the most democratic way of handling the targets and motivating subordinates to achieve the organizational goal.
There are essentially three steps to be followed for quota setting
They are schedule planning, conferencing with each salesperson, and arriving at a summarized written quota statement.
A schedule planning involves planning for goal-setting meetings with individual salespeople and particularly with new recruits. These schedules are necessary to explain systems and reasons, benefits and incentives for each salesperson, and goals for the organization. These are called orientation briefings for the organization because the authority and status of the manager lend power and impact to what is briefed to the salespeople.
The salespeople should be allowed to ask questions and get clarifications for their doubts, and then the sales manager announces a one-to-one meeting to finalize each individual’s goals for the set period. The sales manager then asks the salesperson to submit the individual goal proposal for setting up the guidelines for a combined goal-setting meeting.
Conferencing with Each Salesperson
The next step is to arrange conferences with individual salespersons. The salesperson brings the filled-in goal-setting form with him for discussion. The sales manager allows the salesperson to discuss all the rows in the first column in the output table. The discussion revolves around the four key areas—the territory, the account, the call management, and self-management—and the manager gets an agreement on these areas.
Then the sales manager starts discussing the five key areas namely volume per month, expenses per month, gross margin per month, market share per month, and key account coverage per month.
All three classes of objectives should be covered. When salespeople get stuck with regular goals, the sales manager helps to raise them if they can be led to see problems blocking the growth or can be challenged to innovate and raise their levels of order size, account management, market penetration, or self-management.
The purpose is to create a win-win situation for both the organization and the employee. If goal setting cannot be completed in one meeting, the sales manager can set a few more meetings for problem solving and creative objectives. The meetings have to be formal, structured, and run with scheduled discussions.
The sales manager should make notes about the agreed points during the meeting. The manager should avoid other interruptions during the meeting such as telephone calls and visits by other executives. The effectiveness of the time committed by the sales manager in quota setting will help the sales manager to save his/her quality time in the future and also increase his/her efficiency as a sales manager.
The next task is to prepare a written summary of the goals agreed upon. The objective or goal-setting form serves as a guide for the mutually agreed goals. The written goals become a document of understanding for all purposes. It provides the sales manager as well as the salesperson with clear-cut goals and responsibilities for the year ahead.
Sales Quota – 11 Main Limitations of Sales Quotas Setting
- Individual differences – The ability of individuals may differ. While setting the sales quotas, differences in qualities, abilities, experience, and positions among the salesmen are not considered suitable and, therefore, the sales quotas cannot be real.
- Economic burden – It needs to take the services of experts, market research, and statistical techniques to set the sales quotas. All these requirements bring the expenses much higher. Many organizations are not in a position to meet higher expenses.
- Complex techniques – Certain institutions use complex techniques to set the sales quotas, and it will not be easier to understand the techniques as they are much more complex and costly.
- Emphasis on sales only – Certain managers are of the view that sales quotas are only helpful to increase sales and earn more profits, but this cannot be the only aim of business. They are of the view that selling of sales quotas is not so important to achieve more sales. Advertisement, publicity, sales promotion, etc. are much helpful in getting more sales and earning more profits.
- No importance in sellers’ market – Where the demands are larger than supplies (sellers’ market), there will be no difficulty in selling the product. The producers of such products do not give importance to set sales quotas.
- Effects of various factors on sale – It is not correct to say that increase in profits is due to the result of selling efforts, but various other factors such as price, quality, cost of production, demand and supply conditions, competition, etc. also influence the quantum of profits.
- Negative connotation – Some managers take the term “quota” as a negative connotation. They raise objections to the use of this term. They are of the view that the term “objects” should be used instead of “quotas.”
- Personal bias – It is very difficult to set an accurate, unbiased, and justified quota. It cannot be kept away from the personal bias of managers.
- Lack of mathematical accuracy – L. D. Weld writes that sales quotas cannot be set with entire accuracy. It would be better if it is based on 70 percent science and 30 percent assumption.
- Based on estimates – Sales quotas are set on the basis of sales forecasts and therefore, the quotas will also remain as estimates.
- Indifference towards other functions – Many times, sales quotas prove impractical as the salesmen do not give attention to non-selling activities, such as searching for new customers, removing the objections of customers, collection of dues from customers, etc.
Sales Quota – 4 Different Types of Quota Practiced in Different Organizations
Companies set different types of sales quotas. The method of selecting the quota largely depends on the business practice, the design of the organization, and the level of competition in that industry. Broadly, quota types include sales volume quota, sales budget quota, sales activity quota, and a combination quota.
Now we will explain different types of quotas practiced in different organizations
Type # 1. Sales Volume Quota
Most companies follow this method of quota setting. It is the most traditional and commonly used method in Indian organizations because this method provides an important standard for appraising the performance of individual salespeople, intermediaries, and branches.
Sales volume quotas communicate the organization’s expectations in terms of what amount of sales for/in what period. For example, Torrent Pharmaceuticals uses rupee sales objectives, whereas a company like General Motors uses the number of cars and commercial vehicles.
If a salesperson has to sell 30,000 units of a product from March to August then this can be called the sales volume quota for the said six months. These kinds of quotas can be set for geographical territories, different product lines, different marketing intermediaries, or for more than one of these in combination with any unit of the sales organization. Table 8.1 shows a sales volume quota format.
The annual quota is set for the year and then they are broken into specific time periods such as quarters, months, and weeks. This is called the breakdown approach. Once the salesperson knows his annual target, he can plan out his targets for different periods. In many cases, these are not on specific time periods because they may vary depending on the seasonality of the business, consumer attitude towards buying, and the geographic location of the customer.
The salesperson can fix the sales quota on the basis of the total product line, the existing product lines, and new product lines, or territories depending on the design of the organization, which may include the sales divisions, regions, branches, districts, and individual sales territories.
Organizations make sales forecasts on the basis of the above units, which makes it easier for them to establish the sales quota. The sales volume quota is of three kinds- monetary sales volume quota, unit sales volume quota, and point’s sales volume quota.
Organizations selling a broad product line set sales volume quota in monetary terms rather than in terms of units of product. The international sales quota is also shown in dollars/pounds or relevant foreign currency. The monetary quota is set for each sales unit separately. For example, Zuari Furniture follows a quota policy where each salesperson handling a specific territory tries to achieve the sales quota in monetary terms.
The second method is quota setting by volume. This method is used in two situations, namely, when the prices of products are expected to fluctuate considerably during the quota period, and when companies with a narrow product line sell at a price that fluctuates little during the quota period. Volume quota setting helps the firm to achieve sales in volume terms as the rupee value may vary during the sales period.
The third method is setting sales volume quota in terms of ‘points’. Some organizations use sales volume quota expressed in ‘points’, into which money or unit sales or both can be converted as desired by the sales manager.
A multi-product firm may fix a point volume quota where sales of one unit will bring a certain point, whereas the other will bring a higher point for the salesperson. If a salesperson is assigned a quota of 1000 points by the organization, he is expected to get sales orders of 1000 points as a combination of any product mix of the firm.
Type # 2. Sales Budget Quota
These kinds of quotas are set for various units by the organization in order to control expenses (expenses quota), gross margins, and net profits (profit quota). The overall intention of setting a budget quota is to make it clear to the salespeople that they are more of a responsibility center where the job includes not only obtaining the desired sales volume but also making a good profit. This means the cost to acquire customers should be less than the revenue generated from those new customers.
The expense quota ensures that the salespeople limit their expenses in alignment with the sales volume and control the cost to acquire customers. In this method, the sales manager seeks to provide salespersons with financial incentives to control their own expenses. Tying performance with sales expenses and offering an expense control bonus for incurring lesser expenses in realizing sales are the two common methods by which the expense quota can be set.
A salesperson receives an expense budget as a percentage of the territory sales volume and manages the expenses in rupee terms. Many companies set upper limits on items of expenses such as lodging, meals, and entertainment, and expect the salespeople to manage within that budget.
Profit quota can be set on gross margin or on net profits. Organizations emphasize net profits more than sales volume. The salesperson is asked to generate profitable sales rather than mere sales. Organizations set profit quota along with the sales volume quota because profits are necessary for surviving and excelling in business. The rationale behind this type of quota is that sales personnel operate more efficiently to reduce expenses and increase sales resulting in increased margins and profits.
The salesperson is bound to achieve either the required gross margin or net profits while achieving the sales quota. The gross margin quota is determined by subtracting the cost of goods sold from sales volume. Table 8.2 presents a condensed statement describing sales and expenses for four south Indian states.
The manufacturing department provides the sales manager with information regarding the cost of goods sold, which includes the cost of manufacturing the product. By subtracting the cost of goods sold and the direct selling expenses from the sales volume, one can determine the net profit quota.
The same method is explained in the table below
The problem with this method is that the salesperson does not decide the price and has no control over the manufacturing cost; therefore, they cannot be solely made responsible for the gross margin. In the net margin quota, the salespeople sometimes cut back costs so much that there is a negative impact on sales and the quality suffers. The sales manager needs to constantly monitor the performance and expenses of the salespeople for managing profitable sales.
Type # 3. Sales Activity Quota
The activity of a salesperson has a direct influence on the sales of the organization. The salesperson is not always involved in sales realization; for example, a retail salesperson has the job of providing information only. In this case, the quota can be fixed on the activity a salesperson has to perform, rather than the final outcome.
In addition to the direct sales activity, the salesperson is expected to do some non-selling activity and the quota can be set as a mix of these activities. Activity quota is mostly seen in insurance selling where salespeople must continuously do prospecting, generate sales leads, and develop new business.
This kind of quota is also common in pharmaceutical selling, where medical representatives spend time calling on doctors and hospitals to explain new products and new applications of both old and new products. Activity quota can be set on total sales calls, particular classes or sets of customers, calls on prospects, number of new accounts, product demonstration, etc.
Sales managers also undertake time and motion studies and conduct work studies for deciding on the optimum combination of activities for a salesperson. Activities quota set objectives for job-related duties, which help the salespeople in achieving their performance targets. They help the salespeople to do the non-selling activities perfectly, as they become part of the job definition.
The sales managers can build comparative activities for the south Indian states as shown in Table 8.3-
Salespeople seldom find this method acceptable because they consider non-selling activities as of less value. So they put less time and effort into these activities. Often they provide false activity reports regarding these activities, as they find them of little significance. Activity quota is not a basis for reward but an effective understanding of these activities helps the salesperson to understand why he could not achieve the sales quota set for him on the specified territory.
Type # 4. Combination Quota
Many organizations use a combination of these quotas. The most common combination is the sales volume and activity quota. A combination quota is used to control sales force performance on the basis of selling and non-selling activities. A combination sale quota can be achieving a sales target of 1000 units along with developing 20 new key accounts, identifying 100 prospects, and bringing back 50 lost customers.
This kind of quota often reduces the expected understanding level of the job for a novice and often serves as a demotivator. So, sales managers have to use this method with a continuous briefing and effective control over the sales force. The combined sales quota should be based on the most important activities such as sales volume and the products that sell the most.
Sales Quota – Methods of Setting Sales Quota
Organizations follow various methods for setting sales quotas. Though the explanations above give us an understanding of fixing the quota and types of quota, students of sales management need to understand the practices followed in organizations for fixing sales quota.
Fixing sales quotas in organizations is a challenging task today due to the sheer size of sales organizations, complex sales force structure, and varied competitive conditions in different territories. In addition to this complexity of quota, the setting is the issue of intense competition and faster and frequent launch of technologically complex products in the market.
- Quotas Based on Sales Forecasts and Potentials
Large organizations set quotas on the basis of sales forecasts and the sales potential of the market and the territory. Organizations forecast the total sales or volume for the entire market, which is then divided into territories, and then brought down to the individual salesperson level. The forecasts can be generated at the corporate level, at the total product line level, and at the individual products level.
Each of these forecasts is prepared on a geographic level. Estimated future sales per territory are then divided by the number of salespersons or by the number of branches to determine the sales quota for each. For example, if the total sales estimated by a firm for a certain territory is Rs.20 million during a period of 12 months and 5 salespersons are appointed to do the sales activities, the sales quota for each would be of million per annum.
- Quotas Based on Forecast
It is not always possible to obtain the forecasted figures for individual sales territories as companies lack information, data, money, and people to determine the sales potential for individual sales territories. Small companies set quotas in relation to their sales forecast or total market estimate. They establish quotas on the basis of past performance in geographic areas without regard to the sales potential.
iii. Quotas Based on Past Sales or Experience
Some companies could not make the sales estimates in advance for the total market. In such cases, companies collect the sales data of the previous years, average them out for each geographic territory, and then add an arbitrary percentage for next year’s quota. A few companies set quotas based on average sales for longer periods. This average method is followed due to the ease of using the trends and projecting them for the future.
Everyone’s goal in an organization is to surpass the previous year’s sales, and this method boosts the morale of the salespeople. This method gives a rearview perspective, as it does not take into consideration the sales potential. It also does not ignore the past and present situations of different territories. If several competitors enter a territory then the sales potential is affected and the trend projections may demotivate the salespeople.
- Quotas Based on Executive Judgment
This method is used when there is little or no information available about the market. It may also be impractical to find out the potential of a new product in an existing territory or an existing product in a new territory. So managers have to rely on their past experience for making future predictions. They try to analyze facts and figures for the different markets and then decide the quota for the territory, salesperson, and intermediaries.
- Quotas Based on the Judgment of Salespeople
Many companies ask their own salespeople to set the quota for themselves. This is mostly applicable in situations where the company is expanding the territory or starting up its own sales force. In these situations, it is difficult to project sales even though there may be significant sales potential. Most companies allow their salespeople to give data to set their quota. Many companies also use these inputs from the salespeople to fix their production and manufacturing schedules.
Since salespeople are very much acquainted with the market conditions in their respective territories, they will be able to determine the quotas more efficiently and realistically than the supervisors or sales managers. This provides an opportunity for the salesperson to test their abilities and it makes them work with higher motivation.
But many a time the salesperson set the quota lower than his level to have comfort on the job. The salespeople may not have complete or sufficient knowledge and information to make the necessary analysis for effective forecasting.
- Quotas Based on Compensation
Salespeople are promoted on the basis of their achieving quota. It is like a bottom line for the salespeople. Salespeople are evaluated on the basis of their attaining quota for higher assignments. The salesperson gets extra compensation by reaching sales volume quotas for a total unit or rupee sales, and sales of existing products and new products.
Quotas related to the compensation are determined by any of the previously explained quota setting methods. Meeting quota is a way of life for the salespeople as quota has a direct influence on their commitment to the organization.
vii. Problems in Setting Sales Quota
Sales managers face various problems while fixing sales quotas for the organization. This is the basic reason why we see a variety of quota setting methods in different sales organizations. There is a high level of individual difference in every organization. The ability of individuals to performing certain duties varies, as it is dependent on the personal effectiveness, personality type, and skill of the individual.
While setting a sales quota, differences in the ability, quality, experience, and position of the salespeople are not considered suitably in many organizations, as the basic objective of setting quotas through the scientific process of quota management is difficult to attain.
Quota setting is a complex procedure and in many cases, the salesperson is not able to understand the reason and logic behind the goals and quota assigned to him by the sales manager. Many large organizations use econometric models and services of experts in the area of marketing and sales research, which adds to the organization’s costs.
Quota setting only helps in achieving sales and earning higher profits but many contemporary organizations do not pursue these goals alone. Maximizing the shareholders’ equity, delivering a larger stake to the stakeholders, motivating the employees to contribute more, and reducing the attrition rates are some of the objectives that quota setting procedures do not fulfill.
Many managers also feel that achieving sales quotas is not that important as advertising, sales promotion, and other tools of integrated marketing communication also contribute to achieving higher sales for organizations. Similarly, quota setting has no relevance in sellers’ markets, where the demand for products is higher than the supply making sales an easy job for the salesperson.
Manufacturers do not give much importance to the idea of quota setting. It is incorrect to say that increase in profits is always due to the result of selling efforts; various other factors such as price, quality, cost of production, demand and supply conditions, and level and nature of competition also influence the level of profit.
Quota setting procedures often suffer from the bias and prejudice of the sales managers and are used for reasons not spelled out in the literature. Quotas are not accurate and are based on estimates, which are based on certain assumptions. In the current markets, assumptions go wrong very often due to the volatility of business. This nature of quota setting reduces the scientific application of the quota concept.
As we have seen a perfect quota is a combination of selling and non-selling activities, many times salespeople do not give proper attention to the non-selling activities, such as searching for prospects, handling customer objections, and creating a market for probable market entry of new products. This lack of attention reduces the effectiveness of quota-setting procedures for sales organizations.
Sales Quota – Reasons for Not Using Sales Quotas
Some companies do not use quotas. In certain industrial goods categories, for instance, it is difficult to obtain accurate sales estimates; thus, quotas, if used, are based on subjective judgments. Numerous executives prefer not to use quotas.
In some companies, the fact that quota determination requires using statistical techniques is the reason given for the non-use of quotas. The fear is that sales personnel will not accept quotas prepared by hard-to-explain techniques. In other instances, there are difficulties in arriving at fair weights for territorial potential, competitive position, coverage difficulty, and salesperson ability. Thus, when quotas are tried, they may be set too high, which could cause high-pressure selling, or too low, which could provide insufficient incentive.
Some executives oppose quotas on the grounds that they place too much emphasis on making sales. This may be a legitimate criticism of sales volume quotas, but not of all quotas.
One situation exists where quotas, in the normal sense, are not appropriate. It occurs when a product is in short supply. In such cases, most management believes that it is wise to divide the available supply equitably among customers. In sellers’ markets, the allocation substitutes for the quota, which characteristically is appropriate for use only in buyers’ markets.
Quotas are quantitative objectives assigned to the sales personnel and other units of the selling organization. They are intended both to stimulate performance and to evaluate it. In a successful quota system, special attention is given to the quota setting procedures with sales potentials and planning data from the sales forecast and sales budget. Continuous managerial review and appraisal, and balanced flexibility in making changes in quotas characterize the quota system.