RBC calculated sales efficiency for 72 public SaaS companies and found the average sales efficiency at .8X, meaning that public SaaS companies returned 80 cents for every dollar spent on sales and marketing in the previous year.
Sales Efficiency is defined as the revenue growth rate over a period divided by sales and marketing expense margin in the previous period:
According to OpenView Partners SaaS benchmarking report, “Sales and marketing spend peaks at 50% of ARR at the expansion stage. Too many companies underinvest in sales productivity, saddling them with huge costs without the ROI…You should be carefully monitoring your sales efficiency and looking for ways to improve or maintain it year-over-year. Look out for the ‘leaky bucket’ problem, where you spend significant sums to acquire new customers, but then they churn shortly thereafter (churn bait).“
As a general rule, firms with a sales efficiency less than 0.5 do not have a “sustainable investable growth model,” wrote startup advisor Anna Talerico in SaaSX. A ratio between 0.5 and 1.0 is “much better;” however, “while this isn’t necessarily capital efficient (which would make it a hard ratio for a bootstrapped company to maintain for any length of time), it does indicate sales & marketing efficiency and many investors view this as acceptable.” Better yet, firms with a ratio above one have a “strong sales efficiency and a capital-efficient growth model.” However, when the ratio is significantly above one, the firm may be underinvesting in sales and marketing and “leaving growth on the table.”