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How to calculate Sales Quota + Free Template

We believe that the way that Sales quotas are calculated is wildly wrong, and it's leading to underserved teams and flattened attainment, and it's all because of how they are being derived and calculated.


We've just released a brand new Sales Quota Calculator (you can grab it at the bottom), we're going to break down the maths of it and explain why we think everyone needs to rethink Sales Quota.



What's going wrong?


Currently quota is seen the cause of revenue, and that setting it has an impact on overall company revenue, with businesses frequently raising quotas as an attempt to increase overall company revenue.


The problem is that revenue doesn't work this way, as sales reps aren't magicians, instead they work from opportunity.


In doing this, you end up with a situation of targets created based on what is hoped can be achieved, instead of being set based on what is possible.


Sales quotas should carry a path to target, instead based on the capacity that sales reps have to create and handle opportunities. This capacity is dependent on the whole responsibilities of their role, and the current business performance across average deal sizes, sales cycle lengths and average sales conversion rates.


The maths of sales quotas isn't actually that complicated, and it opens up the possibility to model all kinds of other commercial strategies and efficiency drives:



Calculating Annual Number of Sales Cycles


The starting point for calculating a sales quota is to understand how many full sales cycles a sales rep is capable of handling.


This is the number of sales cycles that can occur within one single year, all based on the time it takes to open an opportunity and close it into a deal. If your sales cycle is 12 months long, it would mean that you could only process one sales cycle per year.


With a 6 month sales cycle you could run through 2 cycles back to back.

The maths for this is simple:

Number of Sales Cycles = Working Weeks (Annually) / Average Deal Length (Weeks)

Example:

Number of Sales Cycles = 48 Working Weeks / 12 Week Average Deal Length = 4 Sales Cycles

Working Weeks are the total number of weeks that a sales rep is available for work and so excludes things like holiday, and so is:

Working Weeks (Annually) = 52 Weeks (Annually) - [ Holidays (Weeks) + Other Absences (Weeks) ]

Example:

Working Weeks (Annually) = 52 Weeks Per Year - [ 4 Holiday Weeks - 0 Other ) = 48 Working Weeks


Calculating Sales Rep Capacity per Cycle


Now you know how many sales cycles a rep can go through per year, you need to calculate how many opps they can handle concurrently in each cycle. 

Again, the maths for this is simple:

Sales Capacity = Sales Working Hours (Weekly) / Weekly time spent per opportunity (Hours)

It's important to note that the units for sales capacity in this formula is opportunities.

Let's look at some example maths:

Sales Capacity (Opps per Week) = 33 sales hours / 1.5 hours per opportunity = 22 Opportunities

The math looks at how much time a rep can dedicate to sales activities that turn opportunities into revenue, including:

  • Discovery calls

  • Demo calls

  • Proposal writing

  • Follow up

  • All other deal linked activity

 

Where we define sales working hours, we're meaning the weekly working hours less any hours lost to non opportunity handling work, this means you should exclude pipeline generation from this. 

Sales Working Hours = Working Hours - [ Time in non-sales meetings + Prospecting + Other Admin ]

Example maths:

Sales working hours = 40 hours - ( 2 hours of meetings  + 4 hours prospecting + 1 other ) = 33 sales hours

Calculating quota in this way through linking it to sales capacity means that you can put a dollar cost on things like internal meetings (like 1:1's, standups etc.) as well as on prospecting.


It also means that you can start to model the impact of reducing sales complexity as this would reduce the time spent per deal which in turn increases the volume of opportunities that can be handled.


The same goes for sales cycle, in that a shortening sales cycle increases the capacity of opps that a rep can handle throughout the year.


Our new calculator can help to illustrate how increasing the need for a rep to prospect decreases their overall capacity to handle pipeline opportunities, which is throws into question the business case for 360 reps vs. AE/SDR models.


Calculating Total Annual Sales Rep Capacity


So now that you calculated how many cycles a sales rep can go through per year, you can then calculate how many opportunities they can handle simultaneously in each cycle. 

The maths for this is again very simple:

Sales Capacity (Annual) = Sales Capacity (Weekly Opps) X Number of annual Sales Cycles

Example:

Sales Capacity (Annual) = 22 Opps Weekly X 4 Annual Sales Cycles = 88 Opportunities Annually

We now have a total capacity figure for how many sales opportunities a rep can handle throughout the year, and it's worth pointing out that this is a calculated maximum capacity


The reason we point this out is that by having a quota larger than this assumes that the rep can handle more than their ongoing capacity of 22 opportunities, either through higher deal sizes than average, higher conversion rates than average, shorter deal cycles than average, working more hours than average etc. etc.


You get the idea, but it means that you'll be running reps overcapacity will result in either burnout, or a decrease in quality of work, likely leading to decreases in the sales performance of the rep.


Either way, it's a false assumption to be calculating based on numbers anything other than your current live averages, and by burning out reps, it can lead to a net decrease in sales conversion rates and deal sizes.

Calculating Sales Quota


We now have the sales capacity as a function of opportunities and you can calculate what that equates to in terms of revenue.


To do this, we simply bring in a few deal averages:

Sales Quota (Annual) = Sales Capacity (Annual Opps) X Average Conversion Rate X Average Deal Size

Example :

Sales Quota (Annual) = 88 Annual Opps. X  23% Conversion Rate X  $35,000 Deal Size = $708,400

Remember - This is based on the rep being at 100% capacity throughout the year, and so would carry a 100% utilisation also.

Put into non maths terms:

Sales Quota is the sum of producible revenue, based on handling the average number of opportunities at average capacity, for the average length of time, won at the average closed won rate

 

Sales capacity essentially dictates the volume of opportunities that can be managed at any one point in time, and the maths has to be based upon the current business averages for the market or vertical that the rep sits in.

 

If the volume of opportunities generated is not equal to the capacity used to calculate quota, revenue will overall be less than quota.

 

What this means in real world terms is that if any proportion of a sales quota comes from lead flow that is out of a sales reps control, and that lead flow slows to a point that it is lower than the amount used to calculate quota, that sales rep will not achieve target without having to do additional work to generate leads themselves to deal with the shortfall - This will in return reduce their capacity to effectively handle opportunities, and so will either mean that they drop the ball in prospecting when pipeline fills back up or handle existing pipeline with an effectiveness beneath average.

 

Ultimately, this means that when considering an increase to overall targets, it should only be done off the back of proven initiatives that increase their capacity and contain additional opportunity flow.


If not, their overall capacity could go up, however the opportunity needed to utilise the capacity won't exist, and so it widens the attainment gap from goal, which is typically harmful to team morale & culture.



Overall Sales Quota and Capacity Formula


Pulling all the formula together, the math isn't particularly difficult to use however it does require an understanding of the work involved with the sales role, and current sales performance - Whoever is calculating it really should have an understanding and appreciation for the amount of work that is involved to achieve it, and so it's a good thing, however it's a potential culture shift depending on the department involved.

The full revenue formula is as follows:



sales quota target calculation formula

Wrap up & Template


This is naturally a very different approach to sales quota compared to how it's traditionally been calculated, especially when comparing to top down approaches of the past (and unfortunately still the present) By using this approach you can build sales targets based of an achievable path to goal, and build commission plans on top of them that leads to more motivated reps

We've built a spreadsheet template that incorporates all of the maths of this, into a simple plug and play Google sheet that you can make a copy of. You can grab it on the link below.






FAQs


1. Why is the current method of calculating sales quotas is wrong?

The current method is wrong because it often sets quotas based on desired revenue outcomes rather than the actual capacity and potential of sales reps. This approach can lead to unrealistic targets and underserved teams.


2. How are sales quotas traditionally set?

Traditionally, sales quotas are set with the assumption that higher quotas will directly lead to higher revenue. This method does not account for the actual working capacity and opportunity handling abilities of sales reps.


3. What is the main flaw in the traditional approach to setting sales quotas?

The main flaw is that it doesn't consider the realistic capacity of sales reps, including their ability to create and handle opportunities based on actual working conditions, deal sizes, sales cycle lengths, and conversion rates.


4. What should sales quotas be based on?

Sales quotas should be based on the capacity of sales reps to handle opportunities. This capacity includes their total responsibilities, the average deal size, the length of the sales cycle, and the average conversion rate.


5. How do you calculate the number of sales cycles a sales rep can handle annually?

The number of sales cycles is calculated using the formula:


Number of Sales Cycles = Working Weeks (Annually) / Average Deal Length (Weeks)


Example: If there are 48 working weeks in a year and the average deal length is 12 weeks, the number of sales cycles would be 4.


6. How do you determine the working weeks for a sales rep?

Working weeks are calculated by subtracting holidays and other absences from the total number of weeks in a year:


Working Weeks (Annually) = 52 Weeks (Annually) - [ Holidays (Weeks) + Other Absences (Weeks) ]


Example: If there are 4 weeks of holidays, the working weeks would be 48.


7. How is the sales capacity per cycle calculated?

Sales capacity per cycle is calculated using the formula:


Sales Capacity = Sales Working Hours (Weekly) / Weekly time spent per opportunity (Hours)


Example: If a sales rep has 33 sales hours per week and spends 1.5 hours per opportunity, their capacity is 22 opportunities per week.


8. How are sales working hours defined?

Sales working hours are the total weekly working hours minus the time spent on non-opportunity handling activities such as meetings, prospecting, and other administrative tasks.


9. How do you calculate the total annual sales rep capacity?

Total annual sales rep capacity is calculated by multiplying the weekly sales capacity by the number of annual sales cycles:


Sales Capacity (Annual) = Sales Capacity (Weekly Opps) X Number of annual Sales Cycles


Example: If the weekly capacity is 22 opportunities and there are 4 sales cycles per year, the annual capacity is 88 opportunities.


10. How is the annual sales quota calculated?

The annual sales quota is calculated using the formula:


Sales Quota (Annual) = Sales Capacity (Annual Opps) X Average Conversion Rate X Average Deal Size


Example: With 88 annual opportunities, a 23% conversion rate, and an average deal size of $35,000, the annual sales quota would be $708,400.


11. What factors should be considered when setting a sales quota?

Factors include the average number of opportunities a rep can handle, the average time spent per opportunity, the average conversion rate, and the average deal size. It's crucial to base these on current business performance metrics.


12. What is the impact of unrealistic sales quotas on sales reps?

Unrealistic quotas can lead to burnout, decreased quality of work, and lower sales performance. It can also harm team morale and culture by setting unattainable goals.

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