SALES QUOTA

INTRODUCTION
A sales quota is a quantitative goal assigned to a sales unit for a specific period of time. A sales unit may
be a sales person, territory, branch office, region or distributor. Sales quotas are used to plan, control and
evaluate selling activities of a firm. As standards for appraising selling effectiveness, quotas specify desired
performance levels for sales volume, expenses, gross margin, net profit, selling and non-selling activities,
or some combination of these items. Sales quotas provide a source of motivation, a basis for incentive,
compensation, standards for performance evaluation of sales person and uncover the strengths and
weaknesses in the selling structure of the firm.
Quotas are devices for directing and controlling sales operations. Their effectiveness depends upon the
kind, amount, and accuracy of marketing information used in setting them, and upon management’s skills
in administering the quota system. For effective results, quotas are designed on the basis of information
derived from sales forecasts, studies of market and sales potentials, and cost estimates. Accurate data are
important to the effectiveness of a quota system, but, they are not sufficient; judgement and administrative
skills are required of those with quota setting responsibilities. Soundly administered quotas based on
thorough market knowledge are effective devices for directing and controlling sales operations.
PURPOSE OF THE SALES QUOTA
(i) To provide standards for evaluating performance: Quotas provide a means for determining which
sales personnel, territory, other units of sales organisation, or distributive outlets are doing average, below
average, or above average job. They are yardsticks for measuring sales performance. Comparisons of quotas
with sales performance identify weak and strong points, but management must dig deeper to uncover
reasons for variations.
(ii) To furnish goals and incentives for the sales force: Quotas provide salespersons, distributive outlets
and others engaged in selling activities, goals and incentives to achieve certain performance level. Many
companies use quotas to provide their salesforce the incentives of increasing their compensation through
commissions or bonus if the quota is surpassed and/or recognised for superior performance. Needless to
say, to be true motivators, sales quota should be perceived as being realistic and attainable and to an extent
surpassable.
(iii) To control salespeople’s activities: Quotas provide an opportunity to direct and control the selling
activities of sales persons. Sales persons are responsible for certain activities e.g. customer calls per day,
calling on new accounts, giving a minimum number of demonstrations and realisation of firm’s account. If
the sales people fail to attain these quotas, the company can take corrective action to rectify the mistake.
(iv) To evaluate the productivity of sales people: Quotas provide a yard-stick for measuring the general
effectiveness of sales representatives. By comparing salespersons’ actual results with set quotas the areas
of activities are determined where the salesforce need help for improving productivity.
(v) To control selling expenses: Quotas are also designed to keep selling expenses within limits. Some
companies reimburse sales expenses only upto a certain percentage of sales quota. Others tie expenses to
the salesperson’s compensation in order to curb wasteful expenditure. Expense quota helps companies to
set profit quotas.
(vi) To make effective compensation plan: Quotas play an important role in the company’s sales
compensation plan. Some Indian companies follow the practice that their salespersons will get commission
only when they exceed their assigned quotas. Companies may also use attainment of the quotas in full or
in part as the basis for calculating the bonus. If the salesperson does not reach the minimum desired quota,
he will not be entitled for any bonus.
(vii) To evaluate sales contests results: Sales quotas are used frequently in conjunction with sales
contests. Companies mostly use ‘performance against quota’ as the main basis for giving away awards in
sales contests. Sales contests are more powerful incentives if all participants feel they have a more or less
equal chance of winning by basing awards on percentage of quota fulfilment which is a common
denominator. Hence, it causes average salesperson to turn into above average performers.
TYPES OF QUOTAS
Differences in forecasting and budgeting procedures, management philosophy, selling problems, and
executive judgment, as well as variations in quota-setting procedures, cause each firm to have somewhat
unique quota. Ignoring small differences, however quotas fall into four categories:
(i) Sales volume quota: The most commonly used quotas are those based on sales volume. This type
of quotas are set for an individual sales person, geographical areas, product lines or distributive outlet or
for only one or more of these in combination. Sales volume quotas are also set to balance the sales of slow
moving products and fast moving products or between various categories of customers per sales unit. The
sales volume quota may be set in terms of units of product sales, or rupee sales or both on overall as well
as product- wise basis Some companies combine these two and set quota on the point basis. Points are
awarded on the attainment of a certain specific level of sales in units and rupee terms for each
product/customer. For example: A company might consider Rs. 1000 equal to 1 point, Rs. 2000 equal to 2
points and so on. At the same time company may award 3 points for unit sales of product A and 5 points-
for unit sales product B. Companies use this type of approach generally because of problems faced in
implementing either rupee sales volume or unit sales volume quota. Unit sales volume quotas are found
useful in market situations where the prices of the products fluctuate considerably or when the unit price of
the product is rather high. Rupee sales volume quotas are found suitable in the case of sales force selling
multiple products to one or different types of customers.
(ii) Financial or budget quotas: Financial or budget quotas are determined to attain desired net profit
as well as to control the sales expenses incurred. In other words, it is set for various units in the sales
organisation to control expenses, gross margin, or net profit. The intention in setting financial quota is to
make it clear to sales personnel that this jobs consist something more than obtaining sales volume. It makes
personnel more conscious that the company is in business to make a profit. Expense quotas emphasize
keeping expenses in alignment with sales volume, thus indirectly controlling gross margin and net profit
contribution. Gross margin or net profit quotas emphasize margin and profit contributions, thus indirectly
controlling sales expenses.
Expense quotas: In order to make the salesforce conscious of the need to keep selling costs within
reasonable limits, some companies set quota for expenses linked to different levels of sales attained by their
salesforce. And to ensure its conformity they even link compensation incentives to keep expenses within
prescribed limits. Since sales are the result of the selling tasks performed which vary across sales territories,
it is not easy to determine expense quotas as percentage of sales in a uniform manner. Also very strict
conformity to expense quota norms result in demotivation of salesforce. As such expense quota is generally
used as a supplement to other types of quotas.
Net profit quotas: Net profit quotas are particularly useful in multiproduct companies where different
products contribute varying level of profits. Its emphasis is on the salesforce to make right use of their time.
It is important for the management to ensure that its sales force donot spend more time on less profitable
products, because the salespersons are costing the company the opportunity of earning higher profits from
their high margin products. In other words, it should ensure that its salespersons spend their maximum time
on more profitable customers. The objective can be achieved by setting a quota on net profit for its
salesforce, and thus, encouraging them to sell more of high margin products and less the low margin
products.
(iii) Activity quotas: Good performance in competitive markets requires the salesforce to perform the
sales as well as market development related activities. The latter activities have long term implications on
the goodwill of the firm.
To ensure that such important activities get performed, some companies set quotas for the salesforce in
terms of various selling activities to be performed by them within a given period. Finally the company must
set a target level of performance for the sales persons. Some of the common type of activity quotas prevalent
in Indian firms are as under:
• Number of prospects called on
• Number of new accounts opened
• Number of calls made for realising company’s account
• Number of dealers called on
• Number of service calls made
• Number of demonstrations made
The chief merit of activity quota lies in its ability to direct the sales force to perform the urgent selling
activities and important non-selling but market development related activities in a balanced and regular
manner.
(iv) Combination Quotas: Depending upon the nature of product and market, selling tasks required to
be performed as well as selling challenges facing the company, some companies find it useful to set quotas
in combination of the two or three types discussed above. Rupee sales volume and net profit quotas or unit
sales volume and activity quota in a combined manner are found in common use in a large number of
consumer and industrial products companies in India.
PROCEDURE FOR SETTING SALES VOLUME QUOTA
(i) Quotas based on sales potential: One common practice in quota setting is to relate quotas directly
to the territorial sales potentials. These potentials are the share of the estimated total industry sales that the
company expects to realise in a given territory. A sales volume quota sums up the effort that a particular
selling unit should expend. Sales potential represents the maximum sales opportunities open to the same
selling unit. Many companies derive sales volume quota from sales potentials, and this approach is
appropriate when - territorial sales potentials are determined in conjunction with territorial design or
bottom-up planning and forecasting procedures are used in obtaining the sales estimate in the sales forecast.
Thus, if the territorial sales potentials or forecasts have already been determined and the quotas are to be
related to these measures, the job of quota setting is largely completed. For instance, let us assume that the
sales potential in territory A is Rs. 300000 or 4 per cent of the total company potential. Then management
may assign this amount as a quota for the salesperson who covers that territory. The total of all territorial
quotas then would be equal the company sales potential.
In some cases, management chooses to use the estimate of potential as starting point in determining the
quota. These potentials are then adjusted for one or more of the factors discussed below:
Human factors: A quota may have to be adjusted downwards because an older salesperson is covering the
district. The salesperson may have done a fine job for the company for years but is now approaching
retirement age and slowing down because of physical limitations. It would not be good on human relations
- or ethical - to discharge or force the person into early retirement. Sometimes such persons are given
smaller territories with corresponding lower quotas. Likewise sometimes new sales people are given lower
quotas for the first few years until they learn a greater level of competence.
Psychological factors: Management understands that it is human nature to relax after a goal has been
reached. Therefore, sometimes sales managers set their quotas a little higher than the expected potential.
On the other hand management must not set the goals unrealistically high. A quota too far above the sales
potential can discourage the salesforce. The ideal psychological quota is one that is bit above the potential
but can still be met and even exceeded by working efficiently.
Compensation factors: Sometimes companies relate their quotas basically to the sales potential, but adjust
them to allow for the compensation plan. In such a case, the company is really using both the quota and
compensation systems to stimulate the salesforce. For example, one company may set its quota at 90 percent
of potential. It pays for one bonus if the quota is met and an additional bonus if the sales reach 100 per cent
of the potential.
(ii) Quotas based on past sales alone: In some organisations, sales volume quotas are based strictly on
the preceding year’s sales or on an average of sales over a period of several years. Management sets each
salesperson’s quota at an arbitrary percentage increases over sales in some past period. The only merits in
this method of quota setting are computational simplicity and low-cost administration. If a firm follows this
procedure, it should at least use an average figure for the past several years as a base, not just the previous
year’s sales. Random or irregular events would greatly affect a sales index based on only one year.
However, a quota setting method based on past performances alone is subject to severe limitations. This
method ignores possible changes in a territory’s sales potential. Generally business conditions this year
may be depressed in a district, thus cutting the sales potential or promising new customers may have moved
into the district, thus boosting the potential volume. Basing quotas on previous year’s sales may not uncover
poor performance in a given territory. A person may have had sales of Rs. 100000 last year, and the quota
is increased by 5 per cent for this year. The salesperson may even reach the goal of Rs. 105000. However,
the potential in the district may be Rs. 200000. This salesperson may perform poorly for years without
letting the management realize that a problem exists. Quotas set on past sales also ignore the percentage of
sales potential already achieved. Moreover, ‘chase your tail’ quotas- in which the more the salespeople sell,
the more they are supposed to sell-destroy morale and ultimately cause top achievers to leave the company.
(iii) Quotas based on executive judgement: Sometimes sales volume quotas are based solely on the
executive judgment, which is more precisely called guesswork. Executive judgment is usually an
indispensable ingredient in a sound procedure for quota setting, but to use it alone is certainly not
recommended. Even though the manager may be very experienced, too many risks are involved in relying
solely on this factor without referring to quantitative market measures. This method is justified when there
is little information to use in setting quotas. There may be no sales forecast, no practical way to determine
territorial sales potential. The product may be new and its probable rate of market acceptance is unknown,
the territory may not yet have been opened, or a newly recruited salesperson may have been assigned to a
new territory. In such situations, management may set sales volume quotas solely on a judgement basis.
(iv) Quotas based on total market estimates: In some companies management has neither statistics nor
salesforce estimates of territorial sales potentials. These companies use top-down planning and forecasting
to obtain the sales estimate for the whole company; hence, if management sets volume quotas, it uses similar
procedures. Management may either (i) breakdown the total company sales estimate, using various indexes
of relative sales opportunities in each territory and then make adjustments or (ii) convert the company sales
estimate into a companywide sales quota and then breakdown the company volume quota, by using an
index of relative sales opportunities in each territory. In the second procedure, another set of adjustment is
made for differences in territories and sales personnel before finally arriving at territorial quotas. Note that
these choices are similar, the only difference being whether adjustments are made only at the territorial
level, or also at the company level. The second alternative is a better choice.
(v) Quotas related only to compensation plan: Companies sometimes base sales volume quotas solely
upon the projected amounts of compensation that management believes sales personnel should receive. No
consideration is given to territorial sales potentials, total market estimates, and past sales experiences, and
quotas are tailored exclusively to fit the sales compensation plan. If for example, salesperson A is to receive
Rs. 5000 monthly salary and a 5 per cent commission on all monthly sales over Rs. 50,000. A’s monthly
sales volume quota is set at Rs. 50,000. As long as A’s monthly sales exceed Rs. 50,000, management holds
A’s compensation-to-sales ratio to 5 per cent. Note that A is really paid on a straight-commission plan, even
though it is labelled “Salary and commission”.
Such sales volume quotas are poor standards for appraising sales performance, they relate only indirectly,
if at all, to territorial sales potentials. It is appropriate to tie in salesforce quota performance with the sales
compensation plan, that is, as financial incentive to performers, but no sales volume quota should be based
on the compensation plan alone.
(vi) Salesperson set their own quota: Some companies turn the setting of sales volume quotas over to
the sales staff, who are placed in the position of determining their own performance standards. The reason
for this is that sales personnel, being closest to the territories, know them best and therefore, should set the
most realistic sales volume quotas. The real reason, however, is that management is transferring the quota
setting responsibilities and turns the whole problem over to the sales staff, thinking, they will complain less
if they set their own standards. There is, indeed, a certain ring of truth in the argument that having sales
personnel set their own objectives may cause them to work harder to attain them and complain less. But
sales personnel are seldom dispassionate in setting their own quotas. Some are reluctant to obligate
themselves to achieve what they regard as ‘too much’; and others far this is just as common-overestimate
their capabilities and set unrealistically high quotas. Quotas set unrealistically high or low-by management
or by the sales force cause dissatisfaction and results in low salesforce morale. Management should have
better information, therefore, it should make final quota decisions. How, for instance, can sales personnel
adjust for changes management makes in price, product, promotion, and other policies?
CHARACTERISTICS OF A GOOD QUOTA SYSTEM
(i) Realistic attainability: If a quota is to spur the salesforce to maximum effort, the goal must be
realistically attainable. If it is too far out of reach, the salespeople will lose their incentives.
(ii) Objective Accuracy: Regardless of what type of quota management uses, it should be related to
potentials. Executive judgement is also required, but it should not be the sole factor in the decision.
(iii) Ease of understanding and administering: A quota must be easy for both management and the
salesforce to understand. Also, the system should be economical to administer.
(iv) Flexibility: All quota systems need adequate flexibility. Particularly, if the quota period is as long
as a year, management may have to make adjustments because of changes in market conditions.
(v) Fairness: A good quota system is perceived as fair to the people involved. The workload imposed
by quotas should be the same for all sales people. However, this does not mean that quotas must be equal.
Differences in potentials, competition, and ability of the salesforce do exist.