What is Your Magic Number?

Sales efficiency is one of the most important numbers to get right when growing your company. Many investors call it the “magic number,” because it is a great indicator of how much growth their money will fuel.

What is Sales Efficiency

Forgive me for being crude, but a company is just a machine that takes money in and spits money out. The money in could be founder sweat equity, new investment, reinvested profits or all sorts of other things, but the whole reason to put that money in is to get money out. If your company spits out more money than it takes in over its lifetime that is good, if it spits out less that is bad.  

Sales efficiency is a measure of the money in and the money out of your sales and marketing functions. Technically it is a ratio of the money out over the money in. If you are the one responsible for building a sales process, you want your sales efficiency number to be well over 1. It is like miles per gallon, the higher the better.

How is Sales Efficiency Calculated

There are lots of ways to calculate sales efficiency, and most of the variations come from the different ways companies can book revenue. Which one you choose isn’t too important as long as you only compare it to Magic Numbers that were calculated the same way. We will keep it simple for now.

Sales Efficiency = New Revenue Generated / Cost of sales and marketing to generate that revenue

How to improve your Sales Efficiency Ratio

We want our ratio to be as large as possible. To do that we need to either increase the numerator or decrease the denominator in a way that doesn’t create a corresponding change in the other. So for example:

New Revenue = Volume x price

Volume = Conversion rate x number of leads

So we could increase the number of leads to increase new revenue in the numerator, but number of leads is also a driver of cost in the denominator so that’s not necessarily the right option. A better conversion rate could be the answer, as long as it doesn’t require substantially more salesperson time which increases the denominator again.

One of the best levers to pull is operational efficiency. Unlike lead volume or conversion rate, it is completely in your control, and it is a pure change to the cost of sales that will have no effect on the revenue from sales. Greater operational efficiency has no negative impact on your reps ability to sell and it could even improve it, a good system will streamline workflows, reduce organizational overhead and let your team spend more of its time selling. One GetGrow customer increased the number of deals each of their reps could manage over threefold.