How to Calculate and Improve Your Sales Efficiency Ratio

Golden Section wants to highlight one particular sales metric: the Sales Efficiency Ratio. To grow right, you need to get your sales efficiency ratio right. We hear stories of companies who spend anything to grow at any cost with no regards to efficiency. That strategy only works in rare cases when you have a product with the potential to reach mega-MRR sales. If you don't have that class of potential with your product, you must consider efficiency.

In fact, the sales efficiency ratio is directly related to the value of your company. At a basic level, every B2B SaaS company is a bond-creation machine. The sales organization turns the feedstock of raw cash and, through an intentional process, converts it into customer contracts. Those customer contracts, if customers are onboard and activated well, yield long term income streams (the gross margin).

Assuming normal churn, that income stream can be capitalized much like a bond into an enterprise value. The cap-rate will include risk of churn change, growth rate (expansion potential) and a variety of other things. But, most importantly, the enterprise value of

that customer will be compared to the acquisition cost. This comparison unlocks an entire new pool of value for the company; the developer premium. When a B2B SaaS firm can show that it can convert $0.50 into $1 ARR which sells for $8 because of the lack of churn and expansion potential, that firm has value outside the value of the customer contracts because the company itself has knowledge and processes that can make that conversion happen.

The impact: Tracking and adjusting to maintain an optimal sales efficiency ratio gives your company strong financial fundamentals, which will increase your company's valuation and allow you to take on non-diluted capital in the next series of funding.

The goal: Understand how sales efficiency is calculated and what it represents. Put in place a system for tracking and adjusting to keep the ratio near 0.7.

How can Golden Section Assist?

Background

Generally, the sales efficiency ratio, called by some the \"Magic Number,\" quantifies how much incremental revenue you generate from your spend on sales and marketing.

Specifically, it shows the ratio of annualized recurring revenue from a period to the S&M expenses spent the prior period to earn those bookings. For example, if in October a sales team booked $85K in new ARR (including upsells) and the sales organization cost the firm $42.5K in expense in September, then the sales efficiency ratio for that company in October would be $0.50. This indicates that this firm can produce $1 of new ARR for each $0.50 of sales and marketing expense. This is an incredible number.

The ratio is looked at by potential investors to benchmark your company's sales efficiency to comparable companies. The goal is to maintain a number of 0.70 or less; more than 0.7, indicates a less than efficient S&M spend, and less than 0.7 indicates it might be time to spend more money on S&M activities.

The sales efficiency ratio is the inverse of the CAC payback period, which calculates the number of months necessary to \"earn\" back your S&M costs to win a particular client.

One caveat, however, is that the CAC payback usually just considers gross margin in its analysis.

Steps

1. Review the trends on a monthly and quarterly basis
2. Schedule a meeting with the sales organization
   • Distribute the trends calculated above prior to the meeting
   • Brainstorm at the meeting a stretch goal for sales efficiency improvement
   • Identify two-to-three strategies to pursue that will impact
3. Distribute meeting minutes, assign responsibilities for strategies, and execute
4. Refine and repeat