One of the big challenges businesses have is setting effective targets for their sales force. According to recent studies, around 50% of companies struggle with at least part of their target setting, failing to effectively reward the highest performers or choose the best methodology. It is critical to get sales targets right to keep top talent and capitalise on opportunities in the marketplace.
Correctly set targets will create a financial advantage for the company and motivate the sales force at the same time. When targets fail to achieve this, the entire compensation plan can be compromised. So target settings must be a central part of your sales compensation strategy, working together with other components to achieve your goals.
So let’s go through the most commonly used methodologies for target setting, with the advantages and disadvantages of each.
Sales Target Optimisation is important because the success of any business strategy depends on all levels of the sales organisation cooperating and functioning properly. Target setting is an integral part of strategy execution which, when done correctly, enables sales organisations to:
- Achieve sales goals : With a motivated sales staff and targets that support the sales strategy, sales objectives can be reached.
- Motivate salespeople : A specific goal that is challenging but attainable can be set for sales representatives and sales managers. It’s important that
they consider it to be fair.
- Achieve compensation objectives : When targets are fair, they reward performance and help identify your high performers, helping to retain top talent.
- Offer equal earning opportunity regardless of circumstance : It rewards the commitment, talent, passion and results of sales staff, regardless of the
local market circumstances.
- Remain flexible to changes in the market : When target settings are optimal, sales managers can quickly adapt to changes and respond to challenges.
Commonly Used Methodologies for Target Setting
The Flat Target Approach: This approach involves allocating flat targets, so the same commission rate goes to all sales representatives, regardless of their achievements. This approach can work for smaller sales teams or when the company has a market with unconstrained potential, but it’s not realistic for organisations with complex operations and objectives. While it is simple and easy to implement, it lacks performance-based rewards and inequitable targets, and doesn’t account for business insights.
Historic Target Approach: As the name suggests, this approach sets targets by looking at what has happened in the past and adding a projected increase. Because it’s relatively easy to calculate, compared to more complex models with an array of variables, this method is popular, with 48% of companies using it. Historic targets can be easily understood by the sales team and there’s no requirement for a lot of data or any business insights.
The problem with this methodology is that it only looks in the rearview mirror and doesn’t consider future opportunities or changing business objectives. This approach also punishes high performer, giving them a higher target to hit the following year.
The Maintenance and Growth Approach : This is a better, more comprehensive system than the previous two approaches, as it’s based on qualitative insights, using factors and weights to allocate growth over the baseline volume.
It is an effective approach as it’s driven more by market opportunity. But the challenge is to achieve consensus on which factors and weights will be used to form the model. The Maintenance and Growth Approach can also underestimate momentum from past sales.
The Regression-Based Approach: This is the approach I personally recommend, because it allows for high accuracy while at the same time, providing motivational and financial advantages. The challenge is that this approach is complex, requiring additional data, and it can be difficult to communicate to the sales team. These obstacles however, can be overcome with good systems, processes and expertise.
The 5 steps in regression-based target setting:
- The first step is to identify all the factors that impact sales : These can be either sales factors or non-sales factors.
a. Sales factors include historical product, market and share volume, plus historical growth rates.
b. Non-sales factors include method of payment, demographics, inventory levels and customer satisfaction.
c. Factors to avoid include salesperson tenure, previous period target attainment and skills rating.
- The next step is to build a regression model and evaluate the factors : Targets will drive results at this stage of the process. We then run the regression
model, eliminating all extraneous and cross-correlated variables and selecting the most important factors in the model based on key metrics (Between
2 and 4).
- Next we finalise and evaluate the model : With a quantitative analysis, followed by a qualitative analysis. The model is adjusted, based on business
insights, the market landscape and any changes we anticipate. Finally, we test the model to verify that it allocates goals correctly. Outliers
are identified and bias is removed, so that all sales reps enjoy fair targets.
- We then allocate goals : With the data on hand, we use the model to predict future performance and then translate that into contributions.
- Finally, we communicate targets clearly to the team: We ensure targets are communicated before the beginning of the goal period. Every sales rep should
understand his or her target and how it was calculated. They should also understand the trends showing why objectives are achievable. This step
is crucial to having a motivated sales team.
By taking these five steps you can achieve the following outcomes with Regression-Based Target Setting:
- An increase in accuracy
- A reduction in bias
- Fewer adjustments needed
- An improvement in communication
Poor target setting is one of the major causes of compensation problems in an organisation. Getting it right is crucial for organisations to meet their growth objectives. Regression-based target setting methodology is more technical and requires more expertise than other approaches, but It is the only one that really gives you financial control, increased levels of motivation of sales reps, and improved sales.
Because it requires the cooperation of different departments, optimising your company’s target setting process may be challenging, but change is imperative for organisations to stay competitive and flexible, and to successfully tackle the complexities of a changing marketplace.
We can help you Leveraging Change to Improve Your Outcomes
As the pace of change accelerates, many organisations find it increasingly challenging to drive sales performance effectively, through their people, processes, or technology.