Revenue efficiency stands out compared to other performance metrics

By Scott Wallask

The old business adage goes, you have to spend money to make money.

But anyone who’s ever lost a game of poker knows that saying isn’t quite right. A better way to put it might be: You have to spend money wisely to make money.

In other words, you need to be efficient.

Yet many companies have a hard time determining efficiency. They race towards revenue goals without stepping back and examining how well they perform.

Henry Schuck, CEO at ZoomInfo, started the company while in law school by putting $25,000 on his credit card. He realized quickly that being profitable early on required efficient business processes to grow revenue and a disciplined approach to investments.

“We have incredibly short sales cycles, sub-30 days,” Schuck told Yahoo Finance in December. “We’ve built an incredibly efficient go-to-market engine … and we see that efficiency continuing.”

Common ways to measure sales and marketing performance include:

Of those options, ZoomInfo (among other companies) views revenue efficiency rate as the most insightful way to track marketing and sales performance because of the ability to track effectiveness in real time.

What is revenue efficiency rate?

This rate looks at the amount of revenue in a given period, such as the financial quarter, divided by what a company spends in marketing and sales costs in that same quarter. Stock compensation and depreciation in those departments’ numbers are factored out.

“[Revenue] efficiency tells you how efficiently your company creates value,” according to Scale Venture Partners, an early-stage enterprise software investor. “It does this by comparing new revenue for a given period to what was spent on sales and marketing in the same period. It gives you a single, difficult-to-argue-with data point.”

Here’s the formula behind the rate:

Revenue efficiency rate = Q# revenue / Q# sales and marketing spending

As an example, if in Q1 a company earned $100 million in revenue and spent $50 million on sales and marketing efforts, its revenue efficiency rate is 2x. The business brought in two times as much revenue as it spent on marketing and sales.

Benefits behind measuring revenue efficiency

Among the advantages of revenue efficiency are that it:

With those benefits in mind, revenue efficiency pulls ahead of other performance metrics mentioned earlier.

In particular, revenue efficiency wins out when it comes to using legitimate finance figures and accounting for actual earning and spending during a period.

The other metrics, in contrast, all present difficulties:

Another important aspect of tracking revenue efficiency rate is the ability to more effectively plan and measure outcomes, said Philip Watson, vice president of financial planning and analysis at ZoomInfo.

“If the sales or marketing team has an idea they believe will drive revenue that requires investment, revenue efficiency provides everyone with a stake in the outcome with a very easy way to track whether or not that investment was worth it,” Watson said. “I think this is really powerful. It allows us to be more forward looking and proactive with how we think about the business.”

Also, in contrast with the above measurements, the revenue efficiency rate remains relevant for longer periods.

“It often persists over time for a given company, especially after $10 million in sales,” Scale Venture Partners wrote. “It makes developing an efficient go-to-market model critically important early on. That model — and its inherent efficiency — is most likely going to be with you for some time.”

Conclusion: Revenue efficiency provides a strong measurement

In reviewing revenue efficiency, three points stand out:

The higher the efficiency rate goes, the more a company gets out of its sales and marketing investments. From this perspective, revenue efficiency stands out as a leading measure for businesses to track.

Scott Wallask is a longtime content writer; seeking stories flowing from data with a dash of skepticism; Northeastern grad.

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