Procedures for Setting Sales Volume Quotas

The sales volume quota illustrates quota setting procedure well because it is the most commonly used type. However the same procedure can be used for the other types.

Sales volume quotas derived from territorial sales potentials: It seems logical that a sales volume quota should derive from the sales potential present, for example, in a territory a sales volume quota sums up the effort that a particular selling unit should expend. Sales potential, by definition, represents the maximum sales opportunities open to the same selling unit. Much management derive sales volume quotas from sales potentials, and this approach is appropriate when (1) territorial sales potentials are determined in conjunction with territorial design or (2) bottom-up planning and forecasting procedures are used in obtaining the sales estimate in the sales forecast.

If sales territories are designed and sales personnel assigned to the territories management is justified in setting sales volume quotas by calculating the percentage relationship between each territorial sales potential and total sales potential and using the resulting percentages to apportion the company sales estimate among territories. If, for instance, territory A’s sales potential is 2 percent of the total, and the company sales estimate is $20 million, then the sales volume quota for territory A is $400,000. Assuming that no further adjustments are needed, the summa- tion of all territorial sales volume quotas equals the company sales estimate. However, total sales potential is generally not equal to the total sales estimate, even though the two figures are related. Sales potentials, for companies as well as for territories, are the sales volumes reachable under ideal conditions, whereas sales estimates and sales volume quotas are the sales levels management expects to attain under somewhat less than ideal conditions.

If bottom-up planning and forecasting procedures have been used, management already has considered such factors as past sales, competition, changing market conditions, and differences in personal ability, as well as contemplated changes in prices, products, promotion, and the like-if it has, then the final revised estimates of territorial sales potentials become the territorial sales volume quotas. However, in spite of what has just been said, further adjustments are generally advisable because sales volume quotas related directly to territorial sales potentials depend upon statistical data underlying estimates of sales potential; in other words, the tempering of experienced judgment is needed for realistic sales volume quotas to result. Rarely does a company achieve an ideal territorial design, and to the extent that territorial differences (in coverage difficulty, for instance) have not been taken into account previously, compensating adjustments are made when setting sales volume quotas.

Few companies achieve an ideal assignment of sales personnel to territories, so, in setting quotas, differences in anticipated personnel effectiveness because of age, energy, initiative, experience, knowledge of the territory. And physical conditions require adjustments. Moreover, sales volume quotas motivate individual sales personnel in different ways-one is thrilled to learn that next year’s quota is 50 percent above this year’s, a second is hopelessly discouraged by similar news-and quota setters adjust for such differences. Then, too, some companies provide financial motivation by linking compensation to performance against quota; this generally means that volume quotas are set lower than sales potentials.

Sales volume quotas derived from total market estimate: In some companies, management has neither statistics on nor sales force estimates of territorial sales potentials. These companies use top-down planning and forecasting to obtain the sales estimate for the whole company; hence, if management sets volume quotas, it uses similar procedures. Management may either (1) break down the total company sales estimate, using various indexes of relative sales opportunities in each territory, and then make adjustments (such as those described in the previous section) to arrive at territorial sales volume quotas; or (2) convert the company sales estimate into a companywide sales quota (by taking into account projected changes in price, product, promotion, and other policies) and then break down the company volume quota, by using an index of relative sales opportunities in each territory. In the second procedure, another set of adjustments is made for differences in territories and sales personnel before finally arriving at territorial quotas.

Note that these choices are similar, the only difference being whether adjustments are made only at the territorial level, or also at the company level. The second alternative is the better choice. Certain adjustments apply to the total company and to all sales territories; others apply uniquely to individual territories. The two-level approach assumes that both classes of adjustments receive attention.

In companies with more than two organizational levels in the sales department, additional rounds of adjustments are necessary. For instance, consider the company with both sales regions and sales territories. One round of adjustments takes place at the company level, and another at the regional level. Most regional sales managers would want a third round of adjustments before setting territorial sales volume quotas, as territorial sales volume quotas should not be set finally until after consulting sales personnel assigned to territories. The regional sales manager ordinarily calls in each salesperson to discuss the territorial outlook relative to the share of the regional sales volume quota that each territory should produce; then the regional manager sets territorial sales volume quotas. Quotas developed in this way are more acceptable to the sales staff, because each has participated in setting them, and each has had the opportunity to contribute information bearing on the final quota.

Sales volume quotas based on past sales experience alone: A crude procedure is to base sales volume quotas solely on past sales experience. One company, for instance, takes last year’s sales for each territory, adds an arbitrary percentage, and uses the results as sales volume quotas. A second averages past sales for each territory over several years, adds arbitrary amounts, and thus sets quotas for sales volume. The second company’s procedure is the better of the two by averaging sales figures; management recognizes that the sales trend is important. The averaging procedure evens out the distorting effects of abnormally good and bad years.

Companies using past sales procedures for determining sales volume quotas assume not only that past and future sales are related, but that past sales have been satisfactory. These assumptions mayor may not be valid, but one thing is certain: companies making them perpetuate past errors. If a territory has had inadequate sales coverage, basing its sales volume quota on past sales ensures future inadequate sales coverage. Further- more, the ‘average-of-past-sales method has a unique defect in that average sales lag behind actual sales during long periods of rising or falling sales. Thus, during these periods quotas always are set either too low or too high. Quotas based solely on past sales, moreover, make poor performance standards, as previously poor performances go undetected and are built into the standards automatically. Two individuals for example, may receive identical sales volume quotas, even though one realized 90 percent of previous territorial sales potential and the second only 30 percent. Neither knowing nor considering the true sales opportunities in each territory, has management perpetuated past inequities. Past sales experience should be considered in setting territorial sales volume quotas, but it is only one of many factors to take into account.

Sales-volume quotas based on executive judgment alone: Sometimes, sales volume quotas are based solely on executive judgment. This is justified when there is little information to use in setting quotas. There may be no, sales forecast, no practical way to determine territorial sales potential. The product may be new and its probable rate of market acceptance un- known; the territory may not yet have been opened or a newly recruited salesperson may have been assigned to a new territory. In these situations, management may set sales volume quotas solely on a judgment basis. Certainly, however, quotas can be of no higher quality than the judgment of those setting them. Judgments, like past sales experience, are important in determining quotas, but it is not the only ingredient.

Sales volume quotas related only to compensation plan: Companies sometimes base sales volume quotas solely upon the projected amounts of compensation that management believes sales personnel should receive. No consideration is given to territorial sales potentials, total market estimates, and past sales experience, and quotas are tailored exclusively to fit the sales compensation plan. If, for instance, salesperson A is to receive a $1,000 monthly salary and a 5 percent commission on all monthly sales over $20,000, A’s monthly sales volume quota is set at $20,000. As long as A’s monthly sales exceed $20,000, management holds A’s compensation-to-sales ratio to 5 percent. Note that A is really paid on a straight-commission plan, even though it is labeled “salary and commission.”

Such sales volume quotas are poor standards for appraising sales performance; they relate only indirectly, if at all, to territorial sales potentials. It is appropriate to tie in sales force quota performances with the sales compensation plan, that is, as a financial incentive to performance, but no sales volume quota should be based on the compensation plan alone, for that is “putting the cart before the horse.”

Letting sales personnel set their own sales volume quotas. Some companies turn the setting of sales volume quotas over to the sales staffs, which are placed in the position of determining their own performance standards. The ostensible reason is that sales personnel, being closest to the territories, know them best and, therefore should set the most realistic sales volume quotas. The real reason, however, is that management is shirking the quota-setting responsibility and turns the whole problem over to the sales staff, thinking that they will complain less if they set their standards. There is, indeed, a certain ring of truth in the argument that having sales personnel set their own objectives may cause them to complain less, and to work harder to attain them. But sales personnel are seldom dispassionate in setting their own quotas. Some are reluctant to obligate themselves to achieve what they regard as “too much”; others- and this is just as common-overestimate their capabilities and set unrealistically high quotas. Quotas set unrealistically high or low-by management or by the sales force cause dissatisfaction and low sales force morale. Management should have better information; therefore, it should make final quota decisions. How, for instance”, can sales personnel adjust for changes management makes in price, product, promotion, and other policies?