1Sales Quotas

Lecture 11
I. Introduction
II. Types of Quotas
I. Introduction
Quotas, compensation, and company policy are the three most powerful tools sales
managers have to direct salespeoples efforts. It is important that these three tools work in
harmony (discuss). Quotas are very helpful in providing incentives to salespeople (tied to the
compensation system), evaluating salespeoples performance, and controlling salespeoples
efforts (discuss).
Quotas and goals are used to motivate and direct salespeoples actions. To be effective
quotas should be:
a] Attainable
b] Easy to understand
c] Complete
Attainable - a long history of practical experience and research has shown that goals are
most likely to be effective in achieving the desired outcome when the goals are attainable, but
not very easy. If a salesperson views a goal as being impossible or almost impossible to achieve,
motivation and achievement will suffer. If a goal is extremely easy, then the goal will not
motivate and reward outstanding performance. In sum, if a goal is too hard or too easy the goal
will not be very effective in gaining the desired sales outcome.
Setting specific, obtainable, yet challenging goals motivate salespeople towards top
performance. It is important to realize that all three elements are necessary for effective goals.
Easy to Understand - Salespeople want to know exactly how they are evaluated. If a goal
is too complicated, then salespeople spend a lot of time and energy trying to figure out the goal,
or trying to game the system. Written quotas are best. Quotas should be tied to performance
evaluations and employee compensation.
Complete - Goals should include all of the important activities to the sales task. An
example will illustrate this point. Suppose you pay on 100% commission and reward on the
basis of sales dollars and meeting the sales quota. If you want your salespeople to perform aftersales service, these goals will not motivate them to perform these service tasks. After sales
service may be critical to future sales, but the goals do not reflect this. (Unless the salesperson is
far sighted enough to grasp the long-term benefit of post-sale service).
Disadvantages of Quotas:
1] Sales can result from the activities of several people.
2] Sales are influenced by factors beyond the salespersons control (economy, competitors
actions, etc...).

3] Territories are always different, which makes it difficult to set goals fairly. Perceived
fairness is an important element of sales force morale (discuss).
4] Setting up a good quota/goal system is very time consuming.
II. Types of Quotas
There are three basic types of quotas: 1) those emphasizing sales or some aspect of sales
volume, 2) those that focus on financial criteria other than sales alone and, 3) those that focus on
salesperson activities.
A. Sales or Sales Volume Quotas
Sales quotas are the most common. They are easily understood. They can be expressed
in dollars, physical units, or points. Because of the importance and difficulty of selling new
products, specific quotas are often set for new products (discuss). A major problem with all sales
quotas is price cuts when the salesperson has discretion over price.
Dollar Quotas are very easy to understand. You can easily relate sales expenses to sales
dollars generated.
Physical Unit Quotas express the quota in terms of number of specific items, or pounds,
gallons or truck loads sold. They can be very useful when prices fluctuate widely (discuss
impact on dollar versus physical unit quotas).
Point Quotas give a certain number of points for each dollar or unit sales of particular
products. This system makes it easy to give greater rewards for sales of high contribution
products or to new products.
B. Financial Quotas
Financial quotas focus on costs (expense quotas) or profit (contribution, gross margin or
net profit quotas). Expense quotas also have a direct profit impact because if expenses are
lowered and sales revenues remain unchanged, then profits increase. Expense quotas are often
expressed as a percentage of sales, but can be strongly influenced by the geographic
disbursement of the territory (explain).
Gross margin quotas are most useful when there are significant differences in gross
margin by product, and there are a limited number of brands being sold. They are much more
costly and complex to administer when compared to sales quotas. Often the goals can be
achieved by properly designed point quotas.
Net profit quotas are the most difficult to administer and the most complex, but they do
focus on profits. They are usually used when there are a very few brands being sold or when
there are very few units sold. Both net profit and gross margin quotas are used much more often
when the salesperson has price setting authority (explain).
C. Activity Quotas
Activity quotas are tied directly to behaviors that the salespeople control, such as the
number of sales calls, calls on new accounts, service calls made, etc.... All of these factors are
contributors to sales, and should be encouraged by the firm.
Activity quotas have two strong drawbacks. First, they do not include revenues. Second,
they are complex to both devise and administer. To use a activity quota also means the
salespeople have to fill out detailed activity reports (which takes time away from sales calls), and
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the sales manager has a lot of paperwork to assess. The quality of the activity is far harder to
assess than the quantity of the activity.
Activity quotas are sometimes used when training new recruits and then dropped after a
period of time (3-6 months) and replaced with the normal sales or financial quotas. This is done
to shape the activities of the recruits in the proper direction needed to meet the financial goals for
the reps district.
D. Using Multiple Quotas
A quota system can include both activities, sales quotas, and perhaps points for special
activities. Usually a weighted average of the different goals is used to determine the overall
evaluation.