Relationships among quotas, the sales forecast, and the sales budget vary from company to company. Relationships depend not only upon the procedures used in forecasting, budgeting, and quota setting but upon how the planners integrate these three procedures. The greater the integration, the more effective quotas are as devices for controlling sales efforts. Planning a company sales effort begins with a sales forecast and evolves naturally into a sales budget, thus setting the stage for the controlling phase, which involves, among other things, determination of quotas for use as performance standards.
A review of the sales planning process is in order. Basically, a sales forecast is a sales estimate tied to a marketing program and assuming certain environmental factors. When management arrives at the sales estimate, it has, in effect, decided the sales volume objective; then, after determining the expenses of obtaining this sales level, management computes the net profit contribution, brings all these figures together into a sales budget, and sets the objective for net profit. Management now decides how much of the estimated sales volume should come out of each territory, how much expense should be incurred in each, and how much profit contribution each should produce. Here management determines quantitative objectives, such as quotas, to assign to individual sales personnel (or to other organizational units of the sales department, or to distributive outlets). However, as is made clear later, setting quotas is not a matter of simply dividing companywide estimates into smaller parts?
Different types of quotas are set Differences in forecasting and budgeting procedures, management philosophy, selling problems, and executive judgment, as well as variations in quota-setting procedures, cause each firm to have somewhat unique quotas. Ignoring small differences, however, quotas fall into four categories:
- Sales volume quota
- Budget quota
- Activity quota
- Combination quota
So what is Sales Volume Quotas?
The sales volume quota is the oldest and most common type. It is an important standard for appraising the performances of individual sales personnel, other units of the sales organization, and distributive outlets. Sales volume quotas communicate managements’ expectations as to “how much for what period.” Sales volume quotas are set for geographical areas, product lines, or marketing channels or for one or more of these in combination with any unit of the sales organization, the exact design depending upon what facets of the selling operation management wants to appraise or motivate.
The smaller the selling unit, the more effective a quota is for controlling sales operations. Setting a sales volume quota for a sales region, for example, obtains some direction and control, but setting sales volume quotas for each sales territory in the region obtains much more. Setting sales volume quotas for smaller selling unit’s makes it less likely that good or bad sales performance, in one aspect of the selling operation will be obscured by offsetting performance in other aspects. The same holds for sales volume quotas on products or time periods more direction and control are secured by setting quotas for individual products rather than for entire product lines, and for short periods rather than long.
Sales volume quotas see extensive use. Sales executives set them and the sales volume objective dominates other objectives. Before profits are earned, some sales volume level must be attained. It is entirely logical for sales management first to set standards for sales volume performance. Sales personnel readily grasp the significance of sales volume quotas. However, sales management should not deemphasize earning of profits or conserving on selling expense. Sales volume alone, although important, is not sufficient-profits are necessary for survival.
The following are the types of sales volume quotas
Dollar sales volume quotas: Companies selling broad product lines set sales volume quotas in dollars rather than in units of product. These companies meet complications in setting unit quotas and in evaluating sales performance for individual products. A key advantage of the dollar terminology is that the dollar sales volume quotas relate easily to other performance data, such as selling expenses, through ratios or percentages. In addition, when products have no established prices, and sales personnel have discretion in cutting prices, either dollar volume quotas or combined dollar and unit volume quotas assure that sales personnel do not cut prices too deeply to build unit volume.
Unit sales volume quotas: Sales volume quotas in units of product are used in two situations. One is that in which prices fluctuate considerably; in this situation, unit sales volume quotas are better yardsticks than are dollar sales volume quotas. If a product is now priced at $80 a unit, 600 units sold means $48,000 in sales, but if the price rises by 25 percent (to $100 a unit), only 480 units sold brings in the same dollar volume.
The second situation occurs with narrow product lines sold at stable prices. In this situation, dollar volume and unit volume quotas might both appear appropriate, but, especially if unit prices are high, unit quotas are preferable for psychological reasons-sales personnel regard a $1 million quota as a higher hurdle than a forty-unit quota for machines priced at $25,000 each.
Point sales volume quotas: Some companies use sales volume quotas expressed in “points.” A company using point volume quotas might consider each $100 sales as worth 1 point, it might value unit sales of product A at 5 points and of product B at 1 point, or it might convert both dollar and unit sales into points. Companies use point volume quotas because of problems in using dollar or unit volume quotas. Porter-Cable Machine Company, for instance, once used dollar volume quotas, but sales personnel often attained most of their quotas through selling only one or two easy-to-sell products. Management initiated a program whereby products were put into eight different categories, according to relative profitability. Then individual point volume quotas were set for each category, and bonus points were awarded for sales over quota in each category. Sales personnel had to meet all the point volume quotas before becoming eligible for b0nus points. In appraising performance, management regarded a 150 percent total point volume attainment with 4 bonus points as less meritorious than a 120 percent point volume attainment with 5 bonus points. The new quota system led to a more profitable sales mixture.
