- Sales effectiveness is a so-called magic number for tracking marketing effectiveness, according to RBC.
- To calculate it, divide the revenue growth by the marketing expenses of the previous year.
- Here are the 9 Most Selling Cloud Software Companies and Why, According to RBC.
- See more stories on the Insider business page.
RBC Capital Markets analysts are tracking what some software companies describe as the âmagic numberâ and a handful of companies are far ahead.
Sales effectiveness – which compares a company’s marketing budget to its actual sales – is a key metric for tracking effective spend and forecasting profitability, RBC analysts wrote in a recent study. In other words, it reflects how every dollar spent on marketing and ambitious sales initiatives translates into real income.
Analysts calculate the metric by dividing revenue growth in a given year (or quarter) by a company’s growth.
sales and marketing expenses for the previous year (or the quarter of the previous year).
RBC calculated sales efficiency for 72 different public cloud software companies and found that the average sales efficiency ratio was 0.8x, meaning that for every dollar spent on sales and marketing, the business generated $ 0.80 in revenue.
Some are well ahead of this curve: the graph identifies
as one of the most successful companies in this regard, RBC research showing it generated $ 6.80 in revenue for every $ 1 spent on marketing, giving it a “magic number” of 6.8x .
Twilio, Atlassian, and Fastly are other companies that are particularly successful in cloud software, even as the rise of remote working has resulted in increased demand for cloud software and services at all levels.
On the other hand, a declining trend in sales efficiency can mean that the company’s total addressable market is shrinking and the number of obvious customers for its products is shrinking.
“The theory being that once the ‘handy fruit’ is gone, it’s harder to grow without increasing the expense,” the analysts wrote.
On the other hand, a trend of improving sales efficiency can mean that a business has improved sales execution and made better use of partners or self-service sales options.
During its analysis, RBC found a few clear winners where the âmagic numberâ was particularly high.
Here are the nine cloud software companies with the highest business efficiency, and why, according to analysts at RBC (all market caps are at market close on 7/28/21):