How to set volume-based sales quotas? (Part I)
“What is a sales quota?” - Majority of industries today are trying to find out the most optimal quota methodology for their needs. However, life sciences and pharma organizations have evolved and moved ahead. Quota setting or Target setting is a standard task associated with IC planning in these industries today. However, the complexities, scale, and dynamics in this space mandate the need for fair and achievable quotas. How do you evaluate quota fairness? Our aim with this series of blogs is to check the fairness of a quota set using different types/forms of Product volume(actual, absolute, and growth) as the criteria.
An ideal quota is one where Territory Achievement does not have any relationship to the Territory size. Essentially whether the territory size is big or small it should have equal opportunity to earn.
In this 1st blog, we will use Baseline Product Volume to test quota fairness. In layman's terms, Base Product Volume (BPV) is the volume of sales achieved in a specific territory.
We start with determining a historical test period to evaluate the fairness of quotas, i.e. a historical period with stable and achievable sales that can be used as a benchmark to evaluate the current quota set. In this case, we used the Aurochs Quota Manager to set quotas for the test period and calculate Territory Achievement.
Quota Fairness Test 1 The 1st way to evaluate the fairness of your quotas is by creating a scatterplot of Territory Achievement against the Baseline Product Volume of the test period.
Correlation is a measure of the direction and strength of the relationship between two variables and a negative correlation tells us that the decrease of one may increase the other and vice versa.
The above out-of-the-box scatterplot shows the relationship between Territory Achievement and Territory Size. Looking at the scatterplot we can say that:
- The achievement for small and medium-sized territories is pretty evenly spread out
- Territories with BPV lesser than 900k are exceeding their targets
- Achievements start dipping and struggle to meet the target as territory sizes grow
- The quota set is fair for almost all territories but a little aggressive for a small group of large territories.
- This can either be handled as a part of the quota refinement process or by adding a small tweak to the methodology/indices used for quota setting
Quota Fairness Test 2
The second way to evaluate quota fairness is to bucketize the product volume using the 20-60-20 analysis. This method is vastly used for employee performance analysis wherein the audience (achievement in this case) is distributed in small, medium, and large buckets. We then used the out-of-the-box capability to create a boxplot of each bucket with their territory achievement.
A boxplot or a box and whisker plot tells you how the values of a variable are spread out where the box has 50% of the concentration and the whisker tells you the top and bottom 25%.
The above box and whisker plot tells us the spread of territory achievement for each bucket. These buckets have been created based on the size of territory (BPV); small, medium, and large.
- Small territories (<20%ile) have an achievement spread between 90% - 99% approx. Around 50% of territories have an achievement of less than 95%
- Medium territories (20%ile < M <80%ile) have an achievement between 93% - 105% approx. There is an even spread of territories as 100% seems to be the median achievement here
- Large territories (> 80%ile) have an achievement between 99% - 105% approx. Over 50% of the territories in this bucket are achieving more than what seems to be the median at 102%
- The quotas are biased towards the larger territories and smaller territories are finding it difficult to meet their quotas
- Similar to the scatterplot example, we need to use the quota refinement process or tweak the methodology to move quotas from smaller territories to larger ones and achieve an even spread
In conclusion, we need to evaluate and make sure that the quota set for the field force is fair and achievable. An aggressive quota set not only demotivates the field force but can also be a cause of high attrition.
In our next blog, we will discuss how we can determine quota fairness using absolute volume growth in territories.