06 Mar Why do sales leaders set individual quotas in 2018?
In a guest article for Sales Confidence, Tom Castley from Apptio tells us how we could improve compensations for SaaS salespeople in 2017.
I’ve been running SaaS sales teams for over 15 years now. One of the things I like best about working in the SaaS and startup arena is that you don’t have to do things the way they’ve always been done. We’re forward-thinking, open-minded people who like to move quickly, so if you see a better way to achieve a goal, it’s easy to go and try it. Or at least, it should be.
In a series of articles for Sales Confidence, I’d like to spell out why some of the things we take for granted in SaaS sales could and should change. I’d also like to present some alternatives. Number one? Sales quotas.
The old way
Considering we’re supposed to be such a forward-thinking industry, it’s funny that most SaaS startups use the same system of individual sales quotas that they’ve used for decades in every other industry.
The company decides how much money they want to bring in per year. £10 million, for example. After that, they decide how many salespeople they want, let’s say 10. (It’s hard to know how many people to hire at the beginning.) Then, they split that revenue 10 ways to create a target. £1 million each.
There’s little thought to whether these targets are attainable across the team, or whether, at the startup stage, sales are even possible. There’s little thought to how much commission you’ll have to pay, or what you want your best people to earn. It’s a basic calculation. It’s worked for years so it’ll work now. Right?
Drawbacks to the tried and tested
There are many disadvantages to the system, which makes it all the more strange that more people haven’t tried to fix it.
Firstly, unattainable targets are a massive demotivator for a salesperson. If in our story, the salesperson knows they have no chance of getting to £1 million, will they try hard to even get to £750K? Or, will they get to somewhere around £600K and then take their feet off the pedal? Worse still, do they just decide to quit leaving you with a massive hole to fill?
Salespeople join startups because they believe in the product or service they’re selling, but they also want to make a ton of money and progress their career too. Do you really want salespeople moving on from your startup, but struggle to secure a better job because they haven’t made quota in 3 years? You don’t want to mess up their careers for no reason, do you?
Next, not all sales territories are created equal. One of your 10 salespeople, with the territory you assign for them, may cruise to their £1 million target and beyond, while others may struggle to put a dent in it with their available prospects. When you’re at a startup, it’s sometimes difficult to know where the best territories are. Why penalise your salespeople while you figure it out?
Here’s a thought. Instead of configuring territories every year, why not assign a territory once a quarter? If a rep finds a deal they run it. All the accounts that they don’t go back into the pot. You’d be amazed at how much quicker reps will triage a territory if they know they’ve only got 3 months to find the gold before it’s all change. The key for any startup is to cover as much of the territory fast, but because all salespeople are different, you get the added opportunity to cover them in different ways.
Finally, when you’re starting a business, you rarely understand how long it’s going to take you to start bringing in revenue. Did you know that on average, it takes a new sales rep 9.4 months to make their first sale? Then, it takes a further 5 months to become fully productive. Have you taken that into account when assigning your sales quotas and planning overall sales?
Solutions to these problems
OK, if traditional individual sales quotas should be consigned to history, what should replace them?
Firstly, rather than arbitrarily individual quotas, ask yourself some questions to help you work out your numbers:
- If you want to make a certain amount of money this year, how much are you willing to pay to get that business in?
- How much money do you want to spend on sales commissions?
- What do you want your top sales rep to earn?
- What do you want the average rep to earn?
- How long do you expect it to take get your sales process to full functionality?
- Should every sales rep have the same quota?
When you know the answer to these questions, you’ll have a clearer picture of what you can do.
To combat unattainable targets, let’s go back to our hypothetical startup. If you want £1 million from each salesperson, but on average they’re only billing around £600K, why not make £600K the target? Once your reps have made target (and have big smiles on their faces) you can aggressively accelerate their commission between £600K and £1 million to help them get to the place you really want them to. Reps that beat target are better because they help you exceed your VC’s expectations.
After they’ve reached this milestone, put a decelerator on after £1 million. Just make sure it fits in with the total you’ve allocated for commissions, and your financial model for CAC (Cost to Acquire a Customer).
Regarding the time until you make your first sale at a startup, be creative. Why not incentivise your reps to get up to speed? Pay bonuses for non-revenue based targets. Don’t be one of those startups that pay a 3-month draw to get reps into the company. Make the draw conditional on activities which will ultimately lead to mutual success, such as certifications, or the size of their pipeline.
A 3 months draw is a waste. Spread it out across the, on average, 9 months that it will take you to start making sales, or give them 13 months to start making their quota.
Try and test
There are some ideas which may help you build a happy, optimally-functioning sales team, without too many variable payments interfering with your plans. However, you have to find a system that works for you, your startup and your team.
Why should we do what we’ve always done, just because we’ve always done it? It’s 2018, and we’re in the SaaS industry. We should be innovating, leading the way. Like you do with your software, try new things, find what works and what doesn’t. Communicate everything with your team and bring them with you, you’ll find the right path.
Remember the one golden rule. Commissions drive behaviour. Just make sure the behaviour you’re driving is in alignment with your corporate goals.