How does quotas work while executing goals

More often than not, companies use either one or a combination of the following approaches to establishing the right sales quotas. This list isn't exhaustive; however, this list describes several commonly used approaches:

Total Addressable Market Estimates

Well-established companies with well-defined markets often follow this method. The typical process involves:

1. Estimating the next year's total market demand or the total industry sales forecast. Typically these numbers are available from research organizations that study various established industries (e.g., IDC or Gartner, etc.)
2. Deciding the company's estimated market share for next year.
3. Establishing the company's next year's sales forecast = 1 x 2.
4. Determining the contribution of each territory to overall sales last year.
5. Setting sales quota by territory = 3 x 4.

Territory Potential

This method is used by companies that have a clear understanding of the product-market fit. To calculate the potential in a market, you need to have a clear understanding of your Ideal Customer Profile (ICP) and their buying patterns. The typical process followed involves:

1. Estimating the next year's industry sales forecast or market demand.
2. Estimating a multi-factor index (MFI) for each territory based on the factors that influence the sale of the product. These factors can be weighted based on historical performance and the degree of sales opportunity. For example, the historical win rates in a particular industry could be a factor. The demand from your ICP based on firmographic attributes, such as the number of employees, could be another factor.
3. Territory Market Potential = 1 x 2.
4. Territory sales quota = 3 x the estimated target market share of the company in a territory.

Propensity Models

This method is similar to the Territory Potential method, but here you would calculate the propensity of your prospects and customers to purchase your products. If your sales growth is heavily based on related products, then this approach might be useful. The propensity is based on where the customer is in the use of your products, which in turn increases their tendency to buy an add-on product or additional products from your company.
For this method, you would need to have a good sense of the typical journey of your prospects and customers, and the anticipating demand based on the current usage pattern of customers in a territory.

Past Sales Performance

This process is perhaps the most commonly used approach. This process involves:

1. Evaluating past years' sales performances (say 2 to 5 years)
2. Estimating the percent growth of the market
3. Territory Sales Quota = 1 x 2

The assumption that future sales may be related to past sales may not always be correct, and therefore, this method is typically used in combination with other methods to drive more accuracy in the target-setting process.

On-Target-Earnings or Compensation based

Some organizations set quotas to align with salesperson compensation plans. The idea here is that you expect an appropriate factor return for a rep's salary or the fully-loaded cost of a sales resource. For example, if you pay your sales reps $200K, then you can expect a 5x return on that compensation, which means a $1M quota. To use this method:

1. Take the average On-Target Earnings or the Fully loaded cost of a sales rep.
2. Estimate the average rate of the return (based on historical performance) or an expected return rate.
3. Territory Quota Target = 1x2.

Sales Rep Estimates & Executive Judgement

This process relies entirely on a bottom-up approach, where the sales reps provide sales forecasts for the next year, and their sales managers provide their judgment (they would either uplift or downgrade the forecasts based on their assessment.)

While this is a great way to cross-check a top-down process, setting primary quotas is not recommended using this method. Sales managers and sales reps can sandbag the numbers or be overly optimistic, leading to variability in attainment.