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:
- Revenue efficiency rate.
- Customer lifetime value compared to cost of customer acquisition, often simply referred to as LTV:CAC.
- Win rate for account executives.
- Qualified leads collected per month, including marketing-qualified leads and sales-qualified leads.
- Lead-to-conversion rate.
- Sales per lead.
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:
- Uses actual dollar figures and not estimates.
- Clearly connects investments and their outcomes.
- Easily compares performance quarter over quarter, year over year, or any other period.
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:
- LTV:CAC — While CAC is based on actual numbers (because those costs are known), LTV is an educated estimate based on past customer patterns. No company truly knows what any given customer will spend ahead of time or how long a buyer will remain a customer.
- Win rate for account execs — Although win rate tracks individual performances and can show a broader picture of sales team activity, this metric does not accurately offer any insight on company-wide investments.
- Qualified leads per month — The leads can be quantified, but it is murkier attempting to apply the results to revenue and spending. There’s no way ahead of time how much revenue a lead will bring in.
- Lead to conversion rate — Again, this is a ratio that is easily calculated, but similar to qualified leads, it’s tricky to compare it to earnings or costs.
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 revenue efficiency rate acts as an easily digested metric to measure company performance.
- The rate offers advantages over other popular performance-based data points.
- It allows for forward-looking planning by companies.
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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