For SaaS startups with unpredictable revenues and churn, my favorite high-level ratio to measure sales efficiency is to divide new (and upsell) bookings by sales and marketing cost. A ratio greater than 1 indicates that your business model is economically favorable and the business should keep investing in sales and marketing. For SaaS startups, I prefer to use the sales efficiency ratio rather than the magic number, albeit a similar ratio, the difference being that the magic number uses GAAP revenues opposed to bookings. Most startups do not have audited GAAP revenues and its revenue stream is unpredictable for SaaS given the lag time in recognized revenue amortization, thus would not be a useful indicator of sales performance until a later stage.
Prior to calculating your sales efficiency ratio, you must first understand your sales cycle, sales compensation, and marketing ROI. Sales cycle refers to the ramp time for reps to win business. Is it one month, one quarter, two quarters? The sales cycle is critical for ratio timing. For example, if the ramp time for a new rep to win business is a quarter, then you would divide the current quarter’s bookings by last quarter’s S&M expense. If a new rep starts to contribute to the business in a month, the you would divide the current month’s bookings by last month’s S&M expense. The next variable to understand is the sales compensation plan because it’s a significant expense and should economically scale as the business grows; so, for all comp plans with accelerators, model the worst-case scenario to make sure a boom in bookings is not bankrupting the company. While sales compensation is an expense and thus in the denominator, the plan effects the numerator as well because the plan must also incentivize good sales behavior for the rep to stay hungry to win new business and be rewarded for tenure to prevent attrition. Finally, understanding the ROI on your marketing spend is critical to control costs and predict your pipeline sales funnel. For example, for every dollar the company spends on advertising, how much pipeline does it generate and when? If your marketing strategy doesn’t drive enough qualified leads or the payback period is longer than expected, then your sales efficiency will suffer as well as increase cash-burn.
Below is a model to get you started measuring your sales efficiency. The inputs (shaded in yellow) on the left are the variables you can toggle. As you enter input scenarios, the green highlighted cells, which are the new sales reps in the plan are reflected in the model.