Sales quotas always seem to be a hot topic, especially in any industry where revenue quotas are affixed to individual sales representatives and sales teams. I have read articles over the years that would seem to suggest that they are passé. Here’s the dictionary.com definition of quota:
1. the share or proportional part of a total that is required from, or is due or belongs to, a particular district, state, person, group, etc.
2. a proportional part or share of a fixed total amount or quantity.
Do you find any part of that definition that is not applicable to modern day business plans? Of course not! How else can a manager measure the productivity of a sales representative unless there are defined expectations? I am sure there are many ways to set sales quotas, but this article is going to address in general the process we recently used to calculate equipment-and-solutions sales quotas for members of our sales team.
Before we get into the process, I would like to outline several goals to keep in mind when setting quotas. They are as follows:
1. The quotas should take into consideration the state of the economy.
2. They should be achievable.
3. The assumptions that went into their development should be understood and explainable.
4. The total of all quotas should align with the overall business plan.
The process we go through to set sales quotas is outlined below. We first go through this process for the entire sales team before we start fine tuning the quotas for each individual representative. This is to ensure the assumptions we make, especially for new placements and conversion rates of sold equipment, will align with the revenue goals required by the overall business plan. It also enables us to determine what additional resources may be required (such as sales representatives, vertical market development, marketing, new products and so on) to meet the revenue goals.
The equipment revenue quotas are derived from three sources: lease expirations, sold machines in field, and expected new placements. The development of each source is explained separately.
Lease Expirations
The first and easiest step in the process is to look at the lease expirations that are to occur. We used a 1.5-year time frame, as we typically upgrade leases 6 months to a year before the lease term ends. The time frame for the 2017 quotas was the potential lease upgrades from January 1, 2017 to June 30, 2018. We have a 95 percent conversion rate, so the part of quota attributable to lease upgrades is the gross revenue value of the lease net of any buyouts, multiplied by .95 (for 95 percent) as follows:
Gross Lease Value: $500,000
Buyouts included: $25,000
Conversion rate: 95%
Lease Expiration Quota:
($500,000 – $25,000) * .95 = $451,250
Sold Equipment
The next step is to calculate a conversion rate of equipment sold, not leased, in the territory. There are several steps to this calculation. First, we calculated the average revenue value over the previous year of each machine sold by the segment of machine. We then produced a list of sold equipment, by segment, in the territory before a certain date. For 2017 quotas, we used an equipment sold date before January 1, 2010. Each segment of equipment is multiplied by the average revenue value to determine the total conversion value if 100 percent of that equipment is sold. This total is then multiplied by the expected conversion rate (we used 20 percent). The calculation is as follows:
New Placements
The first step in the process was to determine the total potential equipment sales (in number of boxes) for the sales representative’s counties. We calculated the potential using the Business Equipment Quota Index (BEQI). BEQI provides market potential (product demand) indices for the US market. The market potential by county is the product of the county index multiplied by the estimate of the total boxes to be sold in the United States. As an example, if the 2017 index for a county is 0.0003015, and the total estimated boxes to be sold in the US is 1,500,000, the calculation is as follows:
0003015 * 1,500,000 = 452 placement potential
We then calculated our estimated market share in each of the counties. We export from our ERP system the historical equipment placements in the counties. We use a 5-year sales cycle and assumed the index did not change enough historically to statistically affect the results. This provides an average annual box placement. Assuming the total placements over 5 years was 500, the market share calculation is as follows:
500 / (5-year cycle * 452 annual placement potential) = 22%
The placements were adjusted for any major account sales that are part of the major account overlay in our territories. If our market place goals are a 25 percent share, this account representative needed to increase the number of boxes placed by 3 percent. The calculation to determine the additional boxes required for year 2017 is as follows:
452 annual placement potential * 3% = 14 additional boxes
We then multiplied the additional boxes by the average box revenue for A3 segments 1-4 and all A4 segments, less 20 percent (to account for heavy discounting when acquiring new accounts). The calculation is as follows:
14 * ($3,750 * .80) = $42,000 (New placement quota)
Total Equipment Quota
This sales representative’s equipment quota is:
Lease upgrades: $451,250
Sold MIF: $61,148
New placements: $42,000
Total $554,400 (rounded)
Solutions Sales Quota
The quota for solution sales is based on the historical solutions revenue as a percentage of total equipment sales. For example, if solutions revenue in 2016 was 6 percent of total equipment sales, and we want a bump to 7 percent, we would multiply the sales representative’s equipment quota by 7 percent as follows:
.07 * $554,400 = $38,800 (rounded)
We would then expect a total of $593,200 (554,400 + 38,800) in equipment and solutions revenue from this sales representative in 2017. In conclusion, there is a high level of communication occurring between the sales representative and their manager during the development of each representative’s quota. We are firm believers in the sales representatives taking an active role in the process, and their involvement makes for personal responsibility and a high level of buy-in on the quota. And that idea about quotas being passé? Don’t believe it. Your good sales representatives want a quota, and quotas are vital to achieving your company’s revenue goals!
