So many startup companies focus on growth and forget that growth has to be efficient. It’s not uncommon to see companies spend too much money to attract new clients and end up with their accounts in the red.
In some cases where your strategic goal is dominating the market and monetizing later, it may work. But it still didn’t work for Uber — the company now has over 100 million users but only managed to turn a profit once in its lifetime.
The solution is to combine growth with efficiency. To do that, you have to track sales efficiency.
This guide will teach you both how to track this metric and how to improve it.
What is sales efficiency?
Sales efficiency is a metric that defines how the spending needed to achieve sales is related to the sales volume. If a company spends relatively little to receive a significant sum in monthly or annual sales, it’s being efficient. If the sales spend is less or equal to the sales volume, it’s not.
To achieve sales efficiency, your company has to spend less on sales and marketing and bring in more in total sales volume. However, doing that is not easy, but we’ll provide tips on how you can do that later in the article.
For now, let’s focus on how to measure your business’ sales efficiency.
Sales efficiency ratio
Sales efficiency ratio is the metric that describes how much sales you generate for each dollar spent on sales or marketing. The basic formula for calculating the sales efficiency ratio is pretty simple. Divide annual sales by annual sales and marketing spend, and the resulting decimal is your sales efficiency ratio:
Revenue / Sales & marketing spend
So if a company achieved a million dollars in sales in a given year and spent 700,000 in sales and marketing to achieve that, then this produces a positive sales efficiency of 1.42.
If the numbers were reversed, with 700,000 in generated sales and a million spent to do that, the ratio would be 0.7, which is a mediocre one.
If you need the ratio to be represented in percentages for reporting reasons, then multiply the result by 100%. For the two calculations above, this gives 142% and 70%, respectively.
How to calculate sales efficiency
This specific formula is a good generalization, but it may not fit every business. There are several adjusted sales efficiency formulas that may suit your business better.
Sales efficiency formulas
One of the first potential issues of the sales efficiency formula is calculating it for gross and net sales.
Gross sales is the total amount of sales without accounting for returns and discounts. Calculating sales efficiency with gross sales allows for a faster way to estimate it, but it lacks accuracy.
Calculating the metric with net sales is much more accurate because net sales account for discounts, returns, and other reductions in price that harm the bottom line. This presents a much clearer picture of sales efficiency because net sales represents the actual amount of money flowing into your organization.
With net sales, the formula becomes as follows.
(Gross annual sales – annual returns – price reductions) / Sales & marketing spend
However, it’s mostly useful for companies that do traditional sales. For the subscription as a service model, sales efficiency has to be calculated a bit differently.
Sales efficiency formula for SaaS
In companies that price their services as a subscription, calculating sales efficiency with revenue generated in a given period doesn’t reflect the true picture as well. The revenue from sales is going to be stretched over time and it won’t be reflected instantly as many companies like that offer a free trial period.
SaaS analytics typically resolves the issue of revenue stretching out by using annual recurring revenue (ARR) for sales efficiency calculation. ARR is the estimated annual revenue based on the subscriptions purchased as opposed to one-off revenue that occurs in any given period.
That’s a much better metric than gross sales because when a sales representative facilitates a sale of a $200 subscription, they’re effectively making the company $2400 over twelve months.
Since gross ARR comes from all the repeat customers you’ve earned over the years, you have to calculate new ARR. Doing that is quite easy — subtract ARR between two periods, and the resulting sum is the ARR added in the latter period.
To be even more precise, you can calculate sales efficiency with net ARR instead of the gross sum. To do that, subtract the price reductions that you issue to new customers and the estimated number of customers who’ll stop the subscription. This makes the sales efficiency formula for SaaS companies as follows:
(New gross ARR – Estimated churn rate-price reduction) / Sales & marketing spend
Another issue unique to SaaS companies is that revenue might not start coming in until after a month or two. Plenty of SaaS services give a generous trial period to new users to onboard them before charging anything.
So when your sales department closes a lot of new deals, it may not be reflected in the sales records in the same quarter.
The workaround for that is the metric known as the Magic Number. The idea behind it is to weigh sales spend against revenue added in the next quarter — this way all the new business that the sales team added will be reflected correctly.
The figure for revenue that most SaaS companies use is GAAP revenue, the standardized metric that makes it easy to compare sales efficiency with other companies. If you want to calculate quarterly sales efficiency, you’d have to annualize the difference between revenue in two quarters. Otherwise, it can be difficult to calculate it because sales spend can vary between quarters.
So the formula for the Magic Number metric looks as follows:
(Q1 GAAP revenue – Q2 GAAP revenue) X 4 / Annual sales & marketing spend
Sales efficiency calculation for one sales rep
The general sales efficiency formula can be adjusted to calculate efficiency of a sales team or a single sales representative. Just switch the general revenue number to the volume of sales generated by the team and the sales spend to the salary fund and the cost of sales tools like this:
Sales generated by the team / Cost of running the team.
The downside is that this method is not the most accurate. You can’t include the marketing cost because marketing affects all sales teams. But if your goal is to compare sales team or sales rep performance, this formula is convenient.
What is a good sales efficiency ratio
When you’re measuring sales efficiency, you want the number to be as hard as possible. Anything below 0.5 or 50% is considered to be inefficient as you’re generating 50 cents for every dollar spent. A number between 0.5 and 1 is a decent one — the company is close to breaking even.
Anything between 1 and 3 is great as it means your sales team generates more sales than you spend on marketing and sales and is being highly efficient. If your sales ratio is above 3, your organization is doing extremely well.
How to measure sales efficiency accurately
While the sales efficiency formula is pretty straightforward, it doesn’t guarantee correct results. It all comes down to the quality of the data you use to determine annual sales volume and sales spend. If it’s not correct, the sales efficiency estimate will be off too.
First, you need to collect at least these three key metrics for both components of the sales efficiency ratio.
Sales efficiency metrics
| Key metrics for net sales | Key metrics for sales & marketing spend |
|---|---|
| Total number of subscriptions sold | Marketing & sales teams’ salaries |
| Total number of discounts | Marketing budget |
| Total number of price reductions | Cost of marketing & sales tools |
All of these come from vastly different sources. Sales numbers and discounts are tracked by either your CRM or your billing provider, the cost of tools is likely to be stored either with the billing provider or your financial department. The financial department will also store information on salary and marketing budget either on-site or in an HR tool.
Bringing all of these numbers together in a reporting solution and unifying data formats is crucial to accurate analysis.
You can track more metrics to arrive at a more accurate number for both net sales and total sales and marketing spend. But these three will give you a pretty accurate ratio.
It’s important to keep historical records of all these metrics to make analyzing the progression of sales efficiency easy.
How to bring the metrics data together
The accuracy of the data you use is extremely important for calculating sales efficiency. Often, sales happen across multiple platforms. Marketing spend is also diversified with many companies running ads on Google and Facebook, a corporate blog, and social media.
Tracking all of these becomes progressively hard, but these metrics are important if you want an accurate sales efficiency estimate. The best solution is to build a sales report template to track efficiency where you can monitor all your metrics. You can do this yourself using a simple spreadsheet app like Google Sheets or go with an advanced BI tool like Tableau. Automation of dataflow from your data sources to the destination repository can be done with the help of an ETL tool. For example, Coupler.io, a data automation and analytics platform, provides an ETL solution to integrate marketing data.
If building a dashboard with your own hands sounds disagreeable to you, you can request Coupler.io data experts to provide a custom solution for your needs. They have vast experience in data visualization, transformation, and management, and will be able to cope with any of your data challenges.
Take a look at these best examples and free templates for sales dashboards.
How to improve sales efficiency
If your sales efficiency ratio is 1 or below that, your organization is wasting money. The odds are you can optimize your sales team’s performance, but the solutions aren’t always straightforward.
There are two main principles you should follow when optimizing your sales team’s performance: analyze first and grab the low-hanging fruit.
A low sales efficiency metric means that something’s not right, but you can’t know what it is without further analysis.
When you have a full list of areas you could improve on, it’s best to do the easiest optimizations. Companies and teams that underperform in terms of efficiency tend to make common mistakes that take away from their productivity. It’s likely very cheap to implement best practices and that can have a larger impact on efficiency, so it’s best to start with doing that.
Analysis
Data is at the core of making the right decisions. You need to take a closer look at all the other important SaaS metrics and see where your team underperforms. To get a better idea of where your marketing efficiency is lacking, analyze these metrics:
- Ad campaign conversion rate
- Return on ad spend
- Social media conversion rate
- Landing page conversion rate
- Email marketing open rate
- Multi-channel attribution
If you’re seeing negative dynamics or poor performance in any of these metrics, dig deeper and figure out why that particular channel is underperforming.
To understand what your sales department is doing wrong, take a look at these metrics:
- Win rate
- Individual sales efficiency
- Customer lifetime value
- Deal slip rate
- Customer churn rate
Going deeper in your analysis of these can show that you have to improve either the sales process or the product.
Focus on best performers
The easiest way to decrease marketing spend while keeping the revenue high is to pause or cut funding to campaigns that perform the worst. There are more sophisticated ways to optimize ad spend, but if you’re looking for a fast and easy solution, you can just focus your budget on what works well already.
It’s best not to cut out the entire marketing channel. Instead, go through certain campaigns on each channel and prioritize those that bring the most customers or revenue. Making marketing spending less wasteful can bring your sales efficiency up quite a bit.
Sales training
If marketing works fine, but the sales efficiency is still low, you can start improving the sales team’s performance by investing in training. You could invest in a formal training program, do some one-on-one coaching, or update sales scripts and guidelines.
Sales is a hard job, and if you want to have a stable and predictable output, you can’t rely on your team’s pure talent. You need to implement standards and train your employees to see the win rate grow.
Automation
Another thing that could be hindering sales performance is the presence of menial tasks in the workflow. If your sales reps are spending hours on manual data entry, they’re going to be less productive.
Many manual tasks in sales can be automated. Automation tools don’t cost that much, for instance, a basic plan of Coupler.io, a dataflow automation tool only costs $49 per month. Many sales and marketing process automation tools cost around the same.
Adding a hundred dollars to your monthly spend means that not only does your sales team end up having more time to be engaged in the activity that makes you money, but they also have time for strategic planning and analyzing their mistakes.
Achieve efficiency in sales
Ideally, any company would want to spend less money and earn more. This makes sales efficiency one of the most important internal metrics. While the sales efficiency formula itself is pretty straightforward, calculating it correctly, and improving sales efficiency isn’t. So, to do these two things the right way, you have to rely heavily on data.
Track the expenses and sales volume to consolidate them in a data analytics solution and have a full picture of every component of the sales efficiency formula.
Then, you have to track a lot of sales and marketing metrics. This allows for deeper sales analytics and further process optimization.
With a good grasp of your organization’s data, you know exactly what’s going on and can make an educated decision on how to fix it.
