Key takeaways
- Sales efficiency is new recurring revenue divided by sales and marketing spend.
- The magic number uses the previous quarter's spend, because spending takes time to turn into revenue.
- Customer acquisition cost looks at the same spend per customer rather than per unit of revenue.
- One quarter is noisy; read the ratio as a trend.
The sales efficiency formula
The sales efficiency formula divides the new annual recurring revenue won in a period by the sales and marketing spend in the same period. A result above one means the team won more yearly revenue than it spent to win it.
Spend should be complete: salaries and commission for sellers, managers and marketers, advertising, events, agencies and the tools they use. Some companies use net new revenue, after churn and contraction, which makes the ratio a measure of the whole go-to-market team rather than sales alone.
How the SaaS magic number works
The SaaS magic number takes the increase in recurring revenue from one quarter to the next, multiplies it by four to make it yearly, and divides it by the sales and marketing spend of the previous quarter. Using the previous quarter allows for the time spending takes to produce closed deals.
In a worked example with invented numbers, quarterly recurring revenue rises by 50,000, which is 200,000 a year, and the previous quarter's sales and marketing spend was 250,000. The magic number is 0.8. Teams then decide what level justifies spending more, based on their own margins and plans rather than a rule of thumb.
Sales efficiency vs customer acquisition cost
Sales efficiency measures revenue per unit of spend, while customer acquisition cost measures spend per customer won. Both start from the same sales and marketing costs, so they usually move together.
They answer different questions. Customer acquisition cost suits a business with many similar customers and leads to a payback period. The efficiency ratio suits a business whose deal sizes vary widely, where a count of customers says little about the revenue they bring.
What moves go to market efficiency
Go to market efficiency moves with anything that changes the revenue a team wins or the cost of winning it.
- Win rate and the average size of deals won.
- The length of the sales cycle, which ties up sellers' time.
- How long new sellers take to reach full productivity.
- Spending on channels that create pipeline but little revenue.
- Churn and expansion, if the formula uses net new revenue.
Reading the sales efficiency ratio fairly
Reading the sales efficiency ratio fairly means looking at several quarters, never one. A large deal or a quiet month swings it, and hiring ahead of growth lowers it for a while before the new sellers produce revenue.
Definitions matter just as much. Leaving costs out flatters the ratio, and comparing it with another company's figure means little unless both count revenue and spend the same way.
Where Pebbles Ai fits
Common questions
Is sales efficiency the same as sales productivity?
No. Sales efficiency compares revenue with spend, while sales productivity looks at the output of each seller for the time they put in.
Should sales efficiency use gross or net new revenue?
Gross new revenue shows how well sales and marketing win business. Net new revenue, after churn and contraction, shows how efficient the whole customer journey is; state which one you report.
Why does the magic number use last quarter's spend?
Because deals take time to close. Spending in one quarter mostly shows up as revenue in the next, so matching them gives a fairer ratio.
About this page. Written by the Pebbles Ai team for people who run sales, marketing and growth. Last updated .
