It’s easy to talk about “sales efficiency” at a surface level — as a general measure of how well your sales teams turn activities (costs) into revenue. But if you really want to drive rapid growth, the deeper questions to answer are:
- What exactly is sales efficiency and how do you measure it?
- Why is it an important measure for any sales manager or director?
- What’s the difference between sales efficiency and sales effectiveness?
- What role does “sales negotiation” play in improving sales efficiency?
- How do you improve sales efficiency while investing in the future?
In this article, we’ll provide pragmatic answers to these questions as well as proven, actionable tactics for you to implement right away.
As individuals, we’ve been helping organisations improve sales efficiency and effectiveness for over 23 years. We take that knowledge and experience across multiple sectors and distil it into practical steps that you can apply in your business.
What is sales efficiency and how do you measure it?
Let’s go back to basics.
Any type of efficiency, in its basic form, is designed to measure how well inputs are turned into outputs.
Efficiency = Output/input
Let’s illuminate this equation with a tangible example: the light bulb. 💡
Light bulbs work by converting input energy (electricity) into light (lumens).
An old-fashioned, standard, 60W light bulb only converts about 2% of the input energy (electricity) to light (approx 800 lumens). The other 98% produces heat🔥.
Given that we buy light bulbs to produce light, not heat, that’s pretty inefficient. Using the equation above, its efficiency is:
Traditional light bulb efficiency: 800 lumens / 60 watts = 13.3 lumens/watt
However, for the same light output as an old-fashioned bulb (about 800 lumens), an LED bulb requires only about 20% of the power, i.e. 800 lumens only requires 12 watts of input energy, so its efficiency is:
LED light bulb efficiency: 800 lumens / 12 watts = 66.6 lumens/watt
Therefore, LED light sources are at least five times more efficient at converting inputs (electricity) to outputs (light).
So what has this got to do with sales efficiency?
It uses the same principle.
Note: because the numerator and denominator both have the same unit measure (e.g. USD), the output is often given as a percentage.
Typically, you’re looking for 200%-300% sales efficiency for a strong, viable, growing business.
Sales efficiency can be tricky to calculate, often due to timing issues and cost apportionment. For example:
- Timing: Spending significantly this quarter on lead generation and marketing may not pay off until the next quarter, or later.
- Costs: Should you include all marketing costs or only the proportion that is focused on performance marketing (as opposed to brand marketing)?
- Attribution: If a repeat customer returns to your eCommerce 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?
Because of these complicating factors, sales efficiency is often calculated as:
Sales in this quarter divided by broadly associated sales marketing costs in the previous quarter.
When it comes to calculating your own sales efficiency, make sure that you clearly define the variables and definitions upfront.
Why is sales efficiency an important measure for sales managers and directors?
If you’re a sales manager or director, you should be measuring sales efficiency. There are several reasons why this is a key metric for measuring the growth of any sales organisation:
- EBITDA: To maximise net profitability, you have to maximise sales efficiency. This is because sales and marketing costs form a material proportion of overheads. So, a drop in sales efficiency ultimately reduces % EBITDA margin.
- ROI: As a sales leader, one of your roles is to maximise sales ROI. You need to maximise the volume of sales for a given level of sales and marketing spend.
- Internal Performance: You can use it at an individual level within sales teams to provide an internal benchmark of who is delivering the most sales value for a fixed input cost.
- Marketing Performance: It helps you understand which marketing campaigns are more efficient at driving sales outcomes.
- Skills Gaps: It identifies opportunities to invest in skills training and tools for your sales team to improve their efficiency.
What’s the difference between sales efficiency and sales effectiveness?
As we alluded to earlier, there is no hard-and-fast rule or consistent definition of sales effectiveness. We like this one from Hubspot:
“The concept of ‘sales effectiveness’ is fluid, but it typically refers to how well an organisation’s sales reps can successfully convert prospects and guide them through its sales funnel. Sales effectiveness is evaluated via a variety of metrics, such as conversion rate, close rate, and quota attainment.”Hubspot
Sales effectiveness is — broadly — about doing the right things consistently to drive long term sales growth. Sales efficiency is linked to this: it’s about maximising the efficiency ratio, over the long term.
What role does “sales negotiation” play in improving sales efficiency?
This is a question we’re often asked by our clients:
“Why should I focus on improving the negotiation skills of my salespeople? They seem pretty good at getting deals done. And we’re making money”.
To understand how negotiation can be a key value driver, you need some important baseline data around price discounting.
In your sales CRM, make sure you capture the initial price setting relatively early in the sales process. I.e. once the lead is past the discovery phase and a salesperson is now shaping the deal.
Next, start tracking discount levels at the point of “Deal Won”. Tracking this data will inform you immediately, by salesperson:
- Are they setting realistic baseline prices compared to the wider market?
- Are they artificially inflating prices because they know they’re going to get chipped in the negotiation?
- Who is discounting the most, beyond where they need to?
Voila, you have an opportunity to reduce discounts and increase sales efficiency.
A checklist for improving sales efficiency:
- Housekeeping: Get your baseline data cleansed and your sales CRM reporting organised so you can start measuring things accurately.
- Monitor discounting: Make sure your sales process checklists have price as a mandatory field and that you can track when it’s changed so you can catch price discounting.
- Benchmark: Get some external benchmark data, specific to your sector, so that you know where you should be aiming for with your sales efficiency ratio.
- Tracking: Track sales efficiency monthly and begin to work out which of your team members are driving the highest sales efficiency. Explore how and why.
- Streamlining: Dig into the sales process and marketing activity to see where time is being wasted, excessive costs are incurred and discounting is being applied too heavily.
- Upskill: Hold lunch-and-learn sessions to apply tips and tactics to improve sales efficiency one small step at a time.
- Align: Make sure sales and marketing are fully aligned and integrated. Run lead-generation workshops with sales and marketing in the same room to work out the best campaigns to run for the next quarter to support sales
In its basic form, efficiency is about maximising the output from a given input. So in this case, sales revenue is divided by sales and marketing costs. Broadly speaking, you should be aiming for a 2:1 or higher ratio.
It’s easy to talk about a high-level concept like sales efficiency. However, as always, the value is in thinking it through in terms of what it really means and why it’s so important to measure for any sales organisation.
Negotiation skills play a key part in improving sales efficiency by reducing the amount of discounting by salespeople during the back-end of the sales process.
To improve this metric, get your data sorted, improve your processes and align sales-marketing to deliver tangible results.
About the Author: Mike Lander
Mike Lander is a successful entrepreneur and expert negotiator, with a proven track record of buying, growing, and selling businesses for seven-figure sums.
He has a uniquely valuable perspective on negotiating commercial deals, having worked on both sides of the table as a Procurement Director and an entrepreneur.
He now uses his specialist knowledge and experience negotiating hundreds of deals worth £400m+ to empower leaders and sales teams to negotiate more profitable deals with procurement.