sales management association quota setting breakout€¦ · suboptimal quota setting methodology -...

SMA 2014 - ZS Albrecht - Quotas © 2014 ZS Associates - 1 -

Sales Management Association

Quota Setting Breakout

Chad Albrecht, CSCP

Principal

ZS Associates

15-17 September, Atlanta, Georgia

Sales Force Productivity

Conference 2014


Chad Albrecht, CSCP

Principal

ZS Associates

[email protected]

SMA 2014 - ZS Albrecht - Quotas © 2014 ZS Associates

ZS Associates is a global leader in sales and marketing

consulting, technology, and outsourcing

Marketing

Operations &

Technology

Sales

Commercial

Strategy

Consulting Capability

Building Outsourcing

Full Range of Commercial Services More than 30 Years

Helping Companies Grow

Broad and integrated service portfolio

delivers high impact and exceptional value

Worked with more than 1,200 clients

in over 70 countries

More than 2,800 professionals

in 21 offices worldwide

BARCELONA • BOSTON • CHICAGO • EVANSTON • FRANKFURT • LONDON •

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PRINCETON • PUNE • SAN DIEGO • SAN FRANCISCO • SÃO PAULO •

SHANGHAI • TOKYO • TORONTO • ZURICH


Quota Setting Workshop - Learning Objectives

- 4 -

In this session, you will

learn:

Types of quota mistakes

Critical elements in a good quota

setting system

Best practice quota setting

techniques

Ways to test that goals are set

fairly and accurately


Quota setting is a top issue regardless of industry

- 5 -

Tech Med Devices

Rank Issue

1 Data Quality

2 Quota Setting

Fairness

3 Sales Crediting

Accuracy

4 Sales Forecast

Accuracy

5 Incorporating

Managed Care

Pharma

Rank Issue

1 Quota Setting

Fairness

2 Sales forecast

accuracy

3 Plan

Complexity

4 Data

Availability

5 Plan

Communication

Rank Issue

1 Quota Setting

Fairness

2 Data Availability/

Accuracy

3 Paying for

Performance

4 Developing

motivating plans

5 Plan

Complexity

Quota Setting POV


Successful quotas provide a reasonable – but not unrealistic –

amount of stretch

- 6 -

Do

llars

Territory Goal

Territory

Incentive Pay

Expected

Territory Sales

Overpay Range Loss of Motivation Range

Low, Meaningless Goal Good Effort Goal Peak Effort Goal Impossible to Achieve Goal

Quota Setting POV

Quotas need to provide a reasonable, but not unrealistic stretch


Based on our experience, sales quotas are inaccurately

set for one of three reasons

- 7 -

Quota Setting POV

National Forecast

Too High

Dispirited team

Suboptimal sales

High turnover

1

National Forecast

Too Low

Unchallenged team

Suboptimal sales

Overgenerous payouts 2 2

Salesperson quotas may be off-base due to an inaccurate national forecast

AND the misallocation of that forecast

Misallocation

of National

Forecast Down

to Salespeople

Same issues as national,

at a local level

Fairness issues within the team 3 3


There are a number of common signs that may reflect a

suboptimal quota setting methodology

- 8 -

Quota Setting POV

1 Extreme outliers on either end

2 Sales incentive spending higher than expected

3 “Top performers” missing quota (or vice versa)

4 More than 2/3 achieve at least 100% or their quota

5 50% or more of salespeople miss their quota

6 Turnover is higher than industry norms

7 Significant variation in salesperson rankings YOY


Effective quota-setting processes include a variety

of common characteristics

- 9 -

Quota Setting POV

Rigorous Methodology

Manager Refinement

Territory Opportunity

Account opportunity

(contracting status,

D&B data)

Geographic opportunity

(population

demographics using

census data, aggregate

D&B data)

Accuracy: simulate

history and correlate to

actual sales results

Fairness: group similar

territories and check for

historical biases

Reflect on-the-ground

reality and increase

sales manager buy-in

Limit degree of change

and require explanation

Procedures, Installed Base, Etc.

Pro

du

ct S

ale

s P

ote

nti

al ($

)

Procedures, Installed Base, Etc.

Pro

du

ct S

ale

s P

ote

nti

al ($

)

20

60

100

140

160

Low Medium High

PREVIOUS-YEAR GROWTH

% G

OA

L A

TT

AIN

ME

NT

CU

RR

EN

T Y

EA

R

40

80

120

20

60

100

140

160

Low Medium High


% G

OA

L A

TT

AIN

ME

NT

CU

RR

EN

T Y

EA

R

40

80

120

20

60

100

140

160

Low Medium High


% G

OA

L A

TT

AIN

ME

NT

CU

RR

EN

T Y

EA

R

40

80

120


Best in class quota setting is based on a 5-step process

- 10 -

1 Validate National Forecasts

2 Determine Quota-Setting

Method

3 Simulate & Finalize Method

4 Refine Quotas

5 Communicate Quotas


A valid and realistic national forecast is a critical input to effective

and motivational sales force goals

- 11 -

Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas

Is the forecast

realistic? ? Is % growth with historical norms?

Does market assessment match external data?

Is it out of date or based on wishful thinking?

Do the forecast

and quota data

match? ?

Forecast/quota geo/channels aligned?

Does forecast time period match quota period?

Forecast/quota segments aligned?

What assumptions are in the forecast? ?

Does the forecast vary by segment?

Anticipated events taken into account?

Seasonality?

Are product adoption assumptions reasonable?

Quota Setting Process


Quota setting methods should be evaluated and selected based

on 3 primary criteria

- 12 -


Fairness

Is the distribution (range) of growth per territory

reasonable?

Is the attainment distributed fairly? Do any

factors other than rep performance bias the

resulting attainments

Simplicity

Is the method understandable?

Is there a simpler method that produces very

similar results?

Predictive

Power

Do the targets accurately predict the actual

sales at a location level?



First we should identify the timeframe for which data is needed

- 13 -


2013 2014 2015

N D J F M A M J J A S O N D J F M A

History for Testing

History for Quota Setting

Gap Quota

Testing Period

Gap Quota

Setting Period

Four step quota SIMULATION process

1. Use history and an appropriate gap to set

quotas for the “simulation period”

2. Compare calculated quotas to actual sales

3. Analyze for systematic biases

(fairness testing)

4. Adjust quota setting parameters for best

combination of accuracy and fair

A shorter gap between quota period and history

period increases quota accuracy

Two step quota SETTING process

1. Using best method from the simulation

process, shift the time period to the “quota

setting period”

2. Scale the quotas based on the sales forecast



Then we start to understand territory behavior by correlating

sales with other metrics

- 14 -


Metrics (R2 Values)

Current Sales (Jul ‘14 to Oct ‘14)

Prod A Prod B

Prior Period Sales 76% 73%

Prior Period IT Sales 24% 15%

Prior Year White Collar Workers 4% 1%

2010 Population 3% 0%

Product A and Product B

are highly correlated with

prior period sales

Product A is moderately

correlated with prior

period IT Sales

High Correlation Example Low Correlation Example

White Collar Workers (M)

Curr

en

t 1

2 M

on

th S

ale

s (

M)

Prior 12 Month Sales (M)

Curr

en

t 1

2 M

on

th S

ale

s (

M)



We then begin to evaluate different methodologies

- 15 -


Common growth - Allocate national target based on the fraction contributed by the territory

to the national sales in previous time period

Maintenance plus growth - All territories will be expected to maintain previous sales,

and grow based on market potential

Index - Territory level index measures are calculated based on a weighted sum of a number

of factors like historical sales, remaining market potential, etc.

Time series - Sales for each territory level are projected based on the territory’s historical

sales pattern

Frontier - Territories are benchmarked against top performers in similar circumstances

Regression - Regression techniques are used to calculate the importance of different factors

in predicting future sales

Ea

se

of C

alc

ula

tio

n / C

om

mu

nic

atio

n

Simpler

Moderate

More Complex

Quota-Setting Methods

Other methods include bottom-up forecasting, sales response and fair share

Most Common



Maintenance plus growth method

- 16 -


How it works:

Te

rrito

ry-le

ve

l M

ark

et S

ha

re

Territory A Territory B Territory A Territory B

Last Year Actual Next Year Quota

Maintain last year’s sales

Share of uncaptured

market potential



Maintenance (100% of last year) plus growth method

- 17 -


How it works:

Previous Period

Market Sales

Previous Period

Product Sales

Un-penetrated

Market

Un-penetrated

Market

Territory Units Units Units % of Nation

A 1,000 170 830 22%

B 1,000 10 990 26%

C 2,000 15 1,985 52%

Nation 4,000 195 3,805 100%

Quota of a territory = previous sales + unique territory growth quota

? Expected growth in National sales = 100

How will net quota of Territory A be computed?

Quota of Territory A = 170 + 22% of 100 = 192



In a variation of the method, we could account for carryover –

that we should maintain at least a given % of sales

- 18 -


Carryover is the sales generated by promotional effort in preceding years

YR1 YR2 YR3 YR4

Last Year’s Sales

Impactable Sales

(due to sales force promotion)

Impactable Sales

Carryover Sales

(due to loyalty and other types of

promotion)

Carryover Sales

Carryover Sales

Carryover recognizes that the return on promotional investment is not immediate

Carryover recognizes that not all sales are due to the sales force alone



Maintenance (at carryover rate) plus growth method

- 19 -

How it works:

Previous Period

Market Sales

Previous Period

Product Sales Carryover Sales

Un-penetrated

Market

Un-penetrated

Market

Territory Units Units Units Units % of Nation

A 1,000 170 153 847 22%

B 1,000 10 9 991 26%

C 2,000 15 14 1,986 52%

Nation 4,000 195 176 3,824 100%


Quota of a territory = portion of previous sales + unique territory growth quota

? Carryover rate = 90% of prior year sales

Expected growth in National sales (100) + expected sales not carried over (19) = 119

How will net quota of Territory A be computed?

Quota of Territory A = (170 X 90% Carryover) + 22% of 119 = 179



Weighted index method

- 20 -


How it works: Quota = National Quota x (Weight 1 x Factor 1 value + Weight 2 x Factor 2 value + …)

Previous

Period Sales History Market Sales # of Key Customers

Units % of Nation Units % of Nation Units % of Nation

Territory A 100 14% 900 13% 4 33%

Territory B 600 86% 6,100 87% 8 67%

Nation 700 100% 7,000 100% 12 100%

Weighting 30% 60% 10%

This Year's Forecast National Sales = 1,000

Territory A

Percent of National Sales Quota 14% x 0.3 + 13% x 0.6 + 33% x 0.1 = 15.3%



We then simulate quotas to test the different quota

setting methodologies

- 21 -


2013 2014 2015


History for Testing


Gap Quota

Testing Period

Gap Quota

Setting Period

Use 6 – 12 months of history and a 2-month gap to set quotas for July – October

Continue to adjust quota setting parameters

until results are fair

Compare the sales for July – October against the quotas

that were set

Check to see whether any systematic biases exist

(i.e. fairness testing)



Quota-setting methods should be quantitatively tested

to ensure both accuracy and fairness

- 22 -


Accuracy Evaluation Predictability of Future Sales

Fairness Evaluation Degree of Bias Across Territory Groupings

0

4,000

8,000

12,000

16,000

20,000

0 5,000 10,000 15,000 20,000

Q1 Quota

Q1

Sa

les

R2 = 94%

The Relationship of Quotas to Sales

20

60

100

140

160

Low Medium High

Previous-year Growth

% Q

uo

ta A

tta

inm

ent C

urr

en

t Y

ea

r

40

80

120

The Relationship of Quota Achievement

to Key Characteristics



You can compare methodologies for overall and individual

variations in performance

- 23 -


1

8

16

20

10

6 4

1

8

12

18

13

4 6

0

5

10

15

20

25

<70% 70%-80% 80%-90% 100%-110% 110%-120% 120%-130% >130%

# o

f Te

rrito

rie

s

Quota Attainment (%)

Distribution of Quota Attainment Weighted Index Method Maintenance + Growth Method

Territories with Lowest Quota Attainment (Weighted Index Method)

Rep Name Territory Weighted

Index Method

Maint. +

Growth Method

Janet Reno 5047 76% 78%

Leon Panetta 5025 74% 79%

Mark Sanford 5194 73% 76%

Tim Pawlenty 5037 71% 76%

Sarah Palin 5193 63% 62%

Territories with Highest Quota Attainment (Weighted Index Method)

Rep Name Territory Weighted

Index Method

Maint. +

Growth Method

John McCain 5098 161% 177%

Bill Clinton 5040 148% 165%

Michelle Bachman 5113 136% 139%

John Kerry 5021 135% 133%

Condi Rice 5196 129% 131%



Using the best method from the testing process,

shift the time period to set quotas for January – April

Scale the quotas based on the sales forecast

Once you land on a preferred method,

set quotas for the period in which you want quotas

- 24 -


2013 2014 2015


History for Testing


Gap Quota

Testing Period

Gap Quota

Setting Period

Once retro-simulation is completed:



Quota refinement allows field management to make changes

based on local knowledge

Subject to pre-approved rules

(e.g., max change, zero-sum)

Subject to approval by senior

management

Field sales management should be allowed

to review and refine their quotas

- 25 -




Communication of quotas is crucial to overall plan success

- 26 -


1 Clear

Methodology

• Explain quota methodology as carefully as the compensation plan

• Supporting materials to answer field questions

1 Clear

Methodology

2 Early Quota

Distribution 3 Individual

Quota

Effective

Communication

of Quotas




- 27 -


1 Clear

Methodology

2 Early Quota


Quota

Effective

Communication

of Quotas

Late quotas = low motivation levels,

field distrust

2 Early Quota

Distribution




- 28 -


1 Clear

Methodology

2 Early Quota


Quota

Effective

Communication

of Quotas

Explain how the salesperson’s quota

was calculated

3 Individual

Quota



Thank You!

sales management association quota setting breakout€¦ · suboptimal quota setting methodology -...

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