Sales Best Practices

Sales Efficiency and Sales Effectiveness: Definition and Importance to Scaling Growth

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Serena Miller

Editor, Sales Best Practices

Although SaaS companies collect an abundance of sales data, effectively visualizing and leveraging that data can be quite a feat. Measuring stats like customer satisfaction, churn, and revenue are relatively straightforward, but sales efficiency and effectiveness are tougher nuts to crack. Yet, knowing precisely which activities actually make your team more productive is crucial to achieving and maintaining sales KPIs, especially as the market shifts and teams are asked to do more with fewer resources. 

Too many companies still consider sales more of an art than true science, relying on gut instinct or a few rockstar sales reps to hit their numbers. But we’re here to tell you that sales effectiveness and efficiency are measurable — and should be a major component of your growth strategy. 

Below, we’ll define sales efficiency and sales effectiveness (yes, there’s a difference) and offer several tips for leveraging them as your company scales.

What is Sales Efficiency?

Sales efficiency compares revenue to sales and marketing spend in a given period. Think of sales efficiency as a way to demonstrate the payoff of investing in sales and marketing. For example, SaaS companies tend to reserve a great deal of their budget for product promotion, events, and sales enablement and want to be confident that this hefty investment drives returns in the long run.

Unlike typical growth metrics that plateau over time, sales efficiency should continue to improve as companies scale.

When companies start to hit their go-to-market stride, their sales efficiency skyrockets. As organizations invest in revenue operations, they are better able to identify and close process gaps. In turn, those businesses can spend less to attract new customers and invest more time nurturing existing ones. This means external-facing teams can deliver more value to customers, and drive more revenue.

But the math isn’t always that simple. Scaling sales workflows takes time and practice, and sales efficiency should be analyzed in tandem with other metrics like growth margin, salaries, commissions, and ad spend. Taking a more holistic approach to sales efficiency can provide more detail and highlight areas for improvement.

The Sales Efficiency Calculation

There isn’t just one way to calculate sales efficiency. Still, most companies use a relatively straightforward calculation:

Sales efficiency = (Revenue / Sales & Marketing Costs) x 100

Above, we refer to revenue as total revenue, which includes net new sales, upsells, cross-sells, as well as churn and downsells. The sales and marketing cost in this equation represents the combined total of several different expenses related to those departments.

Let’s work through an example. Say in Q1, your organization pulls in $2M from sales and pays $3M for sales and marketing activities. Your sales efficiency for that quarter would be 66.7%:

($2M / $3M) x 100 = 66.7%

While this number doesn’t tell you why you’re not quite hitting 100%, it does indicate that there’s an opportunity to dig deeper into your spending and your sales effectiveness. 

To gain a little more insight, consider modifying the traditional sales efficiency equation. For example, maybe you want a cleaner look at gross sales efficiency. You’ve allocated more money towards attracting net new customers and consider churn and downsells a customer success issue. In this case, you can keep your denominator (S&M costs) the same, and replace revenue with net new ARR:

Gross sales efficiency = (Net New ARR / Sales & Marketing Costs) x 100

If your company isn’t measuring up, study your competitor’s sales and marketing tactics. What changes did they make to scale faster and more efficiently? Part of the answer may lie in their sales effectiveness.

What is Sales Effectiveness?

While the terms are often used synonymously, sales effectiveness is not the same as sales efficiency. Whereas sales efficiency measures a sales team’s output, sales effectiveness measures a sales team’s ability to complete the right tasks at the right time. To be effective, your go-to-market teams need to be productive, using workflows that serve them and move them towards a common goal. If sales effectiveness is lacking, sooner or later, sales efficiency will suffer.

How to Measure Sales Effectiveness

At the most basic level, we recommend framing sales effectiveness as the average output per salesperson, where “output” is a KPI associated with a specific company goal. Output could be faster sales cycles, higher conversion rates, dollar increases in ACV, or something else of high priority. Sales processes, goals, and overall strategy differ from organization to organization, so the way sales effectiveness is measured differs as well.

For instance, if your company is interested in expanding into a new vertical, you might measure the number of new opportunities each rep closes within that category every quarter. If your goal is to increase average ARR, you’ll want to assess each rep’s ability to bring in more business every quarter.

How to Improve Sales Effectiveness

Just like any goal-setting exercise, you’ll want to get a baseline reading first to set realistic objectives. Of course, how you break each goal down and the metrics you track will vary depending on team structure and company strategy, but here are some things most sales teams care about:

  • Sales effectiveness by vertical
  • Sales effectiveness by territory or region
  • Sales effectiveness per product
  • Sales effectiveness based on rep tenure
  • Individual rep effectiveness against the average
  • Sales effectiveness based on new enablement sessions, quarterly sales kickoffs, new software, or other investments in the sales team

    Bridge the Gap Between Strategy and Execution

    Although most sales leaders take the time to strategize before each year starts, something gets lost in translation. Inefficient sales processes, poor execution, and disheartened buyers plague the SaaS industry. Traditional revenue organizations don’t know the next best action to take and struggle to make data-driven decisions. Over time, this creates a sales execution gap that makes every member of the team less efficient.

    Sales efficiency and effectiveness metrics can bring a fresh perspective to the sales organization, inspiring growth and execution. Measuring sales efficiency on a regular cadence allows you to be more agile, showing you where problems are and how much impact subsequent changes you made had on your bottom line.

    With these metrics at your fingertips, it’s easy to spot ways to uplevel your enablement, adjust your pricing, create better playbooks, and ensure you have the right systems in place to help, not hinder, reps’ productivity.

    Keeping your sales and marketing engine nimble is particularly important as you go through the growing pains of scaling your organization. Working on the wrong priorities in the wrong way or with the wrong insights leads to a series of productivity losses that eventually result in big problems. Constantly evaluating sales effectiveness and efficiency, on the other hand, can shed light on new ways to serve up the right leads to the right reps at the right time, ultimately getting and keeping your company ahead of the curve.

    Ready to Increase Sales Velocity?

    Today's sales leaders have an especially challenging role. You have to reduce costs, while also hitting your numbers. That’s easier said than done during an economic downturn and ongoing pandemic. To thrive in spite of challenges, modern leaders need efficient solutions that support the full sales cycle. To help, we've pulled together our top resources for improved prospecting, deal management, and sales forecasting: 

    • Your road to forecasting efficiency: Economic uncertainty calls for more efficient revenue processes, including forecasting. Learn how modern revenue leaders drive forecast efficiency.
    • Your path to de-risking deal cycles: A challenging economic environment calls for better deal management. Find out how modern revenue leaders are infusing efficiency and visibility to run stronger deal cycles.
    • How to amplify sales rep impact: Sellers are being asked to hit sales targets under the toughest conditions ever. Learn how to amplify rep impact and efficiency with sharper sales prospecting.

    Surfacing crucial insights is often easier said than done, but Outreach helps sellers and leaders use AI-guided insights to take the right action in the moment 一 not just after the fact. Companies using Outreach can proactively identify and act on growth opportunities to achieve consistently outstanding outcomes. Schedule a free demo or read more about Outreach's Sales Execution Platform can help your team drive more efficient sales growth.