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Chapter 4 Management of Sales Territories and Quotas

Learning Objectives To understand the concept of and reasons for sales territories To learn designing sales territories and assigning salespeople To know territory coverage, including routing, scheduling, and time management To understand objectives and types of sales quotas To learn the methods of setting sales quotas To get insight into setting and administration of sales quotas

Sales Territories A sales territory consists of existing and potential customers , assigned to a salesperson Most companies allot salespeople to geographic territories , consisting of current & prospective customers Major Reasons / Benefits of Sales Territories Increase market / customer coverage Control selling expenses and time Enable better evaluation of salesforce performance Improve customer relationships Increase salesforce effectiveness Improve sales and profit performance

Procedure for Designing Sales Territories Select a control unit * Find location and potential of present and prospective customers within control units ** Decide basic territories by using Build-up method, Or Break-down method * A control unit is a geographical territorial base ** Unnecessary & expensive for consumer products

Procedure in Build-up Method Decide customer call frequencies Calculate total customer calls in each control unit Estimate workload capacity of a salesperson Make tentative territories Develop final territories Objective is to equalise the workload of salespeople

Procedure in Breakdown Method Estimate company sales potential for total market Forecast sales potential for each control unit Estimate sales volume expected from each salesperson Make tentative territories Develop final territories Objective is to equalise sales potential of territories

Assigning Salespeople to Territories Sales Manager should consider two criteria: Relative ability of salespeople Based on key evaluation factors: (1) Product knowledge, (2) market knowledge, (3) past sales performance, (4) communication, (5) selling skills (B) Salesperson’s Effectiveness in a Territory Decided by comparing social, cultural, and physical characteristics of the salesperson with those of the territory Objective is to match salesperson to the territory

Management of Territorial Coverage It means: How salesperson should cover the assigned sales territory It includes three tasks for a sales manager: Planning efficient routes for salespeople Scheduling salespeople’s time Using time-management tools

Routing Routing is a travel plan used by a salesperson for making customer calls in a territory Benefits of or Reasons for routing: Reduction in travel time and cost Improvement in territory coverage Importance of routing depends on the application: Nature of the product – Important for FMCG Type of jobs of salespeople – Important for driver-cum-salesperson job, but creative selling job needs a flexible route plan

Procedure for Setting up a Routing Plan Identify current and prospective customers on a territory map Classify each customer into high, medium, or low sales potential Decide call frequency for each class of customers Build route plan around locations of high potential customers Computerised mathematical models are developed Commonly used routing patterns are: B Circular B Clover Leaf Base (B) C5 C1 C4 C3 C2 Straight line / Hopscotch

Scheduling Scheduling is planning a salesperson’s visit time to customers. It deals with time allocation issue How to allocate salesperson’s time ? Sales manager communicates to salesperson major activities and time allocation for each activity Salesperson records actual time spent on various activities for 2 weeks Sales manager and salesperson discuss and decide how to increase time spent on major activities Companies specify call norms for current customers, based on sales and profit potentials, and also for prospective customers

Time Management Tools To help outside salespeople * to manage their time efficiently and productively, the tools available are: High-tech equipment like laptop computers and cellular phones Inside salespeople to provide clerical support, technical support, and for prospecting, and qualifying, as they remain within the company Outside salespeople can then spend more time getting more orders & building relationships with major customers * Outside salespeople travel outside the organisation

Sales Quotas What are Sales Quotas? Sales quotas are sales goals or targets set by a company for its marketing / sales units for a time period Marketing / sales units are regions, branches, territories, salespeople, and intermediaries Generally, company sales budget is broken down to sales quotas for various marketing units Objectives of Sales Quotas To use quotas as performance standards or performance goals To control performance To motivate people by linking quotas to compensation plans To identify strengths and weaknesses of the company

Types of Quotas Organisations set many types of sales quotas: (1) sales volume, (2) financial, (3) activity, (4) combination Sales volume quotas For effective control, sales volume quota should be set for the smallest marketing units, such as salesperson, districts / branches, product items / brands Sales volume quotas can be stated in (a) rupees / dollars, (b) units, or (c) points Rupees / dollars sales volume quotas are appropriate when salespeople are required to sell many products

Sales Volume Quotas (Continued) Unit sales volume quotas are suitable when Salespeople are selling a few products Prices of the product fluctuate rapidly Price of each product / service is high Point sales volume quotas are appropriate when the company wants salespeople to sell products that contribute more to profits

Financial Quotas Financial quotas control (a) gross margin or net profits, and (b) expenses of marketing units Gross-margin / Net-profit quotas Calculate gross margin by subtracting ‘cost of goods sold’ (i.e. cost of manufacturing) from sales volume. Sales managers are not responsible for cost of manufacturing Net profit quotas are generally accepted by sales mangers as it is calculated by subtracting direct selling expenses from the gross margin Expense quotas In many companies, expense quotas are stated as a percentage of sales Expense quotas to be administered with flexibility , to make salespeople cost conscious, allowing reasonable expenses

Activity Quotas These are set when salespeople perform both selling and non-selling activities Objective is to direct salespeople to carry out important activities For effective implementation , activity quotas are combined with sales volume and financial quotas E.G. Calling on high potential customers, payment collection from defaulting customers

Combination Quotas Used when companies want to control salesforce performance on key selling and non-selling activities Focus on a few types of quotas, to avoid confusing salespeople. An example: Total point score=573/6=95.5 for a salesperson Typically use ‘points’ as a common measure to resolve the problem of different measures used by various types of quotas 573 6 Total 125 1 125 05 04 New Customers (Nos) 178 2 89 50 45 Receivables (days) 270 3 90 4,50,000 5,00,000 Sales Volume (Rs) Percent Quota x Weight Weight (Importance) Percent Quota Actual Quota Type of Quota

Methods for Setting Sales Quotas Several methods are used for establishing sales quotas In practice , companies use more than one of the following methods to increase their confidence in sales quotas Total market estimates Territory potential Past sales experience Executive judgement Salespeople’s estimates Compensation plan We shall briefly discuss each of the above methods

Total Market Estimates Method The Process followed by established companies is as under: Estimate next year’s total market demand , or industry sales forecast, using sales forecasting methods Decide the company’s estimated market share for next year Company’s next year sales forecast = (1) x (2) Find each territory’s percentage share out of the total company sales in the previous year Territory sales quota = (3) x (4)

Territory Potential Method The procedure followed by new companies is as under: Estimate next year’s industry sales forecast or market potential, using sales forecasting methods Estimate multiple factor index (MFI) for each territory, based on factors that influence sales of the product. These factors are given weights corresponding to the degree of sales opportunity. Industry sales forecast in a territory (or territory market potential=(1)x(2) Territory sales quota = (3) x estimated market share of the company in the territory

Past Sales Experience Method The process consists of taking past one year’s sales (or an average of previous 3 to 5 year’s sales), adding an arbitrary percentage (or a percentage by which the market is expected to grow), and thus setting each territory sales quota The assumption that future sales are related to past sales may not be always correct This method should not be the only method used Past sales should be one of the factors used for deciding sales quotas

Executive Judgement Method Senior executives use their judgement when the product, territories, and the company are new or very little market information is available Executives predict company sales budgets and also territory sales quotas This method should generally be used along with other methods Salespeople’s Estimate Method Some firms ask their salespeople to set their own quotas Many salespersons either set very high or too low sales quotas

Salespeople’s Estimate Method (Continued) For setting proper quotas, many sales managers use 2 or 3 of above methods , discuss with salespersons to get their inputs, and decide sales quotas Compensation Plan Method Some organizations set quotas to fit with their sales compensation plan E.G. A company wants to pay a monthly salary of Rs 5000, and a commission of 3% on monthly sales above Rs 1,00,000. The quota of Rs 1,00,000 is set in such a way that salesperson would find it very difficult to cross total compensation of Rs 8000 per month (5000+3000) Sales quotas should not be based only on this method, because it would “ put the cart before the horse ”

Insight into Setting & Administration of Sales Quotas Set realistic quotas Understand problems in setting quotas Ensure salespeople understand quotas By allowing salespeople to participate in the process By continuous feedback to salespeople on their performance compared to quotas Have flexibility in administering quotas Change quotas in cases of major changes in market demand or company strategies Use monthly or quarterly quotas for incentives and annual quotas for performance evaluation Select a few quotas that have relationships with marketing environment and sales situations

Key Learnings A sales territory consists of existing and prospective customers, assigned to a salesperson While assigning salespeople to territories , sales manager should consider relative ability of salespeople and salesperson’s effectiveness in the territory Management of territorial coverage includes routing, scheduling, and time-management tools. Routing is a travel plan used by a salesperson for making customer calls in a territory Scheduling is planning a salesperson’s visit time to customers, based on sales and profit potentials of customers

Key Learnings (Continued) Time management tools available to outside salespeople are high-tech equipment and inside salespeople Sales quotas are sales goals or targets set by a company for its marketing units like regions, territories, salespeople Firms set many types of quotas like sales volume, financial, activity, and combination of above Companies use more than one of the several methods used for setting sales quotas . These are: total market estimates, territory potential, past sales experience, executive judgement, salespeople’s estimates, and compensation plan Companies should select a few quotas , which should be realistic and should be administered with flexibility

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