Purposes of Sales Quotas

Sales quotas serve several useful purposes, as shown in Figure and discussed below.

To indicate stronger weak spots in the selling structure: When accurate quotas are established for each territory, management can determine the extent of territorial development by whether or not the quota is being reached. If the sales total significantly exceeds the predetermined standards, management should analyze the reasons for this variance. If the sales in a district fail to meet the quota, this failure tells management that something has gone wrong. Of course, it does not tell why the failure occurred. It may be that competition is stronger than expected, the salespeople have not done a good selling job, or the potential was overestimated.

To furnish goals and incentives for the sales force: In business, as in any other walk of life, individuals usually perform better if their activities are guided by standards and goals. It is not enough to say to a salesperson, “We expect you to do a good selling job.” It is much more meaningful to express this expectation in a specific quota consisting of a given dollar sales volume or number of new accounts to be acquired during the next month. Without a standard of measurement, sales reps cannot be certain their performance is satisfactory. A recent survey found that sales relative to quota are the most widely used performance criterion by which salespeople are judged.

To control salespeople’s activities: A corollary to the preceding point is that quotas. Enable management to direct the activities of the sales force more effectively than would other- wise be possible. Through the use of the appropriate type of quota, executives can encourage a given activity such as selling high-margin items or getting orders from new customers. The sales reps are not likely to know which area of activity should be stressed unless management tells them. Swissotel North America wanted their salespeople to spend a greater percentage of their time with customers, so management instituted a quota of six quality sales calls per day for each rep.

To evaluate productivity of salespeople: Quotas provide a yardstick for measuring the general effectiveness of sales representatives. By comparing a rep’s actual results with his or her quota, management can evaluate that person’s performance. Quota performance also provides guidance for field supervisors by indicating areas of activity where the sales force needs help. Decisions on whether to give salespeople promotions or raises are often based largely on their performance in relation to their quotas.

To improve effectiveness of compensation plans: A quota structure can play a significant role in a sales compensation system. Quotas can furnish incentives to salespeople who are paid straight salary. A sales rep knows, too, that a creditable performance in meeting 3.ssigned quotas reflects favorably on him or her when it is time for a salary review.

In some cases, salespeople receive a bonus if they achieve a certain quota or they may receive a commission on all sales above some preset level (or quota) of sales. At Disney, for example, the reps earn commissions if they exceed ambitious quotas set by the company for the number of hotel rooms booked. Inequities in territorial potential may cause inequities in compensation unless a firm establishes a quota system. In one territory, a person may get a $1,500 monthly salary plus a 5 percent commission on sales over a quota of $10,000. In a district that presents low potential and a more difficult selling job, the sales rep may have the same arrangement, except that the commission starts when the rep reaches a quota of only $7,000 each month.

To control selling expense: Management can often encourage expense control by the use of expense quotas alone, without tying them to the compensation plan. Some companies gear payments for the salespeople’s expenses to a quota. For instance, a business may pay all the expenses of a sales rep up to 8 percent of sales. Other companies may set an expense quota and let the salespeople know their effectiveness is being judged in part by how well they meet it.

 To evaluate sales contest results: Sales quotas are used frequently in conjunction with sales contests. Salespeople rarely have equal opportunities in a contest unless management makes some adjustment to compensate for variation in territorial potentials and workloads. Using the common denominator of a quota, management can ensure each participant a reasonably equal chance of winning, provided the quota has been set accurately.