Ever wondered how the discounts your sales reps offer to customers affect your bottom line? Or thought about ways your team can boost business profits by reducing the cost to sell? How about how effective your sales team is at driving profit in the first place?
Leading a sales team comes with a lot of questions like those—and one of the most direct ways to answer them is by calculating various sales formulas, including:
With these different sales formulas, you can approach revenue from multiple angles to get a full picture of your business’ financial statements. You aren’t just looking at total sales—you’re looking at sales in relation to the business factors that impact your profits. And that’s powerful.
Below, we dive into some of the key sales formulas leaders should understand, with details on what you can learn from them and how to calculate each.
Sales Revenue provides companies with a clearer picture of how their primary business activities yield revenue. Whereas other revenue metrics can be obscured by non-sales related revenue and one-time revenue generation, Sales Revenue includes neither of these items.
Through this metric, you can learn how your primary business generates more (or less) revenue from one period to the next—regardless of other, inconsistent revenue sources, fluctuating expenses, and costs.
According to Profit Well, calculating Sales Revenue can help guide your business’ long-term strategy, including helping you:
The formula for Sales Revenue is slightly different depending on your business. For product-based businesses, you’ll need to have these pieces of information at the ready before you get started:
Number of units sold
Average selling price
Service-based businesses need to know:
Number of customers
Average price of services
For businesses that sell products, the Sales Revenue formula looks like this:
Sales Revenue = Number of units sold x Average price per unit
So if we look at an example, let’s say a direct-to-consumer mattress business sells 500 mattresses in a given quarter, and the average selling price is $1,000. Here’s their Sales Revenue formula:
The Sales Revenue formula for service-based businesses is equally simple.
Here’s what it looks like:
Sales Revenue = Number of customers x Average price of services
If a business consultancy had 10 clients during the prior quarter and sold retainer services at an average rate of $10,000 per quarter, their Sales Revenue calculation looks like this:
In short, your Sales Margin refers to the difference between the total cost of producing and selling a product or service and the ultimate price is it sold for.
It’s often calculated for an individual sale, but can also be done by product type or for your business as a whole.
“However determined, the sales margin is an important indicator of the success of your business.
The higher your sales margin is, the more profit potential you'll have,” Chron writes.
Unlike many of the other sales formulas we’ve covered here, the Sales Margin formula can vary widely from one business to another.
That said, we’ll run through a basic example below to give you an idea of how to calculate Sales Margin.
Here’s some of the information you’ll need to have at the ready to calculate your sales margin
Total sales discounts and allowances
Total cost of goods sold (COGS)
Total commissions paid to the sales team
Here’s what a very basic Sales Margin formula looks like according to Accounting Tools:
– Sales discounts and allowances
– Cost of goods or services sold
– Salesperson commission
So let’s say, for example, a software company signs a perpetual licensing agreement with a new customer—and they want to find their Sales Margin on the deal.
Here’s an example of that calculation might look like:
$30,000 revenue – $5,000 discount – $5,000 in labor – $3,000 in commission = $17,000 Sales Margin
While the sales formulas we’ve covered above are some of the most important, there’s no shortage of other formulas available to help sales leaders judge performance, strategize, and make sales forecasts.
That’s why it’s key for all sales managers and leaders to understand the sales formulas available and how they can be tracked and used.
Here are a few other important sales formulas you may need:
Return on Sales tells you how much profit your company earns on each dollar produced by sales. It’s a measure of the efficiency of your sales operations. Here’s the sales formula for Return on Sales:
Return on Sales = Operating profit / Net sales
The Sales Growth formula tells you how much your company’s sales grow from one period to the next (usually by quarter or by year). The sales formula for growth looks like this:
Sales Growth = (Current period sales – Prior period sales) / Prior period sales
The sales tax formula is vital for businesses of all kinds because it tells you how much sales tax to charge your customers on each sale. Sales tax rates vary from state to state, but the sales formula for tax is the following:
Sales tax = Total sales x Sales tax rate
Your Sales Conversion Rate tells you what percentage of sales leads end up converting into customers. It’s a good measure of the quality of your leads and the efficacy of your sales team. Here’s the sales formula for Conversion Rate:
Sales Conversion Rate = (Total number of sales / Total number of leads) x 100
Depending on your business, you may have customers who pay in advance for services or products not yet rendered. The Deferred Revenue sales formula helps ensure your periodic financials account for that. Here’s the formula:
Deferred Revenue = Total prepaid customers x Average prepayment amount
Net Income is one of the most important sales formulas out there. It tells you whether or not your business overall is profitable—and the amount of profit you make after all expenses and costs are factored in. Here’s the formula:
ARPU = Total revenue / Number of users
ARPU = Total revenue / Number of users
Monthly Recurring Revenue (or MRR) is the sales formula of choice for many SaaS and other subscription businesses because it helps to understand the value of the core business and forecast monthly revenue. Here’s the MRR formula:
MRR = Total number of paying users x Average revenue per user
Improving your sales team performance and growing the team’s impact on the business requires data-driven decisions—and that means you need to have the right data at your fingertips.
Tracking your key sales formulas is part of that, and your first step toward regular metric tracking is a CRM.
The right CRM can help you not only track key sales metrics, but also visualize that information through analytics and visual reports—making it easier to find trends and identify opportunities for growth.
Freshsales (formerly Freshworks CRM) can help you do all of that and more.
Sign up today to start your 21-day free trial.
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