As with any business, I’m sure your company spends a lot of money on marketing and sales. How do you know if you are getting a return on that investment? Sales Efficiency (also known as Sales & Marketing Efficiency) is a measure of how much revenue you generate for every $1 you spend on sales and marketing.
To calculate your sales efficiency, you simply divide the amount of new business you generated in a set time period (e.g. January) by the total sales and marketing cost for the same time period. For example, if you spent $10k on sales and marketing in January which generated $15k in new customer revenue then your Sales Efficiency would be 1.5.
If your Sales Efficiency is above 1, it means your sales and marketing are generating more cash than they consume and you can spend more to generate more revenue! If the value is lower than 1 it means that you are burning capital and you need to watch your bank account, as you can’t run a loss forever and remain in business.
Okay, that sounds too easy. What is the catch?
You are right, that does sound too easy! Sales efficiency can be difficult to calculate for a number of reasons:
- It can be hard to determine how much of your revenue is due to sales and marketing spend. If a customer returns to your site and spends more money, is that because they had a great experience previously or because you spent money to reach them again? What about subscription businesses where you might not know how much revenue you generated in January until September?
- It can be hard to classify expenses as sales and marketing! Advertising is easy to classify as marketing, but what about promotional discounts? What about channel partnerships where you provide wholesale pricing?
- If your business experiences seasonal swings, it can be hard to have a consistent measure of efficiency. E-commerce businesses boom around the holidays which can influence the Sales Efficiency calculation.
Due to all of these challenges, many different variations of Sales Efficiency have been created over the years for different kinds of businesses. We’ll cover them here on the Data Driven Daily, starting tomorrow with the Magic Number!
(Yes, it’s really called the “Magic Number”. No, I didn’t come up with that.)
Quote of the Day: “Inefficiency is a curse” – Theodore Roosevelt