We want efficiency out of just about everything — which is why, if you’re in business, you need to measure sales efficiency.
Sales efficiency measures how quickly your sales reps can convert prospects into leads and paying customers. In other words, it tracks how quickly your business can generate revenue within a certain timeframe.
Sales efficiency is one of the most important metrics for businesses to understand, track, and ultimately improve. Here are some explanations, tips, and resources to help you do all three.
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What is sales efficiency?
Sales efficiency is calculated by dividing the gross revenue a sales team generates by the costs the team incurs while generating it — like salaries, benefits, office space, and training expenses. If a sales team generates $15 million in revenue at a cost of $5 million, it would have a sales efficiency of 3 or 300%.
Sales efficiency is, in large part, a measure of the speed of your sales operations. It’s usually considered within a specific timeframe — often by quarter. Reporting platforms, like HubSpot’s sales reporting software, can help determine sales efficiency and show which of your reps are converting prospects into leads or making hard sales.
Sales efficiency can be tricky to calculate in some cases. It might be that not all of your revenue is a direct result of your immediate sales and marketing investments. Let’s say a repeat customer returns to your site and spends more money. Is that because of their previous experience or a result of the money you spent that quarter to reach them?
The figure isn‘t always black and white. As finicky as it can be, it’s still an important benchmark to consider. But, let’s not get it confused with sales effectiveness.
Sales Efficiency vs. Sales Effectiveness
Sales efficiency and sales effectiveness are similar, as both are measurements of your business operations. Although they are similar, sales efficiency and sales effectiveness are not the same thing.
Sales effectiveness is a measurement of the output of your sales team. Essentially, it defines the effectiveness of your sales team’s strategies and looks at the sales process at each level. This metric finds wins and losses within the sales funnel. It answers the question, “How does the sales team use our business strategy to generate revenue?”
Sales efficiency, though, is a good indicator of how well your overall business operations run. This measurement will help you determine how efficient your sales team is with available tools, resources, and processes.
Why Sales Efficiency Matters
It’s crucial to keep tabs on sales efficiency. Sales reporting software can make keeping up with sales efficiency easy and convenient. The sales efficiency figure is one of the most straightforward, definitive metrics for understanding whether your sales processes, methodologies, and overall strategy are actually worthwhile. It can expose deeper-rooted, more systemic problems in your sales efforts — revealing if your sales operations are sustainable.,
Let‘s assume all your sales reps hit their quota one quarter. You hit your revenue target, and everyone is ecstatic, but your business is at a standstill. Your company is barely breaking even, and it’s certainly not growing. You’re hitting your revenue target, but something else is at play here.
Sales efficiency makes you take a good, hard look at everything that’s going into your sales efforts. If you see that your sales are inefficient, you might look to bump up quotas, strip back certain expenses, or adjust any other costs or expectations that could be holding you back.
Ultimately, examining sales efficiency provides a starting point — one from which you can gauge both what you’ve been doing well and what you can be doing better.
How to Calculate Sales Efficiency
The Sales Efficiency Ratio
A sales efficiency ratio provides a high-level overview of how long customer revenue takes to pay back sales and marketing costs.
The inverse of sales efficiency is the payback period. If sales your team generates $2 million in annual revenue at a cost of $1 million, your sales efficiency would be two — meaning it would take half a year to reimburse sales and marketing costs.
Your sales efficiency also informs how you should invest in and evaluate your sales strategy.
According to Tomasz Tunguz of Redpoint Ventures, “When sales efficiency figures fall below one and elongate payback periods, it’s likely time to revisit sales and marketing techniques or explore up-sell and cross-sell. When these figures exceed one, it’s likely time for a business to invest more capital into the sales and marketing efforts.”
What is a good sales efficiency ratio?
You can calculate your sales efficiency ratio by dividing your annual sales by what you spend on your marketing endeavors plus your annual sales. The decimal value is your sales efficiency ratio.
Ideally, to be efficient in your business, you want a sales efficiency ratio between one and three. A sales efficiency ratio above three means your business goes above and beyond.
However, if your sales efficiency ratio is below one, you should look at your sales processes to determine where the lag in sales lies. Let’s take a look at ways to improve sales efficiency.
6 Ways to Improve Sales Efficiency
1. Set clearly defined SMART goals.
Clarity is key when looking to improve sales efficiency. Your reps need to know what you‘re hoping to achieve before they can really lock in on their objectives and streamline their efforts. That’s why you need to set SMART goals — specific, measurable, action-oriented, realistic, and time-based.
With sales efficiency, the “measurable” component might be the most crucial. Have appropriate KPIs to serve as benchmarks for how your reps sell and what’s expected from them. Are they expected to close a minimum number of deals each month? Do they have an individual revenue target?
By establishing clear objectives for your reps, you’re giving them the necessary guidance to work as effectively and efficiently as possible.
2. Have a clear picture of who you’re selling to.
Again, clarity is key here. Having clearly defined buyer personas gives your reps a better, more comprehensive picture of how they should conduct their sales efforts. If reps know who they’re meant to be targeting, they can have a better picture of what they should be doing to best appeal to them.
You don‘t want your reps indiscriminately trying to appeal to prospects that are inherently unlikely to take to your product or service. Give your team a solid picture of who they’re supposed to be engaging with and, in turn, set them up to know how to best reach them.
That clarity can streamline sales efforts and save your company time and resources.
3. Work according to a sales process.
HubSpot defines a sales process as “a repeatable set of steps a sales team takes to move a prospect from an early-stage lead to a closed customer.” It’s essentially a blueprint your sales team uses as a reference point through their sales efforts.
A sales process typically contains a company‘s preferred approach to prospecting, connecting and qualifying, researching, presenting, handling objections, and closing. It’s generally specific to each company‘s target audience, that audience’s buyer‘s journey, and that company’s reps’ strengths and weaknesses.
Efficient sales efforts have structure. They need to have some sort of model that indicates whether their prospects are worth pursuing and how they should be pursued.
If your team has a clearly defined sales process, you‘ll know what your reps are getting into and how well they’re doing — and you won’t unexpectedly waste resources on reps who are figuring everything out as they go.
4. Conduct active and effective sales coaching.
Sales coaching is an ongoing effort where sales managers actively support, engage with, and advise reps while reinforcing what they learn in training. It’s an iterative, individualized, routine process — focused on improving reps’ skills and reinforcing correct behavior.
That could include reviewing calls with sales reps and discussing what went well and where they could improve. Another example would be looking over reps’ email conversations with prospects throughout different points in the buyer’s journey and providing constructive feedback.
Ultimately, sales coaching is an engaging, productive process that allows you to make the most of your training budget. Organizations that implement sales coaching programs see considerably higher win rates than those that don’t.
Implementing this strategy will help you get more mileage out of your training investments and improve your sales efficiency as a result.
5. Consider using a sales liaison.
Sales and marketing are inherently connected. Salespeople rely on their marketing departments to feed them qualified leads, and marketers need to know what their sales teams expect in terms of the personas they’re appealing to and the channels through which they’re reaching prospects and customers.
Despite that, many marketing and sales departments are siloed — operating on their own with minimal communication with one another. A sales liaison is an intermediary who relays information on a sales team’s efforts, preferences, and needs to their company’s marketing department.
Sales liaisons can help foster cohesion within a company and ensure that its sales and marketing efforts complement each other as effectively as possible. The role lends itself to seamless understanding throughout a business and better-constructed sales and marketing initiatives.
In terms of efficiency, a sales liaison ensures that a sales team is getting the support it needs from its marketing department. The position can help trim costs a sales team might incur as a result of unfocused marketing efforts and save time and effort by putting those reps in touch with more receptive prospects.
6. Use the right tools to measure your efficiency.
Adopting inside sales tactics and using HubSpot’s Sales Performance Management System can provide a quick but significant boost to your sales efficiency by cutting overhead. Since inside sales are conducted remotely, reps don’t have to travel to connect with prospects.
Naturally, that lowers your budget by slashing direct travel costs and time that could be spent connecting with prospects lost to time on the road.
How Inside Sales Can Make Your Business More Efficient
If there‘s anything to take away from this article, it’s this — always keep track of your sales efficiency. It can expose flaws in your sales operations and offer perspective on whether you need to switch things up.
Steve Jobs claimed humans go from being the least to the most efficient animals when given a bicycle. A low sales efficiency ratio will tell you when you need to tighten up your sales operations and take the proper strides to get your business on a bike again.