If you’ve ever run a 10K road race, you know that race organizers spend a lot of effort to have volunteers at every milepost telling runners what their time is. If you’re like me, you’ve probably sped up at each marker as you strove to beat your personal best time.
The key lesson here is that more information leads to a better result, and sales management and distance running both share the quality that more frequent information about performance drives to a measurably better result at the end. I was reminded of this recently when I read Jason Lemkin’s blog on the inevitability of moving from monthly to quarterly quotas as an SaaS company matures.
I’ve spent a third of my career running sales organizations. I think Lemkin picked a great and timely topic, and his blog is well worth reading. I did have slightly different thoughts on a few of his conclusions, though, and I’d like to share them in the form of some questions and reflections.
Why have quotas at all? Can’t I just pay a fixed percent of bookings and be done with it?
Sure, one can do that, but almost no one does. Why? Because just like running a 10K race, when runners get near their goal, they speed up, no matter how tired they are. When sales people can see a way to break through their quota, they sell harder and work longer. Quota-carrying sales reps work harder than they would without them. Millions of sales reps over the past century have proven this.
Does the length of my typical sales cycle affect the smallest unit of time and the quota attached to it?
Absolutely! If one is selling something where prospects can dependably be closed on a first call, then it might be possible to have daily targets for activity and weekly quotas for bookings.
Although SaaS prospects usually convert faster than prospects for software licenses with a big upfront payment, all other things being equal, most software does not usually have one-week close cycles.
I hold a weekly one-hour call with all my reps to review their forecasts. Can’t that take the place of setting a monthly quota?
Here’s the problem with this alternative: Sales reps that derive a significant amount of their compensation from meeting their quotas only care about the factors that affect that compensation.
For sales compensation plans to be effective, they need to be aligned with the behavior the business wants to reinforce.
Unless there is some unusual clause in your company’s sales compensation plan that places a heavy portion of the compensation on forecast accuracy, sales reps will pay little attention to meeting their forecast if they can putthat attention toward beating their quota instead. Many salespeople treat forecasts as “red tape,” and may actually resent spending time on forecasting their business.
For sales compensation plans to be effective, they need to be aligned with the behavior the business wants to reinforce. Monthly quota-driven compensation plans force the reps to care a lot about their monthly targets and how to achieve them.
Underlying this whole discussion is the desire to smooth out bookings during the quarter.Why is that important? And aren’t their other techniques to get customers to close earlier?
There are multiple benefits to smoothing out revenue. The most important is predictability. Because one of two successful financial exits is an IPO, it is worth noting that it is easier to get a high P/E ratio for a business with dependable, consistent growth rather than for one with erratic big swings in bookings.
But even before an IPO, the earlier business closes in a time period (month, quarter, year), the better the chance of making that target for the time period. Monthly quotas, set realistically, can motivate sales reps to smooth out bookings and support the business’ overall revenue goals.
What about other techniques?Jason Lemkin’s blog post suggests giving sales reps discretion to offer bigger discounts for business that closes early in the quarter. In an SaaS business, gross margins are inherently healthy, so why not do that?
It is certainly true that only monumental discounting will seriously affect the gross margin percentage of an SaaS business, and that metric is watched closely by investors in any type of business.
If you are running an SaaS business, and you want to grow a large, predictable business, closing business earlier in the quarter is a highly desirable goal.
However, what broad discounting will do is lower ASP’s over time, which lowers the size of the served available market. If the market a company is going after is huge, that may be fine. And if the average customer only buys once, then this may be appropriate.
But if the company expects lots of expansion business from its prospects, early discounts will unnecessarily lower the future price that customer is willing to pay, and limit the size of the resultant cash flows by a substantial amount. That is never a good thing.
If I have to set 12 quota targets per year rather than just four, isn’t that a lot more work for me?
No. Every venture-backed business I know has a yearly operating plan. Those plans set budgets for bookings, revenue and expenses by month. All one has to do is figure out how much quota over-assignment is optimal to have “on the street,” then disaggregate that number across all the reps.
And if one is already holding weekly forecast calls, one can talk about whether they’re going to hit their bookings number as well as their forecasts during the same call. It should not add any time to one’s day to use monthly quotas versus quarterly.
The blog suggested that the move from monthly to quarterly quotas is inevitable as the business grows. Is that inevitable?
I don’t believe so. I’ve even seen many companies transition from quarterly to monthly as they grew in order to improve confidence in sales forecasts for all the reasons listed above. One particular networking company I know uses monthly sales quotas and is generating more than a billion dollars in bookings.
Are there types of businesses where you would not use monthly quotas?
Sure. If I had a business where each deal was so large and so complex that a rep could only work two or three at a time (e.g., government or military contracts where the deal variables are multi-faceted and sales cycles are 2-4 years), then that business would probably not be improved by a monthly bookings quota. However, I am unable to think of a single SaaS business with that characteristic.
If you are running an SaaS business, and you want to grow a large, predictable business, closing business earlier in the quarter is a highly desirable goal. Sales management can be tasked with that, but driving a monthly bookings quota down to the reps and paying them on those monthly goals will cause them to switch their behavior at month’s end from indifference or mild annoyance to rapt attention to focus on beating that goal.
Do that and you’ll soon find yourself celebrating their (and the business’) wins as they sprint to the finish line every month, and not just every quarter.Featured Image: red rose/Shutterstock
A dilemma is a situation that offers two possibilities, neither appealing. Enter the unachievable sales forecast/quota dilemma. Mission Impossible, right? Not if we turn the question around on individual salespeople.
Over the past five years, a large number of sales compensation leaders have asked what to do when facing an unachievable forecast they are supposed to allocate out to their salespeople in the form of sales quotas. One possibility is to simply allocate out the national quota to salespeople, resigning a majority of salespeople to the fate of not achieving their individual quota—an unappealing outcome, to be sure, as it demotivates the sales force.
Another possibility is to allocate a lesser, more achievable number to the sales force. While salespeople will find their quota more achievable, finance will likely chafe at individual quotas that do not add up to the corporate number. Again, an unappealing outcome.
Is this simply an unwinnable situation? Throw up your hands since both options are equally unappealing? Or might there be a third way?
What if we allowed salespeople to pick their own quotas, within a predefined range? This concept was first introduced by IBM decades ago and we have seen a recent spike in interest in this approach. The big idea: You offer a range of individual quotas to each salesperson and allow individuals to select the quota he or she feels is the most realistic stretch goal. They own the goal.
I’m sure your mind is racing with the ways this scheme can go wrong. To prevent disaster, here are three must-haves if you are considering the "choose your own quota" type of plan:
- Meticulous Plan Design: In the plan design, assign the most lucrative payoff to choosing and hitting a high individual quota; similarly, do not reward the selection of a “sandbag” quota and grossly exceeding it. Also ensure that the incentive payouts will only add up to the incentive budget when the sales forecast is hit.
- Detailed Financial Modeling: There are so many combinations of individual quota selections and subsequent performance that accurately estimating the total sales incentive cost in hundreds of different scenarios is absolutely critical.
- Careful Rollout: The creation of the individual quota options for each salesperson is a very analytical exercise that must be done precisely. In addition, clearly communicating the plan design and the quota options is key to salespeople understanding their plan and quota options—and to their selection of the optimal quota for themselves and the company.
The "choose your own quota" plan is an extraordinarily innovative incentive plan design with many potential benefits. But it should not be entered into lightly. The execution required to effectively implement this plan should not be underestimated.
The upside of the plan is that it can make sales and finance both happy, an admirable outcome. So instead of attempting to solve the sales forecast/quota conundrum, consider letting individual salespeople solve the problem for themselves. The overall strategy is the company’s to plot, but each rep could determine the arc of his or her own story. How will your firm choose to proceed?