Sales is often one of the largest expense categories for fast growing SaaS companies, so it is important to monitor the return on investment for these activities. This growth program looks at measuring sales effectiveness by comparing outputs (i.e., sales bookings) versus inputs (i.e., the cost of running the sales machine). A high growth business with strong sales efficiency will be valued more richly than a business practicing the ‘spray & pray’ model. Below are only to Top 3 sales efficiency metrics
Sales Quota Achievement
- Definition: this measures how sales people are performing against quota
- Calculation: total quota-retiring sales over the measurement period (usually trailing twelve months to account for seasonality) divided by the total current quota pool. Make the sure the quota pool reflects the actual quotas carried by reps, especially reps who are new to the role and may have a lower, ‘ramp period’ sales quota.
- Benchmark: 80-90% is a good range. If average quota achievement is consistently > 100% then quotas are probably too low and the company is probably paying a premium for over-achievement. If achievement is consistently < 80% then the organization is not at optimal productivity and the company will likely see more churn in the sales team since reps can’t get into the higher compensation tiers. For larger sales organizations it is helpful to do a more granular analysis of quota achievement by sales manager, by geo, by rep tenure, etc. to highlight specific areas of organizational strengths or weaknesses.
- This metric is only useful if the Head of Sales has done a good job setting sales quotas. Sales quota setting is addressed in a different Sumeru Growth Program module.
- This metric only looks at the productivity of quota-bearing sales reps and ignores the rest of the cost of a sales organization. For example, a company could have high quota achievement but overall low sales efficiency if their go-to-market organization is overstaffed with unproductive sales support personnel who help a small population of reps hit their quotas.
Sales & Marketing Payback Period
- Definition: how long does it take for profits from a new customer to cover their acquisition costs
- The shorthand calc is total Sales & Marketing expenses divided by the change in Gross Profit from recurring revenue (use ARR * recurring revenue gross margin). For example, the 2021 payback period = 2021 S&M expense/(2021 ARR gross profit minus 2020 ARR gross profit). One problem with this version is the S&M expenses related to renewals will burden the calculation. That is less of an issue if the renewal expenses sit outside of S&M.
- Segmenting the math by new logo acquisition vs upsell/expansion vs renewal allows for a more nuanced view. For example, the sales efficiency calc for new customer acquisitions would be Fully-loaded S&M Targeted at New Customers divided by ARR Bookings from New Customers. The payback period for new customer acquisition should be longer than the payback period for upsell/expansion.
- Benchmark: 1-2 year payback range is generally good on a blended basis. > 2 years and the company may be overspending on growth. < 1 year may indicate the company could grow faster by increasing its S&M spend. If you are just looking at sales efficiency for new/expansion bookings, < 1 year is the expected payback period.
- Observations: This is not the same as LTV/CAC, which is a Net Present Value calculation where any result > 0 is theoretically acceptable.
Sales & Marketing Spend as % of Revenue
- Definition: self-explanatory
- Calculation: total S&M spend divided by total Revenue (or use Recurring Revenue instead of Total Revenue if the business is not investing in S&M to drive services or non-recurring revenue). You can also substitute ACV Bookings for Revenue.
- Benchmark: tough to give a guideline since it is a function of growth rate (faster growers often spend more) and go-to-market model (a field sales force is more expensive than other channels). This is more effective as an internal metric to view progress over time within the same company.
Observations: This one is kind of a blunt instrument, but the simplicity makes it easy to benchmark against other companies with comparable growth rates and business models.