Friday, October 21, 2022
How to Use the Sales Efficiency Formula to Achieve Your Goals
Are your sales reps productive and efficient? If you don't have an answer to this question, you have a problem.
Keeping track of sales performance is essential for businesses, from start-ups to global corporations, at every stage and in each company sector. It helps company executives and managers to assess whether sales and marketing efforts are paying off or not. Sales efficiency is a crucial indicator of your sales team's success. It allows you to understand the impact on revenue of every dollar spent on selling and promoting your products or services.
To calculate sales efficiency and reduce customer acquisition cost, you must use the sales efficiency formula. This metric is often overlooked but is the best way to know how efficiently your company generates value.
In today's article, we will explain how to use the sales efficiency formula, its pros and cons, and how Wonderway helps you achieve your sales goals. Read on to improve your business's overall performance and boost your sales!
What is the sales efficiency formula?
The sales efficiency formula is a software as a service (SaaS) metric that measures the efficiency of a sales team. It compares the revenue generated in a given period with the sales and marketing costs in the same period.
The easiest way to calculate sales efficiency is to divide sales and marketing revenue by sales and marketing costs in a period. For example, if your sales team generates $200,000 in a quarter after spending $150,000 on sales and marketing: $200,000 / $150,000 is equal to 1.3.
A score greater than 1 is a positive result. Your sales team generates revenue for every dollar you spend on sales and marketing. A score of less than 1 is a negative result. It means your sales team struggles to sell with the financial support and the resources they have.
How to use this formula in practice
You can calculate sales efficiency with the following three formulas to get better and more specific results.
Gross sales efficiency
The gross sales efficiency formula divides the gross new annual recurring revenue (ARR) by the sales and marketing spending in the same period. This metric shows how efficient your sales and marketing strategies are over time.
Net sales efficiency
The net sales efficiency formula divides the net new ARR by the sales and marketing spending in the same period. This metric doesn't only give you insights into your team's efficiency, but it gives you an overall look at how well your business retains customers.
The SaaS magic number formula replaces the net new ARR in the numerator with the difference between the revenue in two consecutive periods. Then, it multiplies the resulting amount by four (annual figures) and divides the number by the sales and marketing spending in the first period.
This metric shows how much your SaaS business is growing in proportion to every dollar spent on sales and marketing.
While the sales efficiency formula can help in the early stages of building a successful business, it shouldn't be the only metric you use to evaluate your performance.
There are other metrics you should keep an eye on to measure if your sales and marketing efforts are bringing positive results to your company.
How does the sales efficiency metric compare to other similar metrics
Sales efficiency metrics determine how well your company sells with the available resources. These numbers can give you valuable insights into your business strategies and the strengths and weaknesses of your sales team.
However, you must track other sales performance metrics to get a complete picture of your sales team's performance.
Here's a list of some of the most important sales metrics you should track and how they compare to sales efficiency metrics.
- The number of new leads: this metric tells you how your company is acquiring customers. While the sales efficiency metric focuses on how effective your sales reps are, calculating the number of leads is key to understanding what activities or methods bring more clients to your business.
- The average revenue per customer (ARPC): this metric shows how much money you earn with a customer in a period. Sales efficiency tracks the impact of your sales and marketing actions to sell and promote your product. The ARPC measures the profitability of your product based on the money you generate from every customer.
- Customer lifetime value (CLV): the sales efficiency formula can indicate how your business retains customers. The CLV tells you how much income you can expect from a customer from the beginning until the end of your relationship.
- Year-over-year growth (YOY): the sales efficiency formula calculates how your SaaS business grows compared to the money you spend on sales and marketing. YOY growth shows if your business has achieved its long-term goals by comparing your company's financial gain in a period with the performance in the same period a year earlier.
- Sales activity completion rates: with sales efficiency metrics, you measure sales reps' efficiency, while with sales activity completion rates, you can see how productive sales reps are during regular tasks. Use sales performance management software to track these activities in real-time. Did you know that by signing up for a sales performance platform like Wonderway, you can reduce ramp time by 50%?
Now that you know how the sales efficiency metric compares to similar sales performance metrics, it's time to list the pros and cons of using the sales efficiency formula in your business.
3 important benefits of using the sales efficiency formula
These are three benefits you can get from using the sales efficiency formula:
1. Keep your team motivated:
Set achievable goals and track your team's efficiency to boost sales reps' morale.
2. Sell more and reduce your sales and marketing spend:
If you use the sales efficiency formula, you can increase the amount you sell and reduce the cost per sale. It can lead to higher revenue, lower costs, and increased profitability in the long term.
3. Make decisions based on evidence:
Use data from previous sales activities to make better decisions about what you should do next.
Are there any drawbacks to the sales efficiency formula? Let’s discuss this.
3 potential drawbacks of using the sales efficiency formula
These are three disadvantages you can get from using the sales efficiency formula:
It sets unrealistic expectations: the biggest drawback of tracking sales efficiency is that it can bring unrealistic expectations for performance. Sales cycles are long and unpredictable, so it’s essential to have realistic expectations about how much you can do in a given period.
It can increase employee turnover: unrealistic sales expectations can pressure employees to meet quotas. It can lead to workplace stress and may increase turnover in your company.
It's time-consuming: gathering data and making adjustments over time can be time-consuming and labor-intensive. Sales reps may see it as a waste of time to spend hours each week logging their activities and trying to improve their efficiency.
There are a few drawbacks, but there are plenty of benefits for monitoring sales efficiency. Let’s discuss this in more detail.
10 ways to use sales efficiency formula to achieve your goals
The first step to building a successful business is not repeatedly committing the same sales mistakes. Keep reading to discover ten ways to achieve your company's sales goals using the sales efficiency formula.
1. Measure the sales performance of sales teams or individual salespeople
Sales performance is one of the most important factors in a company’s success. If a sales team isn’t performing well, it can negatively affect the company’s bottom line.
Salespeople can improve their performance by learning to close more deals, increasing the average revenue per deal, and ensuring that leads are correctly qualified. By monitoring sales performance, you can identify problems early on and take steps to correct them.
2. Make decisions about hiring and firing in your sales team
Hiring and firing employees is a critical part of any business. Doing wrong can lead to negative morale, decreased productivity, and even higher turnover rates.
If you use the sales efficiency formula, you can see who the top performers in your sales team are and who's underperforming. Sales metrics may help you decide better who should be promoted and who should leave.
3. Optimize your sales process
An effective sales process is key to ensuring your business is as efficient as possible and generates the highest possible revenue. Several factors can affect a sales process's success, including customer engagement, lead quality, and sales cycle time.
The sales efficiency formula gives insights into your sales reps' strengths and weaknesses. Once you identify them, focus on introducing strategies to enhance your team's best skills and improve the weak areas.
4. Set sales goals
You can set clear sales goals if you study how your company is performing and what areas you must improve.
If your sales team knows the business target, they'll feel more motivated to keep pushing forward and reaching their full potential.
5. Track sales progress
The sales efficiency formula gives you a detailed picture of your business’s revenue trends. It helps you identify seasonal trends and optimize your sales efforts accordingly.
6. Identify areas of improvement
With sales efficiency tracking, you can monitor your sales team’s performance and identify areas where you need to improve.
You can create new training programs or develop new sales processes to address these issues. It will help you boost your overall sales productivity.
7. Assess the effectiveness of sales training
Sales training can be a great tool to help salespeople improve their skills and knowledge. It can help them learn how to communicate more effectively, build rapport with customers and hone their salesmanship.
Sales metrics like the sales efficiency formula help you adjust this training to your team's needs. Use a sales training platform to organize sessions for your reps and help them improve their sales skills effectively.
8. Improve sales forecasting
Sales forecasting is an activity that involves predicting the sales volume of a product, service, or company.
Using sales metrics, you can predict sales, understand how your business is performing, and start making changes before it’s too late.
9. Compare the efficiency of different sales strategies
The sales efficiency formula doesn't only tell you how efficient your sales reps are but also what sales strategies work best for your company.
Compare the results of different sales strategies and decide where to focus your sales and marketing efforts in the next sales period.
10. Benchmark sales and marketing efforts against other companies in the industry
The sales efficiency formula allows you to compare the efficiency of two or more companies.
Benchmarking is a helpful way to compare how your business stands against your competitors and see whether your company is making progress or falling behind.
Tracking sales efficiency sounds easy, but it's not. Luckily there is specialized software like our Wonderway, which automates the whole process and saves you the time you can spend on other high-priority tasks.
Let's discuss what exactly Wonderway ATLAS can do for your business.
How Wonderway helps you track your sales team's efficiency?
Wonderway is a sales efficiency software that helps you increase revenue per rep and boost your win rate. You can see all your performance data in one place and understand your team's capabilities.
With Wonderway, you can get the best out of your sales reps, whether fresh starters or senior salespeople.
Wonderway provides numerous benefits. Here is what you can do:
- Connect Wonderway with Salesforce, Hubspot, email, and calling tools to calculate key rep metrics.
- Connect to your call and messaging systems and select the best examples to learn from.
- Measure the impact of your team's work and identify the areas for improvement.
- Use machine learning to get insights about your team's performance.
- Create a sales onboarding plan and automate the process to save time when you hire sales reps.
- Improve your representatives' sales qualities and unlock your team's full potential.
- Focus on your team's requirements and create personalized training tailored to each sales rep's skill gaps.
- With data-driven sales training, you can cut ramp time by 50% using Wonderway assessments and skills certifications.
- Get sales training ideas and organize helpful sessions for your employees.
Our advanced sales efficiency software will help your team hit the quota. To evaluate all features, book a demo today.
Sales efficiency formula: The bottom line
Sales efficiency shows your ability to convert leads into opportunities and sales. If your organization has a low sales efficiency, you can identify critical stages within the sales process where bottlenecks occur.
You can then take steps to alleviate those bottlenecks by improving collaboration between team members, streamlining existing processes, and automating manual tasks wherever possible.
Sales efficiency is directly related to how quickly and efficiently your team can move prospects through the buying process from lead generation through conversion to revenue-generating customers. When you streamline operations in your company and optimize procedures, a higher level of sales efficiency is attainable.
In this blog post, we shared the best tips to increase sales efficiency in your organization and explained how to use Wonderway to achieve this goal.
Wonderway eliminates manual work and human errors by collecting data automatically and analyzing your team's performance. It helps you make data-driven decisions, optimize your training process and improve sales reps' skills to hit quota faster.
To get all information you need on Wonderway, book a demo today.
FAQ about the sales efficiency formula
Here's a list of the most common questions about sales effectiveness.
How do you calculate sales efficiency?
To calculate sales efficiency, you must use the sales efficiency formula.
The most straightforward method to gauge sales effectiveness is to divide sales and marketing expenses by sales and marketing revenue for a given period.
You can also calculate sales efficiency using these three formulas:
- Gross sales efficiency
- Net sales efficiency
- Magic number
What's a good sales efficiency ratio?
A sales efficiency ratio greater than 1 is good. Your sales team delivers a positive return on investment (ROI).
A ratio greater than 3 is exceptional. It means your sales team is doing an excellent job selling with the resources they have.
A ratio lower than 1 is not good enough. If that's the case with your company, you should take action and build a plan to improve your sales team's effectiveness.
What is sales efficiency in SaaS?
Sales efficiency in SaaS is the revenue growth rate divided by the sales and marketing expense margin in the previous period.
How effective your sales and marketing efforts are and how quickly your organization can grow is an important indicators of sales efficiency.
What is cash efficiency?
The SaaS cash efficiency ratio reveals how long a firm can continue to burn through cash after accounting for net new ARR.