Sales Force Productivity Conference 2014 15-17 September, Atlanta, Georgia Sales Management Association Quota Setting Breakout Chad Albrecht, CSCP Principal ZS Associates © 2014 ZS Associates -1- SMA 2014 - ZS Albrecht - Quotas Chad Albrecht, CSCP Principal ZS Associates [email protected] © 2014 ZS Associates -2- SMA 2014 - ZS Albrecht - Quotas ZS Associates is a global leader in sales and marketing consulting, technology, and outsourcing More than 30 Years Helping Companies Grow Broad and integrated service portfolio delivers high impact and exceptional value Full Range of Commercial Services Marketing Worked with more than 1,200 clients in over 70 countries Sales Commercial Strategy More than 2,800 professionals in 21 offices worldwide Operations & Technology Consulting Capability Building Outsourcing BARCELONA • BOSTON • CHICAGO • EVANSTON • FRANKFURT • LONDON • LOS ANGELES • MILAN • NEW DELHI • NEW YORK • PARIS • PHILADELPHIA • PRINCETON • PUNE • SAN DIEGO • SAN FRANCISCO • SÃO PAULO • SHANGHAI • TOKYO • TORONTO • ZURICH © 2014 ZS Associates SMA 2014 - ZS Albrecht - Quotas Quota Setting Workshop - Learning Objectives 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 © 2014 ZS Associates -4- SMA 2014 - ZS Albrecht - Quotas Quota Setting POV Quota setting is a top issue regardless of industry Pharma Rank Issue Tech Rank Issue Med Devices Rank Issue 1 Data Quality 1 Quota Setting Fairness 1 Quota Setting Fairness 2 Quota Setting Fairness 2 Sales forecast accuracy 2 Data Availability/ Accuracy 3 Sales Crediting Accuracy 3 Plan Complexity 3 Paying for Performance 4 Sales Forecast Accuracy 4 Data Availability 4 Developing motivating plans 5 Incorporating Managed Care 5 Plan Communication 5 Plan Complexity © 2014 ZS Associates -5- SMA 2014 - ZS Albrecht - Quotas Quota Setting POV Successful quotas provide a reasonable – but not unrealistic – amount of stretch Quotas need to provide a reasonable, but not unrealistic stretch Dollars Expected Territory Sales Overpay Range Loss of Motivation Range Territory Incentive Pay Low, Meaningless Goal Good Effort Goal Peak Effort Goal Impossible to Achieve Goal Territory Goal © 2014 ZS Associates -6- SMA 2014 - ZS Albrecht - Quotas Quota Setting POV Based on our experience, sales quotas are inaccurately set for one of three reasons National Forecast Too High Dispirited team Suboptimal sales High turnover 2 2 National Forecast Too Low Unchallenged team Suboptimal sales Overgenerous payouts 3 3 Misallocation of National Forecast Down to Salespeople Same issues as national, at a local level Fairness issues within the team 1 Salesperson quotas may be off-base due to an inaccurate national forecast AND the misallocation of that forecast © 2014 ZS Associates -7- SMA 2014 - ZS Albrecht - Quotas Quota Setting POV There are a number of common signs that may reflect a suboptimal quota setting methodology © 2014 ZS Associates 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 -8- SMA 2014 - ZS Albrecht - Quotas Quota Setting POV Effective quota-setting processes include a variety of common characteristics Territory Opportunity Rigorous Methodology Manager Refinement Accuracy: simulate history and correlate to actual sales results Reflect on-the-ground reality and increase sales manager buy-in Geographic opportunity (population demographics using census data, aggregate D&B data) Fairness: group similar territories and check for historical biases Limit degree of change and require explanation Product Sales Potential ($) % GOAL ATTAINMENT CURRENT YEAR Account opportunity (contracting status, D&B data) 160 140 120 100 80 60 40 20 Procedures, Installed Base, Etc. © 2014 ZS Associates Low Medium High PREVIOUS-YEAR GROWTH -9- SMA 2014 - ZS Albrecht - Quotas Best in class quota setting is based on a 5-step process © 2014 ZS Associates - 10 - 1 Validate National Forecasts 2 Determine Quota-Setting Method 3 Simulate & Finalize Method 4 Refine Quotas 5 Communicate Quotas SMA 2014 - ZS Albrecht - Quotas Quota Setting Process A valid and realistic national forecast is a critical input to effective and motivational sales force goals Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas Is % growth with historical norms? ? Is the forecast realistic? Does market assessment match external data? ? Do the forecast and quota data match? Forecast/quota geo/channels aligned? Is it out of date or based on wishful thinking? Does forecast time period match quota period? Forecast/quota segments aligned? Does the forecast vary by segment? ? What assumptions are in the forecast? Anticipated events taken into account? Seasonality? Are product adoption assumptions reasonable? © 2014 ZS Associates - 11 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Quota setting methods should be evaluated and selected based on 3 primary criteria Validate National Forecasts Determine Quota-Setting Method Predictive Power Simulate & Finalize Method Refine Quotas Communicate Quotas Do the targets accurately predict the actual sales at a location level? Is the distribution (range) of growth per territory reasonable? Fairness Is the attainment distributed fairly? Do any factors other than rep performance bias the resulting attainments Is the method understandable? Simplicity © 2014 ZS Associates Is there a simpler method that produces very similar results? - 12 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process First we should identify the timeframe for which data is needed Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method 2013 N D Refine Quotas Communicate Quotas 2014 J F M A History for Testing M J Gap 2015 J A S O N D J F M Quota Testing Period History for Quota Setting Gap Quota Setting Period Four step quota SIMULATION process Two step quota SETTING process 1. Use history and an appropriate gap to set quotas for the “simulation period” 1. Using best method from the simulation process, shift the time period to the “quota setting 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 © 2014 ZS Associates A 2. Scale the quotas based on the sales forecast A shorter gap between quota period and history period increases quota accuracy - 13 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Then we start to understand territory behavior by correlating sales with other metrics Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Current Sales (R2 Values) 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 is moderately correlated with prior period IT Sales Current 12 Month Sales (M) Low Correlation Example Current 12 Month Sales (M) High Correlation Example Prior 12 Month Sales (M) © 2014 ZS Associates Product A and Product B are highly correlated with prior period sales (Jul ‘14 to Oct ‘14) Metrics Communicate Quotas White Collar Workers (M) - 14 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process We then begin to evaluate different methodologies Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas Quota-Setting Methods Ease of Calculation / Communication Simpler Common growth - Allocate national target based on the fraction contributed by the territory to the national sales in previous time period Most Common 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 Moderate 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 More Complex Regression - Regression techniques are used to calculate the importance of different factors in predicting future sales Other methods include bottom-up forecasting, sales response and fair share © 2014 ZS Associates - 15 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Maintenance plus growth method Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas How it works: Territory-level Market Share Last Year Actual Share of uncaptured market potential Maintain last year’s sales Territory A © 2014 ZS Associates Next Year Quota Territory B Territory A - 16 - Territory B SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Maintenance (100% of last year) plus growth method Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas 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 ? © 2014 ZS Associates Expected growth in National sales = 100 How will net quota of Territory A be computed? Quota of Territory A = 170 + 22% of 100 = 192 - 17 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process In a variation of the method, we could account for carryover – that we should maintain at least a given % of sales Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas Carryover is the sales generated by promotional effort in preceding years Impactable Sales Impactable Sales (due to sales force promotion) Last Year’s Sales Carryover Sales Carryover Sales Carryover Sales (due to loyalty and other types of promotion) YR1 YR2 YR3 YR4 Carryover recognizes that the return on promotional investment is not immediate Carryover recognizes that not all sales are due to the sales force alone © 2014 ZS Associates - 18 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Maintenance (at carryover rate) plus growth method Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas 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 ? © 2014 ZS Associates 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 - 19 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Weighted index method Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas 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 © 2014 ZS Associates 14% x 0.3 + 13% x 0.6 + 33% x 0.1 = 15.3% - 20 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process We then simulate quotas to test the different quota setting methodologies Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method 2013 N D Refine Quotas 2014 J F M History for Testing A M J Gap 2015 J A S O N D J F M A Quota Testing Period History for Quota Setting © 2014 ZS Associates Communicate Quotas Gap Quota Setting Period Use 6 – 12 months of history and a 2-month gap to set quotas for July – October Compare the sales for July – October against the quotas that were set Continue to adjust quota setting parameters until results are fair Check to see whether any systematic biases exist (i.e. fairness testing) - 21 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Quota-setting methods should be quantitatively tested to ensure both accuracy and fairness Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Fairness Evaluation Predictability of Future Sales Degree of Bias Across Territory Groupings The Relationship of Quota Achievement to Key Characteristics 20,000 % Quota Attainment Current Year 160 R2 = 94% 16,000 Q1 Sales Communicate Quotas Accuracy Evaluation The Relationship of Quotas to Sales 12,000 8,000 4,000 0 140 120 100 80 60 40 20 0 5,000 10,000 15,000 20,000 Low Q1 Quota © 2014 ZS Associates Refine Quotas Medium High Previous-year Growth - 22 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process You can compare methodologies for overall and individual variations in performance Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Distribution of Quota Attainment Weighted Index Method # of Territories 25 20 20 16 15 8 1 Communicate Quotas Maintenance + Growth Method 18 13 12 10 5 Refine Quotas 10 8 6 4 6 4 1 0 <70% 70%-80% 80%-90% 100%-110% 110%-120% 120%-130% >130% Quota Attainment (%) Territories with Lowest Quota Attainment Territories with Highest Quota Attainment (Weighted Index Method) (Weighted Index Method) Rep Name Territory Weighted Index Method Maint. + Growth Method Rep Name Territory Weighted Index Method Maint. + Growth Method Janet Reno 5047 76% 78% John McCain 5098 161% 177% Leon Panetta 5025 74% 79% Bill Clinton 5040 148% 165% Mark Sanford 5194 73% 76% Michelle Bachman 5113 136% 139% Tim Pawlenty 5037 71% 76% John Kerry 5021 135% 133% Sarah Palin 5193 63% 62% Condi Rice 5196 129% 131% © 2014 ZS Associates - 23 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Once you land on a preferred method, set quotas for the period in which you want quotas Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method 2013 N D Refine Quotas Communicate Quotas 2014 J F M A History for Testing M J Gap 2015 J A S O D J F M A Quota Testing Period History for Quota Setting Once retro-simulation is completed: N Gap Quota Setting Period 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 © 2014 ZS Associates - 24 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Field sales management should be allowed to review and refine their quotas Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas 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 © 2014 ZS Associates - 25 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Communication of quotas is crucial to overall plan success Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas • Explain quota methodology as carefully as the compensation plan • Supporting materials to answer field questions 1 Clear Methodology Effective Communication of Quotas 2 3 Early Quota Distribution © 2014 ZS Associates Individual Quota - 26 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Communication of quotas is crucial to overall plan success Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas 1 Clear Methodology Effective Communication of Quotas Late quotas = low motivation levels, field distrust 2 3 Early Quota Distribution © 2014 ZS Associates Individual Quota - 27 - SMA 2014 - ZS Albrecht - Quotas Quota Setting Process Communication of quotas is crucial to overall plan success Validate National Forecasts Determine Quota-Setting Method Simulate & Finalize Method Refine Quotas Communicate Quotas 1 Clear Methodology Effective Communication of Quotas 2 3 Early Quota Distribution © 2014 ZS Associates Explain how the salesperson’s quota was calculated Individual Quota - 28 - SMA 2014 - ZS Albrecht - Quotas Thank You! © 2014 ZS Associates - 29 - SMA 2014 - ZS Albrecht - Quotas
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