If you are fortunate enough to be running a mature sales organization, then the process of determining quota and compensation for the coming year is pretty straightforward. For the rest of us in startup land it’s a head-scratching, confounding exercise. Here’s how to not blow setting quota for your sales team.
Take stock of what you know
The first time you set quota, you think you don’t have anything to base it on. But that’s rarely the case. You have some data, because you have some customers. You have a co-founder who sold about 20 deals in the past year handling inbound referrals? You have a single salesperson who does all the selling and has booked an average of $1.5m in contract value for the past two years? You have three deals won from 30 qualified appointments set by a brand-new BDR? These are all points on a curve you can use as a starting point.
Do your research
If you do enough searches you will find some relevant industry benchmarks. A BDR can book about 10-15 qualified appointments a month. An average deal size of $30K and 60 day sales cycle means a rep can close 3-4 deals a month. Average annual SaaS quotas are about $770K. The average win rate at your deal size is 34%. Quota can be about 4-6X a rep’s on-target earnings. You get the picture—helpful benchmarking data is out there if you look for it. Or call on sales leaders in similar, non-competitive companies for advice. The sales community is fairly generous in sharing its wisdom.
I like a top-down approach to sales strategy, but a bottom-up approach to sales planning. If you need 100 quality leads to get 10 appointments, and 8 of those turn into opportunities and 50% of those close, you know you need 100 leads to get 4 new customers. How many leads can you generate next year (or, how many leads can marketing deliver to you next year)?
Keep it simple
Whatever you do, keep it simple. When you are just getting started it’s not time for ramps and thresholds and complex if/then statements for your quota. If you ask me, it’s never time for that stuff. But especially in the beginning.
Create a flat-plan paying X% commission on all sales of a single type. Add some incentive and bonus opportunities based on hitting and exceeding quota.
That said, do consider what you want to incentive, because that’s how sales works. Want to sell professional services on top of the subscription? Give a higher commission on those deals. Want to emphasize new deals over expansion deals? Same. Make sure you are paying higher commission for the types of deals that are your strategic priority.
Try 3 or 6-month quotas if you are really stuck
I borrowed this idea from Tomasz Tunguz, and I love its practicality. If your gut says it’s not time to set quota, then don’t. Set a short-term quota and see what happens, adjusting as you reach the end of each term until you feel you have enough of a baseline to create an annual quota.
Sometimes you have to guess
I am not afraid to admit what every startup sales leader knows. Sometimes you have to just take an educated guess. I was interviewing a potential (and very well-qualified) sales executive the other day and I posed this question, “How do you approach setting quota for a sales organization that is very nascent and doesn’t have any consistent results to base it on?”
He fumbled, he stumbled, he hemmed and he hawed. And finally he said, “I have no clue, I just sort of take the best guess and hope I am right.” I appreciated his honesty and willingness to just admit it.
But don’t guess crazy
The title of this article is how to not blow determining quota, and some would say guessing is crazy enough to blow it.
Even when you guess, don’t just pick a number out of thin air. That’s a recipe for disaster.
If you are going to wing it then make it an educated guess based on what you know, industry benchmarks and some short-term quotas. There is nothing worse than creating a completely unattainable quota that demoralizes everyone.
Sales teams like to win, and then beat that win the next time around. Your annual quota should set them up to win. Winning begets more winning.