#68- SaaS sales efficiency
How to calculate SaaS sales efficiency + reading material
My last post on BVPs 'The Rise of SaaS in India' highlighted the India SaaS framework to evaluate by Bessemer. Within, it mentioned the India SaaS team at Bessemer pays special attention to two metrics: Net Dollar Retention and Sales Efficiency.
This morning, I received a question posted by a gentleman on LinkedIn:
I use this as an opportunity to demystify sales efficiency for all.
What is sales efficiency?
It is a metric to understand how much new revenue can be generated by spending $1 on sales & marketing efforts.
How is sales efficiency calculated?
Sales efficiency is calculated by adding all new revenue generated in a time period (usually a quarter) and dividing it by the total spends on sales & marketing in that quarter.
Sales efficiency = New ARR / Total Sales & Marketing spends
Where New ARR = Closing ARR - Starting ARR
Note: For a true measure, we should ideally calculate it as New ARR of the current time period divided by total sales & marketing for the last time period. This is because current period ARR addition is a function of the sales & marketing efforts in the last quarter. However, for this post, I am simplifying the formula and keeping both numerator & denominator as current time period metrics.
Lets take it with an example for better understanding
Consider ABC Inc., a young SaaS company selling its product to All Big Customers. The company has a sales & marketing team, and in the last year has won $53,000 worth of annual recurring revenues.
To do so, the company has spent the following resources on sales & marketing
This tells us that in FY22 the company spent:
Q1: $10,000 in sales & marketing in order to win new deals worth $11,000
Q2: $12,500 in sales & marketing in order to win new deals worth $12,500
Q4: $15,000 in sales & marketing in order to win new deals worth $14,500
Q2: $17,500 in sales & marketing in order to win new deals worth $15,500
This gives us the gross sales efficiency of:
Notice it is called gross sales efficiency. Why?
Because we have not accounted for any customers who downgraded plans, or worse, left. When we account for churned ARR & contraction ARR, we get the net closing ARR:
Notice how the closing ARR changes drastically in Fig 4 compared to Fig 1.
This means that the net new ARR when you also account for ARR that you lost due to churn or downgrades looks something like this:
and gives us the net sales efficiency of:
You can download the excel file here, and find your gross & net sales efficiency.
Why calculate sales efficiency?
Your sales efficiency tells you whether your sales process creates value. If your sales efficiency is more than 100%, you are in a strong growth position. Every $1 you spent on sales & marketing efforts will return you more than $1 in new revenues.
However, if your sales efficiency is less than 100%, you may want to pause and check for reasons why. What is not working? The issue may be in:
a) Getting new revenues from new customers, or
b) Getting more revenues from existing customers, or
c) Losing revenues by way of downgrades or churn
One of the paths of least resistance may be to activate customer success to enable more cross selling opportunities and get more revenues from existing customers, and avoid some churn.
When to look for Gross vs Net?
When to look for gross sales efficiency?
When its time to review the outcome of your sales and marketing activities. Gross sales efficiency tells you how efficient was your sales & GTM in that time period.
When to look for net sales efficiency?
When its time to review the entire business. There are people and processes being run to attract customers (marketing), sell to customers (sales), and retain customers (customer success) - and net sales efficiency captures all of the above. It tells you how is your entire organization performing right from attracting, converting, and retaining customers.
What are the benchmarks?
Closing thoughts
As always, take all metrics and benchmarks with a pinch of salt. Every metric and benchmark may not apply to your business, but should make a broad sense.
If you’d like to discuss some of these points, please feel free to reach out to me on ss@malpaniventures.com.
Further reads
Sales Efficiency Benchmarks for SaaS Startups (Tomasz Tunguz)
How to Develop Best in Class Sales Efficiency (Tomasz Tunguz)
What is sales efficiency and why does it matter to founders? (Paubox)
A Primer on SaaS Sales Efficiency (Scale Venture Partners)