Sales Efficiency vs Sales Effectiveness
What should you focus on?
Photo by Melanie Deziel on Unsplash
There’s a distinction in SaaS sales teams that I hadn’t fully appreciated until I started working with a number of different ones. Some teams prioritize efficiency and some effectiveness. It shouldn’t be the case, but inevitably it just is.
What you do will depend a lot on what you are selling. But, what’s important is to understand that you can’t afford to be poor at the one that makes most sense for your business, and if you start to pivot, you need to make sure you have the bases covered. I’ve witnessed first-hand what happens as a company transitions from needing to be efficient to needing to be effective, but doesn’t understand what that means.
Let’s kick off by defining the two categories.
Sales Efficiency
Sales Efficiency measures how fast a team is able to convert a lead into a paying customer while minimizing the costs. Sales efficiency can be calculated by dividing new revenue generated during a specific time period by the cost of the Sales & Marketing teams’ efforts, including salaries, commissions, ad spend and overheads.
So, if we won $150k in new revenue and it cost us $100k to win it, then that’s a ratio of 1.5. But if we only won $50k for our $100k, that would give a ratio of 0.5. Generally speaking you should be aiming for about 1.0
Sales Effectiveness
Sales effectiveness, on the other hand, is concerned with the ability of a sales team to convert leads into quality customers (ie ones that spend the most and love the product).
Measurements here might be more about hitting individual sales targets, being knowledgeable about the product and being able to adapt to changing needs as the landscape evolves.
When does it matter?
In an ideal world, your business would be both efficient and effective. But often you see companies naturally leaning more towards one or the other.
If you are selling lots of licences at a relatively low Average Contract Value (ACV), then the likelihood is that you’ll want to automate and streamline the process as much as possible. You can’t afford to spend hours and hours with a lead for a $100 contract. So your focus will have to be on keeping things lean and reducing friction for the customer. You will be pushing for sales efficiency.
On the other hand, if you are selling something for $100k+ a pop, then you likely have something pretty complex which isn’t a straight-forward decision for the buyer. Here you will be relying on skilled, knowledgeable sales people to work with leads to a successful outcome. In many ways, more like the type of sales you might do at an agency or consultancy.
What are the characteristics of sales and marketing teams in the two categories?
If they have to prioritize, this is where companies will likely be focusing their efforts:
Sales Efficient Company
Sales efficient companies tend to have lots of leads and customers, spending smaller amounts of money.
For companies with High Volume/Low Value you would expect to see a sales team that ‘hand holds’ customers: shepherding them towards the payment page by answering basic questions.
But in the background, to work well, you would expect a pretty awesome formulaic machine that includes:
Tech Systems - CRM, automated drip campaigns, marketing outbound, lead magnets, good content - all playing nicely together.
Sales Resources - battle cards, a list of objections and stock answers, agreed talking points
Database - fully populated database with everyone in your addressable market, ready to be part of various marketing sequences. An ability to dissect the database based on levels of engagement to date.
Metrics - a way to capture and report in real-time on a set of agreed KPIs that includes Monthly Recurring Revenue (MRR), Expansion, Churn, ACV, Customer Acquisition Costs (CAC), Conversions from lead to trial and trial to paid (if relevant) and Marketing Attribution.
Lead Management - with so many leads, a strategy to score and direct leads. For example, some leads may warrant a demo, some really won’t and should be pushed towards a webinar or trial.
Sales Effective Companies
Sales Effective companies tend to sell fewer contracts, but at a much higher ACV.
For companies with Low Volume/High Value, the tendency is to be less concerned with measuring everything that moves. If each of your customers are paying you $1m, then are you going to obsess too much about velocity of the sales cycle, or your conversion rate from lead to sale? It’s not that you don’t care about these things, it’s just that they will matter less than, say, your ability to convince a CFO of a publicly traded corporation that they should spend seven figures on your product.
At a Sales Effective company you would expect to see:
Sales Quotas - sales teams in both types of company might have sales quotas, but it matters more when you have longer sales cycles and higher ACVs. If a rep is only closing a handful of deals a quarter, then missing out on one or two has a big impact. Part of this might include Discount Measurement by rep, where it becomes clear that there more skilled sales people won’t need to rely on heavy discounts to convince customers to come on board. Similarly their ability to upsell or cross-sell where appropriate.
Skills Training - sales teams will work through their sales pitch, objection handling, upselling and closing strategies. Nothing will be left to chance.
Product Knowledge - whereas a sales efficient organisation tends to have simpler products and there is less of a need to know much beyond how to make it work, a sales effective company needs their sales and marketing team to have a deep knowledge of the product, the use cases and even the tech stack. You might have a product marketing specialist and a technical sales person on the team.
Longer Sales Cycle - sales efficient teams are usually coming in at the point that the lead is about to make a purchase. Much of the work higher up the funnel is taken care of by content, automations and lead magnets. For a sales effective team, they will often need to educate the buyer about the competitive alternatives and where they fit into that at a much earlier stage in the sales cycle.
Positioning - this group has a clear idea what their differentiated value is and which customers care the most about it. A deep understanding of the ICP and their pain points is an essential element that is less of a requirement in a sales efficient team who are relying on the marketing machine to deliver enough converting leads.
Highly Valued Sales Reps - the difference between a good sales rep and a bad one is more extreme with a sales effective organisation. You get less bites of the cherry, so if your reps can’t convert, that’s serious. On the flip side, good reps are worth holding on to. This means reps are better paid, there is more of a structured career progression path and staff churn is lower.
When does it really matter?
Companies will naturally become more efficient or effective based on the type of customer they are going for. High Volume/Low Value will need to have their systems highly automated because anything else won’t be cost effective. Low Volume/High Value businesses will be able to do hold off implementing automated solutions by plugging gaps with humans, and the margins won’t be too badly impacted.
Where it becomes a problem is either where a company moves ‘top-down’, or ‘bottom-up’.
Top-down (for example, where they start to introduce a self-serve element), is problematic where the automated tools haven’t been put in; where marketing hasn’t been obsessed with attribution and testing; and where companies try to apply their high-touch winning strategy for an ACV that can’t support it.
Bottom-up normally shows itself when the sales reps just aren’t up to the job of selling at an enterprise level. It’s not their fault: they’ve never been trained, they may not possess the skills and they have little experience. What you see is them doing a features demo and offering discounts, without anything in the way of proper discovery and a strategic single approach to a sales pitch. This works if you are selling to a Mom and Pop shop, but it doesn’t really stack up if you are in front of a CTO at a billion dollar company.
Somewhere in the middle - your ACV is mid-market. You need both a volume of leads AND a sales team that can work with multiple stakeholders, offering a more consultative sales motion. In this case you need both. You need to have a predictable way to generate leads and be all over your CAC especially as things can come undone quickly if your sales efficiency has a poor ratio, but at the same time, your sales reps need as much expertise as their higher-ACV colleagues. This area is sometimes referred to as the ‘uncomfortable middle’ for precisely this reason. It’s the best and worst of both worlds.
It also falls apart, for sales effective teams with no automation, when businesses get beyond a certain scale. After a while, it doesn’t matter how great your sales team is if you don’t have the tools and processes in place to manage leads at scale.
