Target setting aligned to business objectives

Setting sales targets – a view from management and from the sales team

Sales targets are expressed in a variety of ways with common examples being; revenue, margin or number of units sold.  Targets may be set at the point that an order is taken, when the product has been delivered or the service has commenced or even when the customer pays.

Targets should be set taking account of any factors that could distort actual performance such as seasonality.  The setting of targets should also allow for anomalies such as special offers that may be made after the targets have been set.  We look at both issues in the accompanying article on compensation schemes.

Simplistically, the sum of the sales targets held by individual sales people should equal the amount of business the company wants to acquire through sales in a particular period and typically a trading year.  In a business where customers have an ongoing relationship and pay fees on a regular basis such as for an outsourced service, the target will often be in two main parts; business from continuing contracts and business from new contracts.  The role of maintaining existing relationships and finding new customers may be undertaken by separate teams or it may be a shared role and in the latter case the sales person will normally carry two targets for; continuing business and new.  Where continuing business is part of the mix targets may be applied to maintaining the level of existing business or it may require the sales person to grow it.

Approaches to setting targets

Let’s consider a simple example of a sales team of four people working for a company that wants to grow from current revenue of £3m to £4m over a 12 month period.  If the company has no annuity revenue, as it only supplies products, the whole £4m will have to come from new orders won by the sales people in the 12 month period.  If on the other hand the company does have annuity revenue and of the £3m revenue, £2m is ongoing maintenance contracts then the task for this year is to find £2m extra revenue.  In both cases consideration must be given to whether the sales team have the capacity to find and sell either the £2m or £4m and whether all the support facilities are in place; marketing, lead generation, pre-sales support, technical support, manufacturing & delivery capacity, etc.

Making targets meaningful

I work with a lot of sales teams and a common feeling is that targets are set arbitrarily, by taking the overall target the board has set for the business and dividing that by the number of sales people.  In the simple example above, the company has four sales people who achieved revenue of £3m last year and the same four people will now be required to achieve £4m.  Unless there has been some significant change e.g. better products, it is difficult to see how the fixed sales capacity can achieve an increase of 33%.

This approach invariably leaves sales people demotivated as they feel they are likely to be blamed for any failure to achieve the new target.

There is no point setting unachievable targets, in fact it is dangerous.  The target will usually be the bottom line of the budget so there will be other dependencies within the budget on achievement of the target and in particular expenditure commitments.  So, for example, if a business is planning to take on additional space to cope with the additional work the cost of the space will be committed and incurred before the company knows whether the sales team can achieve the target.

A safer and more meaningful approach to target creation is to work it bottom up, so continuing with our example:

  • Last year the four sales people achieved £3m and the company thinks they can achieve the same this year plus 3% from an already agreed price increase = £90,000
  • A new product will be launched that will increase the value of some orders resulting in an uplift of £120,000. This will feed into the KPIs around which targets can be set.
  • A new re-seller partner has been recruited who is forecasting to sell £250,000

So the above suggests the existing sales team plus the new re-seller partner will produce £3.46m of sales in the year, of which £3.21m  will be down to the in-house sales team.  So logic suggests the budget and targets should be built bottom up from the projected revenue and reflect where emphasis needs to be given, e.g. new product sales to existing customers, contract renewals, …  If the individual sales targets are now determined from this logical approach the company is more likely to achieve its goals and the sales people will understand their individual targets so they are more likely to feel committed and motivated to pursue them.  Rational target setting also supports the sales manager as they work with the sales people in their efforts to achieve them.

If the example company really wants to grow to £4.0m they need to carefully consider how they can achieve it, e.g. budget for additional sales resource, but if they are only just thinking about this as the year is starting they need to allow for the time required to recruit and get the person up to operational speed.  They would also need to consider the fact that the new re-seller is an unknown quantity so may not produce what they have forecast to do.

Having set targets, we now need to consider how to incentivise the sales team to achieve and exceed those targets.

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Maintain margin without having to say ‘No’!

Sue Barrett’s post on LinkedIn entitled “How to stand your ground and hold your margins” provides useful hints for the sales person in front of their customer, but could the dilemma be avoided through use of appropriate targeting?

The way in which commission schemes are designed should take full consideration of the behaviour they will encourage. As a general rule commission earned should be based on two basic principles:

The scheme should motivate the staff to modify their behaviour such that their efforts are fully aligned with the objectives and goals of the company.

  1. The scheme must be seen to reward people for their efforts and most importantly, reward them in line with their relative contribution.
  2. If commission is earned purely on revenue, what incentive is there to not give away discounts, which in turn impact on margin?

Likewise, if the sales force are not well informed on how prices are calculated and the underlying cost structure, then the impact of discounts and give-aways on margin will be less well understood.

Why might it be beneficial to use margin rather than revenue as the incentive?

  • What keeps a business fed is the margin so by paying against margin you focus the sales people on what the business wants.  When they are doing their deals they will be more appreciative of a discount’s impact on profitability as it also hits their pocket.
  • Let’s assume you make 10% gross margin; so 10% of margin will pay the same as 1% of revenue. 10% is much more motivational than 1% even though it pays the same.

If you’d like some help with designing effective commission plans, and helping your team improve their negotiating to reduce need to discount, why not give us a call.

Acorn creating mighty Oak

Is 1% improvement in anything worth having?

At first view probably not, but to illustrate the value that can be gained from small but continuous improvements in business performance we have chosen three key areas to consider; revenue generation, gross margin, and cash collection.  There are also lessons to be learned from looking outside these conventional areas of the business into the world of IT testing and data quality.

So is 1% improvement worth having?

A 1% improvement on annual revenue of £100,000 would be impossible to spot as it could easily be swamped by normal fluctuations in customer activity.  However, what if you were able to improve your revenue position by 1% every month; now you would be looking at a 12.5% compound increase for the whole year – worth having?

Acorn creating mighty Oak

From little acorns …

From a different perspective, it is likely to improve confidence in pursuit of an improvement if you set a SMART objective of 1% increase per month rather than an annual 12.5% increase.

Following on from a LinkedIn thread referring to Dave Brailsford’s successful approach to Team Sky, we explore a number of key areas where the approach can be used in business to gain real benefits from small, incremental/cumulative changes.

We have also looked outside the usual areas of a business where people seek to make improvements as we think there are good lessons to be learnt elsewhere; we look at the world of IT testing and the cost of bad data where the focus is the other side of the coin; reducing waste.

Revenue Generation

Everything starts here; without revenue there is no margin, profit or cash, in fact; there is no business.  Whether your business is turning over £100,000, £1.0m or £100m per annum the same basic principles apply; it is easy to visualise and bring about small incremental increases in revenue which quickly add up to something significant.

  • Be more selective, at an earlier stage in your selling cycle, when deciding which opportunities you will pursue.  Avoid time wasters, tyre kickers and those who are just interested in a low price.
  • By spending more time on fewer better quality opportunities you will increase the chances of closing more business.
  • From the same amount of marketing and selling effort you will gain more revenue and yes that could easily be a 12% increase in a year.

Gross Margin; improvement and protection

Margin can suffer in two main ways.  Firstly, if you feel obliged to reduce your quotation without also reducing the amount of effort you will put into delivering the result.  Secondly, reducing your price, even if you reduce the amount of effort, will result in a reduction in margin.

  • Having been more selective in the opportunities you choose to pursue you will have removed at least some that would have dented your margin.
  • From the earliest stage, when engaging with a potential customer, demonstrate the value that you deliver and avoid being sucked in to talking about price; value is what matters.
  • By demonstrating the value you deliver you make it harder for the customer to justify to themselves pushing down on your quoted price.
  • Quote the real price for the amount of work that needs to be done; don’t delude yourself that you can “make it up later”.  Along with death and taxes one of the givens is projects always take longer and cost more so you won’t be able to make it up later.
  • Once you have the deal you can avoid margin erosion by delivering exactly what you quoted for and the customer contracted for.  Don’t be tempted to undertake “added value” work as it will dent the margin and the customer probably won’t know or appreciate what you have done.

If, for example, you have revenue of £100,000 on which you make a margin of £20,000 then to gain an increase of £1,000 on the margin you will require an increase in revenue of £5,000.  Alternatively, you could keep the revenue at £100,000 and employ some of the above tips which could easily add that extra £1,000 or probably more to your margin.  You get the same or a better result without additional effort.

Cash Collection

Whether you are funding your business from your own resources or a line of external finance then every day a customer has your money in their bank account it is costing you interest and it is also reducing the funds you have available to invest in your business.  Here are a few tips to help you get your money faster:

  • At an early stage in the engagement with a potential customer discuss contractual terms, including payment terms, don’t leave it until the end as you will have far less negotiating power.  Don’t allow the desire to win a piece of work get you bullied.
  • Don’t be shy, ask for what you need.  Always ask for some money up-front and if you are delivering projects ask for staged payments making sure those stages align with the outgoings you will have on the project.
  • Make your payment terms short; seven or 14 days.  The customer will try to negotiate up and even if you let them you are more likely to get 21 or 30 days than you would have been had you started at 30 days.
  • Discuss your terms with the decision maker and get them to agree; don’t assume that because they have signed a contract with your terms that they will have taken the internal steps required to get you paid when you expect.  If the customer wants to use their terms you do not have to accept everything as presented; it is called an agreement not a dictat.
  • As soon as the agreement is signed call the customer’s finance department, introduce yourself and let them know they will be getting invoices from you.  Ask them what you can do to make their lives easier; should invoices be posted or sent electronically, do they have specific days for processing invoices, do they work part-time, etc.
  • When you raise an invoice, send copies to both the sponsor/budget holder and the finance department.  After a few days call to make sure they have it and ask when it will be processed.  Call back again just before processing date to confirm it has indeed been authorised and will be included in the payment run.  Don’t be shy, it is after all your money!

Even small reductions in your debtor days will improve your finances easily delivering a 1% improvement per month.  But more importantly, you will have greater financial certainty and your money will be available sooner for you to invest or spend.

Lessons from other worlds

It has long been recognised by those in software engineering, that the cost to repair an issue escalates the longer it remains undetected in the lifecycle.  Typically a 1:10:100 type ratio is applied to correction costs, and that excludes the additional cost of impact if the issue “escapes” into the wild (production).

If you search the web for “1:10:100 rule” you will notice that this basic ramification is being applied to the cost of bad data also.

The world of software engineering is much more precise than the world of sales and marketing or business management but the same principles of early detection can be beneficially applied to all areas of the business.  If your first meeting with a new potential customer tells you; “we are unlikely to win this one at a good price” then qualify it out there and then.  Or you could do what many businesses do; invest a lot of time and effort bidding for the work only to find you don’t win or worse still you do but at a very poor price.

Be brave; qualify early, qualify hard!

Customer engagement for win-win deals

Customer Engagement

If your customers are slow to make decisions and your pipeline forecast is forever moving, we can help you.

If your sales force are submitting bids with a low uptake so you feel you are just providing free consultancy, we can help you.

Markets are changing and customers have more opportunities for research before they buy, consequently the sales force has different challenges in order to engage with customers. Gaining insight into your Customer’s world and thereby understanding how you can deliver greater value than your competitors can be key to how you approach your target market.

We have helped companies in various sectors re-focus their propositions and markets for greater customer engagement, leading to more new and extension business. This also assisted the sales management to obtain more reliable forecasts.

“Working with Performative greatly improved the quality of engagement with potential customers and our ability to forecast outcomes from those.” MD, Mobile Technology company.

Feel free to call us for a confidential discussion.

shorter sales cycles, new customers, more business, increased profilts, better cashflow