How to calculate sales efficiency ratio
Sales efficiency (sometimes the gross or net efficiency ratio) is a family of metrics that all ask the same question: how much revenue did each dollar of go-to-market spend produce. It is close kin to the magic number.
Variants differ in whether they use gross or net new revenue and whether they lag the spend by a period. The principle is constant: higher means you are acquiring revenue more efficiently.
- New revenue / S&M spend The formula
- Above 1 Excellent efficiency
- Gross vs net Two common variants
Short answer
The sales efficiency ratio measures new revenue generated per dollar of sales and marketing spend. Divide new or net new revenue in a period by the sales and marketing spend that produced it. If you added 2,000,000 dollars of new ARR on 2,500,000 dollars of spend, efficiency is 0.8. Above 1 is excellent; the magic number is a lagged variant.
Step by step
Choose gross or net new revenue
Decide whether to use gross new revenue (additions only) or net new (after churn). Net is more conservative and reflects real growth.
Take the sales and marketing spend
Use the sales and marketing spend that produced that revenue. The magic-number variant uses the prior period's spend to reflect the lag.
Divide revenue by spend
Sales efficiency equals new revenue divided by sales and marketing spend. It is a ratio, not a percentage.
Interpret the ratio
Above 1 means each dollar of spend produced more than a dollar of new revenue, which is excellent. Between 0.5 and 1 is workable; below 0.5 signals inefficiency to fix.
Worked example
You added 3,000,000 dollars of net new ARR this year on 3,000,000 dollars of sales and marketing spend. Sales efficiency = 3,000,000 / 3,000,000 = 1.0, meaning each dollar of spend generated a dollar of new recurring revenue.
Using the magic-number variant, you would divide this year's net new ARR by last year's spend to account for the lag between investment and revenue, often giving a slightly different, more flattering or conservative figure.
How Ardovo handles it
Ardovo computes sales efficiency and the magic number from live revenue and connected spend, so you can see both the immediate and lagged views. Rook explains what moved efficiency, whether spend rose or new revenue slowed.
Frequently asked questions
What is the sales efficiency ratio formula?
New or net new revenue in a period divided by the sales and marketing spend that produced it. Above 1 means each dollar of spend generated more than a dollar of new revenue. The magic number is a lagged variant.
How is sales efficiency different from the magic number?
They are close relatives. The magic number specifically uses net new ARR over the prior period's sales and marketing spend, adding a lag. Sales efficiency is the broader family, sometimes using same-period spend or gross revenue.
What is a good sales efficiency ratio?
Above 1 is excellent, meaning spend produces more than a dollar of new revenue each. Between 0.5 and 1 is workable, and below 0.5 signals inefficient acquisition you should fix before increasing spend.