Sometimes you might be dealing with your sales quotas the same way as slicing your pizza wrong…if one slice is too big, someone might end up with no pizza…
An important finance task for a growing business is figuring out how to motivate new salespeople while not giving away the farm. However, how can you do that efficiently? From our experience as consultants, and given the many different types and sizes of businesses we have worked with, we present some of the biggest sales quota mistakes we have seen:
Mistake 1: set quota based on sales instead of gross margin
The reality is that all products are not created equal. Some may have a solid markup, and others may not. Sometimes you need to sell the unprofitable product in order to have the chance to sell lots of the profitable one. The issue is that, at best, salespeople will sell the profitable and unprofitable indiscriminately—if their sales commission as a percentage amount is the same either way, they won’t differentiate. The worst case is that they will sell the less profitable one even more, since it may be discounted relative to competitors. The secret is to not let salespeople make a bad situation worse. You need to ensure that they are incentivized to sell the most profitable products by compensating them based on gross margin.
Mistake 2: capping commissions
Many businesses cap the commissions of salespeople. Why? If you have set the quota based on gross margin, then every extra $ of sales they make is extra money for your business. If you were in their position, would you use up all your good leads once your commission is capped? Or would you save them for next year, when the quota is reset?
Remember: The best workers will stop working once they have hit their quota, waiting for their commission structure to reset.
Mistake 3: excluding commission in profitability analysis
While many companies omit this, commission should be included in any profitability analysis. It is not usually considered a “hard” cost like salaries, but it is still a hard cost—just ask your lawyer! Have you stopped to think if you have been making these mistakes all along? It is never too late to rectify them and help your business grow in a proper and sustainable way: based on gross margins. If you find yourself in a situation where you have signed quotas poorly, come up with a way to “give” something (e.g., removal of a cap) in exchange for “getting” something (e.g., resetting quotas based on gross margin rather than sales).
