Recently, I held a conversation with a technology company where the VP of Operations and the CFO determined the sales quota for the sales force. The VP of Ops calculated their department's overhead, then added a 40% gross margin to that number and that became the sales department's annual goal. Then, they took this number and divided it by the number of salespeople they thought they could afford. Voila! Like magic, they had a sales quota for the sales team.
This impractical and unscientific quota determination happens over and over again in technology firms. More times than not, the sales quota number is created based on commitments to investors, bankers or Wall Street, combined with accounting's perception of what the cost of sales should be.
The losers on a short-term basis are the sales reps as they struggle to make their monthly numbers.
The long-term losers are the company and affiliated departments because they have budgeted their business models based on this fabricated sales quota.
Here are the top ten most common methods firms use to calculate their technology sales quotas:
1. Last year's territory sales numbers;
2. The cost of the salesperson times a multiplier (sales costs x 3??);
3. The cost of corporate General Administrative (G and A) plus a gross margin;
4. Revenue goals committed to Wall Street or VC's;
5. The total of the VP of Sales department's goals divided by the number of salespeople;
6. The salesperson's success the previous year;
7. An imaginary compensation number that was sold to the salesperson as their income potential if they hit 100% quota;
8. What the IT trade press says is the annual growth rate for technology for this year (up 12%, quotas are up 12%);
9. The VP of Sales' experiences at other companies; or
10. A percentage of what the top salesperson did in their
Can You Recognize Your Firm's Method?
What do these measurements have to do with the potential of that particular salesperson's territory? These elements are based on outside influences and expenses not related to the sales potential of their technology product or service in an assigned territory.
The fact is none of these methods are accurate
This impractical and unscientific quota determination, more times than not, just frustrates everybody. Operations is upset because their bench utilization is low. They end up blaming sales because they haven't "hit their numbers." Accounting is upset because A/R is shrinking and VC's are upset because their financial milestones are missed.
IT sales quotas should not be mystical numbers made-up in the backroom and then sold to the sales team. The best way to determine an accurate sales forecast is based on market potential by "territory" for your service or application. For example, a territory's potential for CRM system sales to advertising agencies in Boston is totally different than New York City. Yet, in most firms, the reps would have the same quota. We define the term "territory" as the area in which your sales account executives are assigned. Territories can be regional, national or vertical based on how your firm markets, but the sales quota is assigned to an individual based on the market opportunity for their "territory" only. The idea of taking a national sales force quota and dividing it up by the number of salespeople to come up with "Individual" quotas makes no business sense. And worse, it just frustrates salespeople.
So, who is responsible for the determination of territory potential for product and application? The Marketing Department. They are the key to the first step of accurate sales quota determination. They should have the ability to go out and evaluate sales staff territories to determine market potential, competitive analysis, regional economies and how many actual target prospects are in a particular region. With this data, Marketing can then calculate the TOTAL amount of possible sales IN DOLLARS in the territory if ALL prospects are sold. Once, you have this territory potential dollar assessment in hand, you then calculate the forecasts by backing in your closing ratios, your lead conversion ratio and your average sale. Now you have one person's territory quota based on a percentage of the total market potential. From here, the VP of Sales can just combine the individual quotas for all reps and get their national sales forecast.
Once this is completed, the Ops and Accounting departments can back-fill staffing requirements, sales operating costs and marketing budgets.
Is it hard? No. Does it take time and a strong marketing effort? Yes. But, this is how your firm and sales staff can more accurately hit and exceed their sales numbers.
Paul DiModica is President of DigitalHatch, Inc. (www.digitalhatch.com)
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