Set Quotas Correctly And Secure Your Success.

It’s the time of year when sales leaders are deep in budget planning for the coming year. But when it comes to setting quotas, I’ve seen a lot of folks use less-than-solid methods:

• “Let’s just assume that they’ll do 5% more this year than last year”
• “Let’s tell every seller they need to do “just one more deal this year” and set quotas accordingly."
• “The board wants to see 10% growth, so I’ll just raise quotas by 10% - and hire another rep or two as cushion."
• "I’m going to be clear that I won’t tolerate non-performance. So I’ll build a plan where every rep needs to achieve 100% of their quota, and threaten to replace any who don’t make it.”

While many boards and CFOs will sign off on plans built with these assumptions, the challenge is that they’re often not based in reality. Pretty early in the year, the team starts missing these sales targets – and then you’re playing catchup for the rest of the year.

The average tenure of a VP of Sales is about a year and a half. And one of the main reasons there’s such high turnover in this role is their teams don’t hit revenue expectations.?

I’ve significantly exceeded that tenure in a long succession of roles. And I believe that one of the most important things that you can do to create job security is to set appropriate sales expectations with your leadership team, set appropriate quotas for your reps – and understand that those aren’t the same thing.

Use Historical Performance Data To Identify Expected Sales Performance

Past performance is generally the best indicator of future performance. So when you want to know what your team is going to do next year, take a look at what they did this year and the year before.

Yes, you’ll definitely work on better sales messaging, put your reps through training programs, and launch better products – but a lot of the “plans” identified above have no basis in reality for many companies.

We can get an honest baseline of team performance by looking at a few metrics:

• For reps that have been around a while: what is the average performance – by month, by quarter, and by year?
• For new reps: how many months did it take for them to get their first sale? How long did it take until their sales volume matched your tenured reps? What was monthly performance across this onboarding period?

With these questions answered, you can start building a month-by-month spreadsheet that includes each of your team members, where they are in their ramping period, and what their sales expectation should be.

Here’s an example of a sales team with 4 fully-ramped sellers, and three in various stages of onboarding – at a company where new hires don’t hit full monthly production until month 6.

Consider Turnover

Next, think about what turnover on your team will look like in the coming year. Sure, you’re a great place to work – but some number of people will still decide to leave for other opportunities.

You’ll also choose to let some poor performers go – and these need to be planned for, too.?As you work on this part of the plan, ask yourself:

• What has turnover been over the past year or two?
• Do you have individuals that you already know you will exit in the coming year?
• Are there particular times of year when you think this will happen?
• How long does your recruiting process take to replace a departed quota carrier?

Now you can add rows into your spreadsheet to represent the loss of quota for anticipated turnover, and the ramping quotas (post-recruiting lag) for their replacement.

Here’s an example anticipating the loss of one fully-ramped quota carrier on January 30th, and a replacement being found 60 days later:

Make Strategic Adjustments

At this point, you can sum each of the columns, and get a pretty strong sense of what revenue generation is going to look like for each month of the year. This is your baseline sales expectation.

Now you can compare that number to what your leadership team would like it to be. If it doesn’t show the growth that they want to see (and at this point, it probably doesn’t), think about what strategic actions you can take in the year to close the gap.

• Can you add additional headcount? How many and on what timeframe? Model additional ramping reps into your plan (as long as you’re confident you have enough territory in your total addressable market that won’t cannibalize the performance of your existing reps).
• Are you launching a new marketing or training program that can raise performance? Figure out what month you should start seeing results from them, and rise the monthly performance by the appropriate percentage from that point forward.
• Are you bringing new products to market? When will they be ready to sell, and how long as it taken to get 1, 2, 10 sales on those??

Here’s how those adjustments might look to get you from you expected sales to your final plan:

Communicate Sales Expectations To Management

Now you’ve got a realistic revenue plan to take you month by month through the year, and the foundation to clearly connect the investments you need in training, headcount, and new product to improved performance – as well as the timing implications of each of those strategic bets.

Use them in conversations with your leadership team to make sure everyone is bought off on the various assumptions, and that you’re not just signing up for a number without a reason to believe it’s attainable.?This conversation is what makes these strategies different than the hopeful assumptions that many folks use for budget planning, because – if they aren’t supported with data and investment to make them happen - they shouldn’t go into the plan.

As you finalize your sales expectations, also take into account the seasonality of the business. So far, our calculations have assumed consistent production from fully-ramped reps across the year (so a tenured rep with a 1.2M expectation would be delivering 100k each month across the year).

Yet we know that many businesses have a seasonality to them. Some businesses see lots of end-of-year sales in Q4 tied to holiday spending while others are front loaded with Q1 buyers who want a new product to help them deliver their year. Perhaps you see?slower sales in the summer months while buyers are on vacation, or are in a business that is strongly tied to something that happens in the month of August.

Whatever drives your seasonality, look at your historical trends to figure out what percentage of your revenue happens in each quarter or each month – and then apply this shape to your final plan with management.

Teams also perform better when they are building on a sense of success. For this reason, I also like to lower the expectations for the first quarter of the year (making it up later on) so that they come out of the gates “winning.” In doing so, the morale of the team is much better than it is if they miss their first quarter and need to play catchup (and deal with the cost cutting measure that most CFOs will want to put in place as soon as they see a deviation from plan).

The other benefit? You set yourself up as a leader who meets-or-beats expectations quarter after quarter, rather than one who misses all year long but manages to save it at the very end.

The adjustment doesn’t need to be too big– just a few percentage points to ensure the team meets or exceeds its Q1 plan:

Based on the last two years’ performance, this sales team should do 23 or 24% of their annual business in the first quarter. But if we set the Q1 target at only 20%, they’ll finish that quarter ahead of plan.

When we get to the end of Q2, previous performance would say they’ll have done 43-45% of the annual goal. In this plan, the expectation for first half is only 42%, which should continue the culture of winning.

In Q3, we’ve set a bit higher expectation – but have banked some overperformance from prior quarters. So even though history shows that this quarter will only do 20% of the year’s revenue (missing the 22% revenue target), the overperformance in the first half still puts them at 64% of plan (right in the middle of the 63% and 65% they did in prior years).

Finally, the 36% target for Q4 sits right in the middle of the 35% and 37% actuals in previous years – a safe bet to place for the final quarter of the year.

Now Set Quotas

With this plan agreed to by your management team, it’s now time to set quotas for your sellers.

Many individual contributors – and a lot of first-time managers – assume that the expectations we’ve been talking about and the assigned quota are the same thing. Yet a company that assumes every rep will achieve 100% of the quota assigned to them is destined to fail. No team is going to have perfect execution against plan across every seller, with no attrition, every month of the year.

Our spreadsheet so far tells us what the business should count on them doing – but we want to motivate our teams to do a little bit more than this baseline expectation.

My general rule of thumb is that you’ve got a happy sales team if 80% of your sellers are making between 80 and 100% of their quota – with a handful of folks overperforming significantly.

You can make that happen if you take the expectations we’ve build and add in a 15-20% cushion to these goals, and manage your sellers to this quota – rather than to the baseline revenue expectation in your business plan.

The Takeaway

Setting sales expectations and quotas with this process takes a little bit of work – and a fair bit of familiarity with excel or a more sophisticated financial planning tool.

But when it’s done right, you’re setting your management team’s expectation of sales performance around a plan grounded in reality – with all of the implications of new hires, surprise terminations, seasonality, and other messiness that life brings.

You’re also creating expectations for your sales team that encourage them to stretch just a little bit to put themselves (and you) into a place where you’re always overperforming, rather than falling short of expectations.

On a personal level, being the person who exceeds expectations consistently helps to cement your job security. But it also positions your company for success – being surprised with a little bit of extra overperformance each month (and the option to invest it back into the business) rather than constantly falling slightly short (and needing to make constant cost cuts) instead.

That’s a great place to be.

Looking for more detailed guidance? Find a more complete template for this process (and more!) in my book, The CRO's Guide To Winning In Private Equity.