What is sales efficiency? Definition, metrics and strategies

For your company to be profitable, it needs to generate more income from sales than it spends trying to make those sales. One way to track this is by measuring sales efficiency.

Sales efficiency is a key performance indicator that lets you see how cost-effective your sales efforts are. You can then use this insight to optimize how your team uses their time and resources, driving more efficient sales.

In this article, we’ll explore everything you need to know about sales efficiency, from why it’s so important to seven actionable strategies you can use to improve this crucial metric.

What is sales efficiency?

Sales efficiency is a benchmark that measures how well a company generates revenue through its sales activities. Also known as the “Magic Number”, sales efficiency helps you find out how much revenue you bring in for every dollar spent on sales and marketing.

The more revenue you can generate from limited resources, the more efficient your company is. If you spend $200,000 to generate $200,000 in sales, you have a sales efficiency of 100% – in other words, you’re breaking even.

However, if you spend $200,000 but generate $400,000 in sales, your efficiency is now 200% and you’re running a profitable company.

The higher your sales efficiency ratio, the more effective your company is at managing its resources and optimizing sales processes. A low sales efficiency (under 100%) indicates that your company needs to improve if it’s going to stay in business in the long run.

Why is sales efficiency so important?

Tracking sales efficiency is one of the easiest ways to measure your company’s overall sales performance. While it isn’t the only metric you should track, it’s an easy-to-calculate ratio that gives you a direct feeling of how well your sales efforts are generating revenue.

Here are some of the major reasons to track and improve sales efficiency:

• Get an overview of your company’s performance. Sales efficiency directly impacts a company’s profitability. By analyzing efficiency (and other key sales metrics), you can evaluate your return on investment (ROI) for your company’s sales efforts.

• Improve your sales process. Based on your analysis, you can pinpoint bottlenecks or inefficiencies in your sales process. You can then implement strategies to improve your processes, like additional training for your sales reps or technology that might help streamline operations.

• Optimize resource allocation. By tracking sales efficiency, you can identify where resources are being used effectively and where they aren’t. You can then make strategic decisions to allocate your resources better.

• Evaluate sales rep performance. By monitoring sales efficiency for individual sales reps, you can find out which are performing well and which are underperforming. You can then provide additional support where it’s most needed.

• Forecasting and planning. Tracking sales efficiency helps you forecast predictable revenue more accurately. By understanding current efficiency levels, you can set more realistic targets and budget more effectively to meet your financial goals.

How to calculate sales efficiency

To measure sales efficiency, you need to divide your sales revenue by how much it costs to make those sales. Here’s what that formula looks like:

For example, imagine you spent $300,000 on salaries, office space, training and marketing in the last quarter. From this investment, your sales team generates $900,000 in revenue. To work out your sales efficiency, you simply divide $900,000 by $300,000 to get a ratio of 3.

To get your sales efficiency as a percentage, multiply the ratio by 100. In this case, your sales efficiency would be 3 x 100 = 300%.

While the sales efficiency equation itself is simple, working out how much you spend to make your sales can be a challenge. Costs can include employee benefits, salaries and insurance, software subscriptions, training costs and other overheads.

Which costs you choose to include changes the context of your sales efficiency ratio. This is why companies choose to track gross sales efficiency or net sales efficiency.

Gross sales efficiency

Gross sales efficiency highlights the new annual recurring revenue (ARR) that you’ve generated in a given period. It doesn’t include things like customer churn that also affect your bottom line.

By focusing solely on ARR, you can get a clear picture of how efficient your sales and marketing teams are.

To calculate gross sales efficiency, you first need to calculate your gross new ARR.

Gross new ARR refers to the new recurring revenue that you generated from new and existing customers over a period of time. This includes new subscriptions as well as increased ARR from upselling and cross-selling to previous customers.

Here’s the formula:

Once you have your gross new ARR, you can use it to calculate gross sales efficiency:

In the example, we used quarters. However, if you have a faster sales cycle, you may want to calculate gross sales efficiency monthly.

Net sales efficiency

Net sales efficiency includes customer churn in the equation, helping you see what your sales efficiency is once you consider lost revenue.

To calculate net sales efficiency, you first need to determine your net new ARR. This is how much new revenue you’ve generated from new customers and from upselling or cross-selling to previous customers, minus any churned ARR.

Here’s the formula:

You can then use the net new ARR to calculate net sales efficiency:

What is a good sales efficiency ratio?

It’s no good being able to calculate your sales efficiency ratio if you don’t know what it means. Here’s an explanation of each important sales efficiency range:

• Sales efficiency ratio under 1. If your sales efficiency is under 100%, you’re spending more on the sales process than you’re getting back in revenue. It’s time to implement new sales strategies to improve efficiency.

• Sales efficiency ratio around 1. You’re breaking even. A ratio of one means you’re generating an equal amount of revenue to expenditure. This is a good start, but your sales strategies need more optimization for you to become profitable.

• Sales efficiency ratio from 1 to 3. You’re generating a positive ROI. Keep improving your sales strategies to boost sales efficiency even more.

• Sales efficiency ratio over 3. Only exceptional companies generate a sales efficiency of over 3. However, if your sales efficiency is this high, it could indicate that you’re underinvesting in your sales and marketing teams. With additional investment, you could increase your revenue significantly.

7 strategies to improve sales efficiency

There are two main ways to increase sales efficiency:

1. Generate the same amount of revenue but reduce costs

2. Make more revenue while keeping costs the same

Whether you have a low or high sales efficiency ratio, there’s always room to improve. Here are some strategies you can use to boost efficiency and optimize your sales activities.

1. Give your sales reps clear, achievable objectives

Setting clearly defined goals can help boost your sales efficiency. With understandable, achievable targets, your sales reps always know what to focus on next.

The best way to set sales goals is through the SMART goal-setting framework. SMART stands for:

• Specific. Your sales goals should be clear and precise. For example, you might set the goal to increase sales by 10% within the next quarter.

• Measurable. Your goals and quotas should be trackable and quantifiable. In our example, your goal to increase sales by 10% is clearly measurable and easy to track.

• Achievable. Setting unattainable goals can demotivate your sales team and decrease productivity. Instead, you should set goals that are challenging but achievable. For example, setting the goal of increasing sales by 50% in the next quarter might be unrealistic, whereas 10% is possible.

• Relevant. Your goals should align with broader company sales objectives. For example, say your current strategic focus is expanding into a new market segment. You could set the goal to generate a specific amount of new sales from that segment.

• Time-bound. Finally, your goals should have a timeframe. In our example, it was to increase sales by 10% in the next quarter. Having a deadline for your goal creates a sense of urgency and helps your sales reps prioritize their tasks more effectively.

2. Create an ideal customer profile (ICP) to boost conversions

An ideal customer profile is a detailed description of the primary type of customer that will benefit most from your products or services. Knowing this information will help you target the prospects who are more likely to convert, increasing your sales efficiency.

There are three main reasons why using an ICP is so effective.

First, as we’ve mentioned, it enables targeted prospecting. An ICP arms your reps with vital information about your ideal customers, including their industry, demographics, location, pain points and needs. With this data, they can prioritize any new sales prospects who meet this criteria.

Second, an ICP helps your sales reps generate personalized messaging. They can use the pain points and needs identified in the ICP to tailor their communications and craft value propositions that resonate with the target audience.

Third, an ICP ensures optimal resource allocation. By focusing on prospects that meet the ICP, salespeople can use their time and resources more effectively. They can prioritize their sales activities rather than waste resources on low-potential leads.

3. Streamline your sales processes to reduce inefficiencies

Sales processes are the systematic steps your reps take to convert leads into customers. By streamlining these steps, you can reduce wasted time, improve sales productivity and ultimately close more deals.

The first step to improving your sales processes is creating well-defined sales stages. Each stage should represent a step in the customer journey. It should also link with milestones that indicate progress toward closing the sale.

When you define these stages, it’s easier for your salespeople to track deal progress to ensure they’re moving forward.

For example, your stages might include

• Prospecting

• Qualifying

• Presenting

• Negotiating

• Closing

Milestones might include

• Scheduling a sales demo

• Holding a follow-up meeting

• Obtaining a signed contract

Refining your sales processes should be an ongoing effort. You should regularly evaluate key sales performance data and identify areas for improvement. Below, we’ll explain a few key metrics that, alongside sales efficiency, will help you implement effective changes to your sales process.

4. Refine your sales messaging to resonate with your customers

Sales messaging refers to the language, content and value propositions used by salespeople to communicate with prospects. When sales messaging is well-crafted, it can engage prospects more effectively, helping to build relationships and drive sales.

Here are a few tips to improve your messaging:

• Tailor your communication to your audience’s preferences. Find out your prospects’ needs, pain points and motivations by analyzing customer data and conducting market research. Then, personalize your messaging so that it reflects the challenges they face.

• Create clear and compelling value propositions. You should be able to clearly demonstrate the benefits, features and advantages of your offerings. When crafting your value proposition, remember to emphasize the value of your product and how it differs from competitors.

• Use compelling storytelling. The best sales messaging incorporates storytelling techniques to capture your prospect’s attention and create an emotional connection. For example, you could share success stories, case studies or testimonials that illustrate how your offerings have positively impacted other customers.

5. Keep your reps up-to-date with sales training

Effective sales training can boost your sales reps’ efficiency by providing them with the most up-to-date knowledge and techniques. Professional sales courses equip your team members with the tools and strategies to engage prospects, overcome objections and increase your win rates.

Sales training helps develop and enhance essential sales skills. These skills include things like active listening, effective questioning, negotiation and closing techniques.

Sales training also helps reps understand their offerings in the context of the industry they work in. With a better understanding of their offering, they can effectively communicate its features, benefits and unique selling points.

Finally, sales training can provide guidance on the particular sales methodology that the company uses, whether it’s solution selling, challenger selling or something else. This training provides a framework for you to follow, making sure that you stay on track while closing deals.

6. Invest in the right sales tools

Investing in the right sales tools, like a customer relationship management (CRM) system, can significantly enhance sales efficiency. A CRM is a comprehensive platform that manages customer interactions, sales processes and data analysis.

Here are some of the benefits of effective CRM software like Pipedrive:

• Centralized customer data. A CRM system acts as a centralized database for all customer information. It provides quick access to things like contact information, purchase history and communication logs so you don’t have to switch apps or scroll through lengthy spreadsheets.

• Streamlined sales processes. CRMs provide features like pipeline management, task scheduling and automated reminders. Track your sales progress, set reminders for follow-ups and prioritize leads effectively.

• Improved communication and collaboration. CRM systems allow for seamless communication among sales teams and with other departments. For example, Pipedrive lets you share customer insights, notes and updates on the CRM platform, ensuring that everyone is on the same page.

• Automation of repetitive tasks. CRM software offers automation for repetitive tasks, saving you valuable time and effort. For example, Pipedrive lets you automate lead capture, data entry and follow-up reminders so that your reps can spend more time closing deals.

7. Track and analyze other important sales metrics

The sales efficiency metric is important, but it isn’t the only one you should track. To get a complete picture of how your organization is performing, you need to monitor and analyze a handful of KPIs including the LTV:CAC ratio, lead response time and the payback period.

LTV:CAC

LTV:CAC is the ratio of customer lifetime value (LTV) to customer acquisition cost (CAC). This helps you understand how profitable it is for you to acquire new customers and what types of customers are worth pursuing. The higher your LTV:CAC ratio, the more it costs you to acquire new customers (and vice versa).

To calculate LTV:CAC, you need to know each value. LTV is how much revenue you can expect to make from a customer throughout their lifetime with your company. CAC is how much it costs to acquire each new customer.

Once you have these values, you simply divide LTV by CAC to get your ratio. For example, if your LTV is $1,000 and it costs $500 to acquire a new customer, you have an LTV:CAC ratio of 2:1 ($1,000 / $500 = 2).

If you find that your LTV:CAC ratio is too high, you can implement strategies to lower it like targeting more qualified leads or refining your sales pitch.

Lead response time

Lead response time is how long it takes you to respond to a lead’s expression of interest. The quicker you respond, the more chances you have of converting them into a customer. So, by minimizing your lead response time, you can increase conversions (and overall sales efficiency).

If you find that your lead response time is too long, you can implement strategies to reduce it. For example, you could set up push notifications and automatic reminders through your CRM system so that you never forget to follow up.

Payback period

Finally, the payback period is the amount of time it takes for you to recover the cost of acquiring one customer. For example, if it costs $500 to acquire a customer and they spend $50 per month with your company, the payback period is 10 months.

Tracking the payback period helps you see how efficient your customer acquisition strategies are. The shorter it is, the more efficient you are.

Final thoughts

Tracking sales efficiency is vital if you want to run a successful company. It can help uncover inefficient processes and tighten up your sales operations. By continually improving sales efficiency, you’ll pave the way to long-term success.