Growth

“Everyone’s Freaking Out About Quarterly Quotas”

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Jason Lemkin

In SaaS companies in the very wide band from ~$1m to $40m ARR or so, the debate over Quarterly vs. Monthly Quotas comes up all the time.

And it especially comes up when you hire your First VP of Sales, because odds are, he or she will want to move from Monthly to Quarterly Quotas.

And if you do move to Quarterly Quotas — you’ll probably hate it as a Founder.  Because you’ll almost immediately move to a pattern whereby each quarter, you see 15-25-60.  I.e., of the quarterly quota, you close say 15% in the first month, 25% in the second month, and 60% in the final month.  The larger your ACV, the more extreme the ratio.  The more transactional your sale, the less extreme it will be.  But it won’t be 33/33/33, I can guarantee you that, once you move over.

Let’s be clear — once you move to Quarterly Quotas, you’ll see more revenue slide to the last month of the quarter.  Your stress will likely go up.  Because your real visibility (not Sony Baloney Pipeline visibility, but real visibility), will go down.

hold the line

And yet …

You gotta do it at some point.  Especially for your larger accounts.

Because in the bigger deals, if the sales reps close less than say 20-30 deals a year (the # of deals is inversely proportionate to the deal size), then they just aren’t going to fall ratably each month.  And as time goes on, and you segment your sales team into S, M and L … at least the L guys won’t ever be able to meet a monthly quota.  Not really.

So what’s to do?

  • Sometimes, folks try to create accelerators for deals closed in the first month of the quarter.  While that seems to work at the margin, the problem is that money has to come from somewhere.  It either drives up your costs higher than plan (= stress), or it forces you to net net lower sales comp in the other 2 months (counterproductive, maybe).
  • Another variant is to have a smaller monthly quota and larger quarterly quota.  The simple way to do this in our basic, first comp plan is not to pay any bonus in any month the rep doesn’t cover their costs.  So you have to close at least some portion of your quarterly quota in the first two months to get your full paycheck.  This doesn’t really move the needle here that much in the end, but in the early days perhaps can help without the Rob Peter to Pay Paul of the prior point.
  • Allowing more discounting earlier in the quarter can work.  This is pretty uncommon, but it can work wonders.  Once you have a system to control and automate discounting, if you “secretly” let reps discount more in the first month or two of the quarter, they will close more.  But — you need to be OK with the discounts.  And even with a CPQ system, it’s hard to hold the line here.
  • Trust in your VP of Sales, and ask her to figure it out.  This is the best answer.  Let her figure it out.  Tell her you need more predictable revenue, and that you want to hold her to X% of the revenue for the quarter to close each month.

I wish I had the perfect answers here, I don’t.  But I  have four ideas above.  Share your learnings here as well.

When you are at $100m ARR, you’re gonna be stuck with Quarterly Goals and Quotas unless you have a hyper-transactional model.

But if you can force the team to sweat it out with Monthly Quotas as long as possible — you’ll have much better visibility, and less variability, as CEO.  It’s worth holding the line as long as you can, until you see it no longer matters.

Published on June 5, 2015
  • Here is a radical idea: abandon quotas altogether.

    If you have clear minimum performance expectations, a low base / bonus OTE ratio, and a sales plan that really only gets folks into the money when they’re performing above target, this could potentially be a good option.

    Why? Bottom performs will get paid very little and eventually attrit out. Top performers will stick around and keep selling harder and harder to get into the top-tier accelerators. Best of all, the company doesn’t have to worry about setting quotas and the back-and-forth rigamarole that usually entails.

    • Jason Lemkin

      Yeah you can do that for a while, I basically did. But it turns out even if you do it this way and “quotas” per se become less important, people still want to know their hurdle and thus ‘quota’ each month. Even if you don’t do true quotas (and yeah, in some ways I didn’t), they need to have a hurdle each month.

  • If team is large enough, maybe you just alternate qtr end dates so SAE’s qtr ends are staggered

  • Larry

    Quotas serve two purposes — one to drive compensation, and the other to drive salesforce productivity. To hit a certain ACV target, you have to figure out how many heads (and the corresponding cost) it will take you to get there. Add to that the complex timing considerations of when the revenue comes and even further the quarterly rigor if you are a publically traded company I find it very difficult to effectively advocate for monthly targets that are realistic.

    With that said, I do tend to adjust targets in months 1,2 — and yes, with the large segment it’s very difficult. But recognize this — you also have to be able to create sense of urgency on the part of the customer — and that’s often very difficult to do in the first two months of the quarter, unless you have a strong ‘impending event.’

    Bottom line — focus on sense of urgency every day, every week and every month as a sales leader and that’s how you’ll get the most predictable results. If sales leaders are lax in months 1 and 2, so will the results.

    • Jason Lemkin

      Agreed. And yet … as a CEO, I don’t want quarterly quotas for the exact reasons you are stating, until I absolutely have to 🙂

  • Poya

    As a Sales Rep. I absolutely love Monthly Quotas if the total ACV is less than $ 10K-20K. And here is why: As a Sales Rep – you can use the end of the month rather than end of the quarter to incentivize & build urgency in pushing deals forward.

    In return – I expect to get rewarded for my efforts if you’re consistently killing it month after month.

    • Jason Lemkin

      yeah. it breaks down a bit with the really big ACVs, but incentives can be well aligned at smaller ACVs as you note, great point.

  • Although great in concept, one big thing that’s missing in this type of analysis and any attempts to have a more even spread in monthly revenue – buyer preferences & patterns. The tech industry has trained buyers (esp. on the larger deal size side) to wait for ends of quarters and fiscal years to get the best deals. Even attempts to even things out with quarters that end on non traditional months have not really worked.

    Moving to subscription models has definitely helped move away from larger, infrequent, multi-year deals to smoother revenue, but the end of quarter rush persists.

    At the Small and Medium deal sizes, the buyers tend to purchase when it’s convenient for their business to absorb technology, fit into their timelines, and have closer alignment to impending events that are driving decisions in the first place.

    In most large enterprises with large deal sizes, that’s not the case. Procurement process and business requirements are nearly as well aligned as we’d like to think.

    TL;DR – can’t fix this until buyer side behavior changes as well.

    • Jason Lemkin

      I know that’s “true” but I also know that if you hold the team to monthly targets, you still sell more in Month 1 and 2. You can’t completely change buying patterns but this ends them as an excuse. Some VPs only buy at month end. But when I was a VP in F500, I didn’t care, only about my overall budget. It’s varies. Quarterly allows excuses. Even when those excuses are sometimes, even most times, true.

      • Agreed. Just because it’s not perfect, doesn’t mean we shouldn’t try and benefit from any evening up of monthly revenue that we can get.

        We all like suspense, but I’d rather have 12 suspenseful ends of month, than 4 suspenseful ends of quarter 🙂

  • Brendon

    You absolutely should run it monthly for as long as you can. And, generally, your SMB and midmarket teams SHOULD ALWAYS BE MONTHLY. Forever.

    Your enterprise/major accounts team has to be managed a little differently. They have to have monthly targets as well, but with an understanding they are really measured on the quarter.

    Guess what, if your enterprise reps are any good, they will see the SMB/midmarket reps closing deals everyday and they will “sort of” fall into that cadence as well. You have to guard against shortchanging deals in favor of expediency on the high end.

    What you’ll learn over time is that your best SMB reps will start to close bigger and bigger deals much faster than their enterprise counterparts. Which means, when ready, they should probably be moved up, or just flat out may be better sales people than your ex Oracle/Salesforce/ etc folks that are out in the field.

  • Great discussion on an issue that has continued to age me well ahead of my years.

    Historically we have closed about 10-15-75%. To try and smooth the quarter, I have tried monthly transaction requirements. 15% of a reps bonus is tied to transactions per month. If you hit all 3 months you get that 15% plus a “consistency” bonus (carrot and stick in a way). Reps hated it because 1. They couldn’t accelerate 15% of their variable and 2. Even if they hit their ACV target by quarter end but missed transactions, they got dinged a portion of their bonus.

    We eliminated that after 3 quarters. Now we are trying a carrot-only approach of a month 1 and month 2 contest for highest rep transaction count. First and second place reps earn $1000 and $500 gift cards respectively.

    Reps like this but it isn’t really changing behaviors the way we need to.

    Another thing I want to try is monthly commissions. Today we pay quarterly. If we pay bonuses monthly, will that incentivize reps to close more ACV earlier in the Q?

    Thoughts?

    • Jason Lemkin

      I would definitely stay paying monthly, tomorrow, if you want to align around monthly targets. I also agree that sticks don’t work right here. You have to do it with carrots. A carrot payment, plus CLEAR monthly quotas that EVERYONE can see in Salesforce, AND monthly payouts … is my best idear at the moment …

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