Done well, quota-setting is an enabler to achieving your top-line revenue or bookings targets. How you as a Sales Operations leader determine quotas also has a significant impact on managing sales expense. Poorly done quota-setting will have devastating effects on retaining your best salespeople. There’s a lot riding on you getting quota assignments right as you plan for 2019. In fact, several recent surveys of B2B Sales leaders found that the majority view accurate quota setting as a significant problem.
Your approach to setting quotas must first consider the offering your company brings to market. You must distinguish between tangible products versus services (SaaS, PaaS, IaaS, etc.).
There are four key reasons you must distinguish between product versus a service in quota-setting:
- Seller revenue and cost recognition
Tangible products are typically built and delivered within a short time frame. As such, the majority of revenue recognition and cost allocation for products occurs quickly as well.
Services agreements stretch over a period of time, often a year or more. Even in the case of a customer paying for services up-front, revenue and costs are recognized over the length of the agreement.
- Buyer determination of value and cost (TCO and ROI)
Both services and product buyers use measures such as Total Cost of Ownership and ROI, however, the weighting of components underneath are different. Services offerings often include larger training and customization costs within TCO.
Physical products can be depreciated over time and are financed through capital expense. Services are, in large part funded as an operating expense.
- Nature of your offering
Services offerings tend to be more “sticky” than products. As such, SaaS, PaaS and IaaS buyers typically incur greater switching costs than most product buyers that switch. Tangible products, in general, are more difficult to upgrade or adapt on the fly to evolving needs. On the other hand, services generally have flexibility built in to address changing requirements
Customer Acquisition Costs and Lifetime Value (CAC & LTV) – Understanding that CAC and LTV will be different for products versus services is elementary. Differences here will also determine how you assign new customer quotas versus existing customer renewal quotas.
- Sales Organizational Structure
Hunters – If you’ve determined your services go-to-market strategy requires a new logo hunting specialist, you must consider the basis for their Quota. Hunters can be compensated on Total Contract Value (TCV), Annual Contact Value (ACV) or Monthly Recurring Revenue (MRR). The answer depends entirely on services maturity and the behaviors you want to drive.
Farmers – If you have sales roles responsible for managing existing services clients, they too can have quotas based on TCV, ACV or MRR. Determining the right measure is again dependent on service maturity and the behaviors you want to reward.
Renewals – If your product fit resonates well in the marketplace to fill a defined need, renewal rates should be very high. Associated effort to gain renewals should be low.
As B2B services offerings continue to rapidly evolve, quota setting complexity has increased as well. The growth of services offerings available to buyers is exponential. This rapid evolution requires professionals that manage and assign quotas for services to be especially agile. Services maturity and position in the marketplace shift in response to this rapid evolution. In aggregate, the above distinctions between services and products drive unique needs in setting accurate quotas that deliver on targets.
With all of the above to consider, remember there are core, shared inputs needed to best determine quotas for services and products.
The most notable shared data elements needed to correctly assign quotas include:
- What is the total addressable market for your product or service?
- What is your current estimated share of wallet among customers?
- Is your product or service maintaining, growing or losing market share?
- What is the value of your active pipeline, sales cycle time and closing rate?
- What is your sales rep capacity as compares to their portfolio (calls/visits per month they can execute versus calls/visits needed to best serve the clients in their portfolio)
Of course, setting quotas for products or services will lead to the next step in your planning for 2019 – evaluating compensation plans. As different as products and services are in quota-setting, so too are compensation plans. Leading the charge in Quota setting and sales compensation evaluation is essential for successful Sales Ops leaders
For more guidance on sound quota setting as you head into 2019, download The Sales Compensation Design & Quota-Setting Checklist.