Thinking Through the Quota-Setting Process
Target or quota setting is key for organizations. If you are scaling fast, you need to run both a tops down and a bottoms up quota setting process and you need to do this for all roles. Through the year as teams adjust, we need to make adjustments and think about giving and tracking quota relief. In this chat, Bala and Dharmesh discuss challenges in running this process and how to track all changes.
Transcript:
Dharmesh: Hello everybody, welcome back to another fireside chat about thinking through the quota setting process, which is really about three elements: quota setting, territory team management, and rep management, which are key to running a performing sales organization. This is a topic that’s very close to our heart.
So this quota topic came off of the discussion that I was having with Yuri last week. During the discussion, I referred to the CSO insights study that had 52 percent as the attainment number for most reps. That is a shocking number! We have way more tools today for sales than we ever had. There are more people joining sales… maybe that’s why. We were just hiring anybody into sales with a heartbeat.
But I do think how we set quota plays a key role. The fact that attainment is low should scare people. Are we disincentivizing our sales teams? So, let’s focus on all the elements that it takes to set quota the right way. The first thing that we need to understand is what is involved in the quota setting process. What are all the things that people need to consider when they start getting on the path of setting quotas?
Bala: Hello everybody! Good to be back chatting again about another topic that Dharmesh and I’ve had a lot of discussions about and that is very, very close to our hearts. It’s interesting because, historically, we’ve seen the attainment numbers continue to drop. It’s counter to this whole idea that we have more automation, more data, more use of machine learning… but yet we are falling behind on attainment numbers. To bring that in perspective, 50% of your people don’t meet their number. If you hire a labor force to do something and 50% of them don’t do their jobs or are not able to do their jobs, then you would rethink the process.
[3:58] Simplicity and Clarity in the Quota Setting Process
Bala: So that’s the reality. It’s a complex; there is a mixture of science and art that’s involved in the processes of setting quota. But to your question, what is a good quota setting process? I’ll start with looking at what is a good quota, and what does it mean to set a good quota?
Quota ultimately is a goal. And just like any goal setting process that you might have, or any acronym you might use, such as SMART goals, they’re all going to point to some fundamental aspects that you have to think about. The first one of which is simplicity: Is it clearly understood? What is your goal? What is your number? What are you going after?
Having worked with a lot of salespeople they all prefer to have just one number to go hit. The more complex you make the quota number itself, or the other set of goals that you have, the more difficult it is. The easier you make it the better. That simplicity is number one.
The ability to be clear, or the clarity of how the process was done, how the number was set and what are the factors in that number are also important for a salesperson to understand. A salesperson wants to be able to say “Here’s my number; I know how it was calculated; I know it’s fair; I know it’s reachable. Here’s how I’m going to hit that number.”
We undervalue those and I see quota plans that have really complex aspects, such as different baselines, different products included and not included. Then there are individual quota, team quota, sub-team quota, product quota… On one hand it’s great because you’re trying to drive different behavior through those levers, but the problem is you have to keep an eye on the recipient of that number. Can that person understand and does it motivate that person?
Dharmesh: That’s a huge point. In my experience interviewing salespeople, they’ll ask you what my quota processes is… if you cannot explain it in under two minutes–
Bala: Even two minutes is too long!
Dharmesh: They’ll say “I’m done; I don’t want to work here.” Simplicity and the transparency of how it’s been set, that’s something they actually deserve to know. I’ve seen teams in the spirit of doing the right thing, think “I don’t want to share how the sausage is getting made. I’ll just tell them this is your number” and that is actually a disservice.
Bala: For those of us that who have operated on both on a commission and a salary basis — the people that work on a salary basis, which most of the sales operations and strategy folks tend to be — really don’t understand the emotional aspect of a commission-based system. This is their livelihood; this is how they have to make money. Not having clarity on what your salary would be at the end of the month would trouble you. That’s an important aspect of setting a quota: clarity and transparency.
[8:07] Motivation for Sales Teams
Bala: Motivation, really the whole reason why you set quotas is to motivate your salespeople towards a certain behavior. That behavior could be getting new accounts or pushing a particular product or just meeting the revenue numbers… you also have to think about these goals because the more variables you add into the quota setting process, how complex this thing gets… at some point it becomes counter-productive to motivating towards a certain behavior because there’s too many variables to consider.
Dharmesh: Sales guys love to have things under control. Multiple variables gives a sense that there are things that not are not under your control and your fate depends on that. That’s not a very good feeling.
Bala: It’s not a good feeling at all. There are other ways to drive those kinds of behaviors; spiffs are a great way to push a certain type of product or certain behavior short term.
The other factor that impacts a good quota is your understanding of the assumptions you’re making and setting that quota. One of the fundamental assumptions you make in a quota setting processes is your ramp time, the productivity of the person in that role. When you think about the ramp process, you could set a three-month ramp as your basis for how you calculated your quotas. But if that’s nowhere close to reality, then you have a problem. Dive into an understanding the assumptions you’re making in the setting process and whether those assumptions hold true when you’re setting the quota. Is that really happening? Is that being measured? Is that being tracked?
Dharmesh: Because what happens is those assumptions of being driven at a manager level and every manager has his or her own view because there’s no central repository of ramp information. Every manager can have a different view on what the ramp is, therefore impacting quota they’re going to accept and pass it on to the team.
[11:01] Flexibility and Time in the Quota-Setting Process
Bala: Yeah, that’s definitely one aspect. The last piece that I would add is flexibility. You want to build some level of flexibility into the quota process because you are going to encounter a bunch of practical situations where you have to deal with the adjustment of that quota or provide relief. COVID is a great example of a situation where a lot of companies are just doing quota relief because of economic conditions. I’ve seen a lot of companies do quota relief when a product release does not go out on time; you made a quota based on the assumption that the product would release on a certain date, the engineering team delays it. Now you don’t have a product. So what do you do? You have to provide quota relief.
There are number of situations like that, that require a level of flexibility in your quota process. The rules around that should be clear so managers understand when these flexibilities can be used. An inflexible system is very rigid, and you will find it difficult to deal with all the practical problems that pop up.
The other factor in a good quota process is that it is something that gives people enough time to work towards. I see a lot of organizations wanting to change quota every three months and define a new quota structure, new goals for the sales team. Well, the problem is if your sales cycle is three months, you’re not going to have the runway to hit the goal that was set. If you keep changing the goalpost, then it’s difficult for the sales team or a salesperson to be able to ramp up and hit that goal as you’re moving it. While there is a tendency to say, “We’ll just adjust the quota to account for market conditions or whatever the situation is”, you also have to keep in mind, the more you move the goalposts, the more difficult it becomes for the salesperson to actually hit that number.
Dharmesh: That is a really important thing to keep in mind, because I’ve seen that a lot of companies at different stages, they aspire. A company like Conga that has a culture of redoing, readjusting territories and quotas almost every quarter. Now, that works if your ACV is low — I know you can make a sales cycle under three months. It may not work if you have a six-month sales cycle.
Bala: I’ve seen it done really well when these factors are considered. If the goals are always clear, it may be perfectly fine to shift quota around every three months. But as long as the sales team understands that that’s going to happen, they have the knowledge of why it’s going to happen.
And the standard adage that if too many people are beating your quota, maybe you set it too low; if too many people are not meeting the quota, then maybe you said it too high. That is the art portion of this: how do you get to that right level?
Dharmesh: The number one thing is really understanding the territory potential. If you’re a fast-growing company, like Zoom, you don’t know how big your market is. We absolutely want flexibility then to update your quota every quarter, which means you’re identifying ICP and your ICP fit is always moving. Essentially the territory potential is always changing.
[15:46] Starting the Quota-Setting Process
Dharmesh: So let’s talk with the quota setting process itself, what are the things that are involved in the process of setting quota?
Bala: Typically going to get a tops-down number, a number from your finance team or your CEO or somebody that says we’ve got to go hit this revenue goal. The idea of setting the quota is to meet that revenue goal with the least amount of budget that you can or exceed that revenue goal with the budget that has been provided to you.
Now these things can’t be too off balance — if your budget is really low but you’re asking for a magnitude increase in the amount of revenue, then there’s probably something fundamentally broken there. You’re assuming a massive amount of productivity out of your existing team, which may not be feasible. That’s a high-level consideration when you’re talking about that from a tops-down number perspective.
The other thing that is important is that you need to look at sales as an investment. That angle gets missed a lot because you are not always looking for a short-term return in everything that you do in sales. Especially if you’re a growing business or if you have a market that you are developing, you cannot have your eyes set on a quarterly number. You have to look at market development — how long does that take to get set up? And that could be multiple years. You could be investing in a market over multiple years. You have to look at the returns that you expect to happen in a multi-year horizon at some point. That plays into how you set the quota for a developing market versus a mature market versus a saturated market. That’s another important factor in your tops-down numbers to consider.
Then your capacity discussion is important, where are you going to hire? What people are you going to hire and in what roles? All of those will be based on this macro-segmentation, where you say, “We’re going to go vertical here, or we’re going to expand in Europe, or we’re going to expand in Latin America”, whatever those strategic goals are, they need to be clearly identified and documented so that everybody’s on the same page.
And you can classify those as market penetration, retention of existing customers driving down attrition or you’re expanding into a market that’s unknown. That could require a whole different approach to quota setting than you would in a market where you are trying to retain customers. That’s one of the key things that you have to do in the top-down process is really understand what are the strategic imperatives that you’re trying to drive. Write them down and be clear about what it is that you’re trying to achieve.
That can feed into the quota setting process in terms of how you align your quota to those targets, to those goals that you strategically want to hit.
Dharmesh: To recap the tops-down process: We start with a goal in mind. We are going to look at capacity and at our product mix and the penetration. Based on that, we build a coverage model and those are the elements that will all contribute to a tops down number you will come out with. It should at least give people in the field, directionally, what corporate strategy looks like. It’s an acquisition strategy, it’s a retention strategy — it’s a mix of both.
Bala: Yes, and it could be by region, by business unit, by product… it could vary. So you may be launching a new product and therefore you want to drive growth into existing customers of that new product. Whatever that strategy is you want to be clear about what it is that you’re trying to achieve and your targets. It could be market share, or share of wallet, it could be market development, it could be new logos… However you define what those goals are.
Then you start the process of breaking down the tops-down number into your various business units or groups that you’re going to set. The return from a developing market may not be a high. That was the expectation versus a market where we have saturation, and where we have a lot of existing customers. You have to consider that the stage of the company is also very important in terms of attracting the right level of people into the company you have to be in par with the market in terms of how much quota you’re going to set. Most of the SAS companies in the market are a million dollars in enterprise rep, then you cannot have a $4 million quota target. You won’t attracting the right people; it’s very similar to how you pay people with salaries. Once you start doing that macro breakdown, the number one thing you have to do is get in a room with your sales leaders and business unit leaders that would be responsible for these goals and really get their feedback on that process.
[22:35] Setting Quota in Growing Companies
Dharmesh: When you talk about business units, segments… That works in a more mature organization where there is some structure, a territory, teams, and business units. But a lot of companies that are growing really fast may not have a very well-defined territory model coverage model in general. And they’ve taken an OTE approach; this is the number that I want and I’m just going to multiply it; this is my on target earning. How does that work out in your mind?
Bala: Ultimately, you’re trying to find an aspect of potential in the market, whether you define that potential through territories in a well-defined market where you can understand potential based on accounts. But in a developing space you don’t know — let’s say it’s a new product in the market or your new company that’s launching a single product — you don’t know what the market’s going to look like. You haven’t gotten the historical information to know what is the best approach that you can take. People tend to figure out a process for how they can justify the budget spent on a sales rep. One approach is to think about it as an ROI on every dollar spent on a salesperson: if I spend $10 on a salesperson, I want $100 back. Without really understanding the market and what you’re developing can also be problematic.
Dharmesh: I think so. That is one of the big drivers on why attainments are low because what are you’re missing out on is… what is the ICP of your market and how big the potential is and working realistically, that is just giving up, and could be generating an unrealistic number that goes against all the principles you’ve talked about. Yes, it’s simple, but it’s definitely not transparent and it is not easily motivating for most people.
Bala: It’s not a motivator and it doesn’t take into account ramp; it doesn’t take into account a lot of the other factors that add nuances. In a really early-stage company, it may work because you would simply be setting a target because you have to set a target. You’re saying I need to get to X number of dollars; I need 10 people to get there; that divided by 10 is my multiplier that I need on every person to get there. Very, very simplistic way of thinking about it. When you don’t take into account all the other variables, that’s where you don’t meet the numbers. But that’s a very common approach we’ve seen.
Another common approach that we’ve seen is to take a market number and say a person experienced in sales for two years should carry your quota of 700,000. A person with five years of experience should carry a million dollars. A person with 10 years of experience should carry $1.5 million. That again is devoid of any understanding of the potential, the market, the exact ability to meet that number is not very clear. You’re basing it on the experience of a person but not based on any other factor that would influence that person’s productivity in that market that you’re setting for them. Any simplistic approach like that would be problematic. That’s where you need to have flexibility.
I’ll go the other way and say, if you try to figure out what the potential of a territory is by coming up with a really simplistic way of calculating the potential, like taking the number of employees and multiply it by my license cost per employee and this is how much money I should be able to make in a particular account… That’s very simplistic. Even if you are using a territory-based approach to set a number, you really have to think about the historical basis. I just talked about how being at par with the market is important in terms of compensation, in terms of tenure, it’s also important to make sure that people with experience get higher quota they can go meet it. It’s a multi-variate thinking.
[27:44] Coverage in a Territory-Based Model
Dharmesh: Yeah. Well, one thing that I would add to that as we talk about the territory-based model… We know CRM data is notoriously dirty, and you have all these unassigned accounts that are just sitting around. You have to keep in mind when you’re building a territory-based model is having coverage for all the accounts and know your leftover or unassigned accounts. I’ve got to figure the model, make sure there’s coverage on those. Otherwise, you could have a territory model that a number of accounts will come up in a particular way, but if they have no coverage…
Bala: This is where the bottoms-up thinking has to come from. You have your tops-down number that you got from finance or your CEO. You’re trying to figure out how you break that down. But on the flip side is you have to be able to justify it bottoms-up. Now for that, there is a number of ways in which you can look at it.
One is the territory potential number of accounts that are assigned to a rep, etc. The other aspect of it is productivity: how productive is this person in that role? Was it a new hire into that role? Were they transferred in from another part of the company? Is this a market or product that they’re familiar with? When you think about productivity, of course, sales enablement and all of those aspects come into play, but that’s a critical factor to think about.
The third is: You have to have some sense of how many deals a particular sales rep can close. You can assign 50 or 100 accounts, but if they can only work on four deals at a time, just in terms of the amount of effort that it takes to work on a deal, how complex are these deals? Is it a lot of solutions-selling or are you just dialing a deal? The individual’s ability to physically do that work is also another factor in consideration. It’s not just about the size of a territory — you could have a thousand accounts in a territory but it doesn’t mean you’re touching any of them if every deal takes an enormous amount of time to close. How much time can one person spend and what is the productivity of that person?
Dharmesh: What’s my coverage model on top of those territories?
Bala: And things like conversion rates, how many deals can a salesperson actually work on at any point in time, how many of those deals would convert? These are a variety of ways in which you can bottoms-up try and figure out how to get to that number right now. Try and match the bottoms-up number with the tops-down number. You’re not going to get it perfectly matching, but you want to get it as close as possible in any different angle that you look at it.
Dharmesh: I want to stress that point. One of the biggest roles for a good sales ops or sales strategy team is being the binding glue between bottoms-up and tops-down. Tops-down, you have a number because this is what I’ve committed to. This is the number I’m giving, but you need to get validation from the folks in the field and be able to translate that gap or come up with a workaround that bridges that piece.
Bala: You want to have some plasticity in that number. You want to have some ability to use set goals that are a little bit higher than what it’s comfortably reachable. You have to look at it from all these dimensions. You have to look at the model from multiple bottoms-up strategies; from a workload perspective; from a conversion rates perspective; from a productivity perspective… If I look at it from all of these variables and all of these aspects, it comes out to about roughly this number. That then is a defendable number from a sales strategy and a quarter setting process perspective. For a rep, you can say well, here’s the number of deals we think you need to work on to get to that number. Here’s what we think your productivity ought to be. Here’s what the conversion rates ought to look like. This is what we have seen historically.
Now some of them, you may not be able to justify because you’re making assumptions, because you don’t have historical data. If this is your first sales team, you don’t have any ramp data to know how long it’ll take, but you’re making some assumptions. Being able to show that is critical and also consider from a bottoms-up perspective.
[33:47] Knowing When You’ve Set a Good Quota
Dharmesh: We think a good processes is a tops-down and bottoms-up. But generally, I’ve seen that tops-down number just float down to most teams, especially in a growing organization. But ideally you want both the tops-down and bottoms-up. It needs to be simple, transparent, motivating, should have elements of both tops-down and bottoms-up. When you do all those things, do you think you set a good quota or… when do you know you’ve set a good quota?
Bala: These are all things that you do in order to make sure you can get to an achievable quota. You can justify why that number is what that number is. When do you know that you’ve set a good quota? When a reasonable amount of people in your organization are able to meet or beat that quota. People talk about the bell attainment curve and all that. I’m not sure I’m a big believer in that but the idea there would be that a majority of the people are able to meet and exceed the goal, thereby giving you the ability to get to the number. If you look at a 50% attainment rate, 50% of your resources are being wasted. If they’re not producing the goal that amount that you want, it means that you are at risk of not meeting your revenue targets. That’s the important thing: the predictability of being able to do it.
You know you’ve set a good quota when “the majority of people are able to meet or exceed the goal. The important thing is predictability.”
Dharmesh: You could meet your revenue target, but you will not meet your contribution margin because the magic number or the cost of sales becomes high because you got these people who are not contributing what they should be.
Bala: This is when we talked about the top-down number; the top-down number is not just a revenue number. It’s also your budget number.
Dharmesh: Correct.
Bala: That is the amount of money you have to spend to get to that revenue number. You can’t forget that. You can go hire a thousand people and get that number, but you blow out your budget. It’s a combination of both things, and the lead times that are in that process. But fundamentally, this process of setting quota is that way.
I also think that it’s a heavily collaborative process because especially in an early-stage company where things are still developing and you don’t really have market data, you don’t have historical data to back up the numbers, your intelligence is going to come from people on the ground. Your intelligence is going to come from your salespeople; it’s going come from your sales managers; it’s going to come from the organization.
And anecdotally or even empirically it’s going to come from them. It’s important to involve the team in that process of setting a goal and making sure that it is a goal that they’re comfortable with and that they can justify, but at the same time, it’s also stretching them and motivating them to do better, to go higher. Really understanding that dynamic is important.
Dharmesh: That that gets into it because that’s what a good quota is. It’s simple. It’s transparent. It’s motivating. Transparency needs — I need to know how you’ve balanced my accounts. Do I have enough upside potential customers or the corporate side attention on new customer mix? It has to be run in a transparent manner; it’s not ops people just doing stuff in the backend. When you run the process, you are involving managers and folks.
[37:15] Breaking Points in the Quota Setting Process
Dharmesh: The question is where do we see breaking points in this process? Where do you think things are breaking down generally? We’ve all had our war stories of reps walking out of the room saying a quota is unrealistic and going. You end up losing your best guys who go somewhere else.
Bala: I’ve actually seen a variety of scenarios, just in past companies that I’ve worked in. You set a quota and 50% of the people are not happy with the number. 50% of them are ecstatic about it. That should be an indication that maybe 50% are going to miss their numbers. But you also drive attrition; people that once you give them the number for the year, they’re going to look at it and look at how realistic it is. If they feel like it’s not an achievable target, you’re going to incur more costs to the organization of having to replace those people. This comes back into motivation, that motivation is not a fluffy thing. It’s actually costly because if people leave, you will spend more time hiring them, ramping them to get them productive. This impacts your ability to meet the number. The people that are in seats right now that can produce the number is less costly than hiring somebody, training them, getting them to a point where they can actually contribute.
To your question of where things break down, things start to break down when you haven’t talked through all the variables and you can’t explain how those numbers are come about both to managers and sales reps. It’s important that the sales reps feel like their managers were involved in the process, their feedback has been heard and that feedback has been accounted for in their numbers is an important aspect of feeling involved in the process of setting the goal for the company. It’s also important for those tops-down bottoms-up numbers and the assumptions that you’ve put into those numbers to be monitored very carefully. You can assume the ramp is three months, but if the rapid eight months you’re way off in terms of what your goals were that you set for the target. Hiring and attrition, all of these things impact your numbers.
Dharmesh: If you talk to sales leadership, and they’ll say the Pareto rule applies: I’ve got these 20% of stellar sales guys who will kill the number and 80% of the people who will just manage it. There’s a lot of emphasis from sales enablement and other teams to clone that 20% behavior and say, “how do we get the rest of the organization to the level of their game?” There’s definitely some skill involved from a sales perspective, but how much of that goes back to how the territories were carved. Going back to the elements of quota setting process, you can have a great guy in a not-so-great territory with a lot of penetration and he will never make his number.
Bala: The important thing there is not to isolate individuals — you want to isolate a pattern. You don’t want to isolate an individual because that could be a one-off thing, an outlier. But if you’re seeing that 20%, let’s say 10 guys or gals out of your team, and you’ve see a pattern in the way they execute that seems to lead to those results, you want to replicate that pattern. You don’t want to say, “Hey, here’s Sally. She always closes her deals. She’s fantastic, this is what she’s really good at.” You’re trying to clone Sally. Well, that could be problematic. It’s important to isolate the patterns and replicate the things that are working or replicate the behavior that’s working in terms of how you sell. But also look at the bottom 20% and say, what are they doing that is problematic? Are they spending enough time prospecting? What’s the distribution of work? That’s also important. While you look at the top 20% to replicate, you should also look at the bottom of 20% and say this is what you shouldn’t be doing because it’s not producing results.
[42:19] Quota-Setting Under Current Conditions
Dharmesh: As I look at the clock, clearly, we are extremely passionate about this and we can keep continuing on this. But COVID, you talked about this earlier, that’s a shift in corporate strategy. A lot of companies right now, at least for this quarter, they’re not thinking of retouching the quota. They’re going to use this time to re-skill the hunters to be more like farmers… But changes in corporate strategy are always happening, which means quotas have to be changed. Do you think the current way of setting quote hampers or enables companies to keep those sales teams in line with the changing corporate strategy?
Bala: To be honest, the approach that most companies are following right now, which has is not touching the quotas that we set, is the right way to go about it. Because you don’t want to keep changing the goal posts. This is a three-month issue or six month issue or whatever the case is. However, what they’re doing is using temporary mechanisms, such as quota relief, spiffs, double accounting for certain types of behavior that they want to drive. These are temporary incentives that you can put in place to drive behavior that you want without changing your final quota number. You can give people 150% credit for a particular product sold into an industry that’s not doing well, for example. That should be the first approach, going back and changing the goalposts should always be the last thing you do.
When you’re setting the goal the quota setting process, you should keep this in mind, assuming that something like this would happen, what would I do in that case? Because it may not be a global thing, like the pandemic is, but it could be a local situation in a particular market, it could be driven by a product not being available, it could be driven by localization of a software product that’s not available in the market like Japan, for instance. There are micro reasons why some of these things might happen and you must have mechanisms to adjust to the punches of the market with quota settings. Spiffs are a great way to do it.
Dharmesh: How have you seen some of our customers reviewing the plan almost every quarter. Now that they’re on the platform, how have you seen them embracing this?
Bala: A lot of them are really understanding. It gives them a lot more intelligence right into what they should be thinking about now. Not all of them are adjusting quotas just because they’ve gained an intelligence on a particular topic. What they’re doing is thinking about how to use that locally within the year to motivate their staff. As I said, spiffs or reliefs or whatever mechanism that you can use to help motivate the people. But all of that falls into how they think about setting quotas for the next year and really thinking about all the variables that they can use. All the bottoms-up ways in which they can get to the number and all the things that we talked about.
Dharmesh: If there are any other topics that people want to hear it, shoot us an email dharmeshfullcast@io or on our LinkedIn page, but we look forward to continuing this next week with Rosalyn.
