Productivity vs Efficiency: What’s the Difference?

David Hehenberger's avatar David Hehenberger June 11, 2024

What’s more important – productivity, or efficiency? And what, even, is the difference?

Is there a difference between productivity and efficiency, or are they just buzz words, interchangeable jargon used by managers, business owners and online gurus, to sound smart?

Keep reading and we’ll explain all you need to know.

What is Productivity?

Productivity focuses on the amount of work accomplished.

In economic terms, productivity measures bulk output per input unit. The input could be capital, labor, raw materials, or other valuable resources.

But in business terms when we talk about productivity, it refers to the output of goods or services and the required inputs such as technology, human resources, capital, etc. 

How to Measure Productivity (With Examples)

There are several aspects of productivity within a business. The overall productivity of the business is essentially a sum or result of these individual aspects.

For example, each individual employee has their own level of productivity, each of which contributes to the productivity of the business as a whole.

There are also different departments or facets of the business, for which productivity can be measured separately.

But how exactly do you calculate productivity?

Using the productivity formula mentioned above, you’ll want to calculate output in relation to input. This is likely to be different across different areas, departments and factions of a business.

Here are some examples:

Productivity Metrics

The units used to measure productivity are completely contextual. It depends on what is being assessed, such as which department, team or task.

Here are some commonly used metrics:

Revenue

This is common for businesses to use. After all, the end goal of every business almost always the same – to make money.

Whether it’s in manufacturing, marketing or sales, revenue often makes sense as a measure of how productive the business, or a particular area of the business has been.

Revenue is the measure of money coming in to the business. Just try not to confuse it with profit – which is revenue, minus expenses and operating costs. Profit doesn’t always work that well as a productivity metric, and in most cases is more of a measure of efficiency.

Tasks Completed

Measuring personal productivity, or worker productivity, is usually done in a simple formula of tasks complete vs time worked.

This is not always the best measure of whether or not someone is productive, however. It depends on the nature of the task, as well as whether the task was completed at a sufficient level.

For example, you might measure the productivity of your customer service team by the number of support tickets they respond to. But this would ignore the complexity of each support query, as well as whether or not the customer went away satisfied.

Key Performance Indicators

Similar to the above, but generally a better measure of productivity, is using KPIs or Key Performance Indicators as an output measure.

KPIs can be whatever is the best display of worthwhile work produced – such as sales, leads, or products made.

Generally, you’ll want to use KPIs to ensure that, whenever you measure productivity, you’re measuring it in terms of results that actually benefit you or the business in a positive way.

What is Efficiency?

Efficiency refers to the quality of work produced, and the amount of resources used to produce such work.

This is in comparison to productivity, which is a measurement of output.

Efficiency has to do with better use of resources, whether that be labor, capital, or time, and aims to reduce waste, fine tune operations and improve overall quality of the products or services a business or individual provides.

How to Measure Efficiency – and Examples

Instead of only looking at output, like you would when measuring productivity, you would consider the resources required to achieve that output when measuring efficiency.

You’d also take into account the quality of results, and more heavily weigh high-quality results over simply quantity.

Let’s say you have a sales person that is closing two new accounts per week on average, which is a measure of their productivity. 

To understand the sales person’s efficiency, you can track the following. 

A more efficient salesperson will deliver more results with fewer resources (in this case, time). They could also deliver better results – for example, 1 account worth $100 versus 2 accounts worth $30 each.

Difference Between Productivity and Efficiency

Let’s stick with the salesperson example. 

Your sales person could increase their output in two different ways. They could either increase productivity, or they could improve efficiency. 

To increase productivity, they would need to increase the number of emails or calls each hour/day. 

By increasing their output each hour, they will book more calls, and ultimately increase overall output which is to close more accounts. 

But to increase efficiency, the problem should be approached a bit differently. 

You can only do so many more calls or emails each day as a salesperson through sheer effort. 

To move beyond, you need to look at your entire process and identify any parts that can be optimized. Either by removing wasted time, or through technology. 

Let’s say your sales team is currently storing prospect contacts in a spreadsheet and manually calling each of them with their cell phones. 

If you install a CRM system and an auto dialer software, then you can expect the number of calls per hour to increase significantly without an enormous shift in effort. 

You can expect that your team will book more calls and close more sales each week. This is an example of increasing productivity through a more efficient process.

Learn More: The Best HR Software for Startups

Productivity vs Efficiency: Is One More Important Than The Other?

What you want is an ideal balance between productivity and efficiency. But there are times, depending on the state of operations in your business, when you might have to prioritize one over the other. 

If you focus solely on productivity, then you might lose focus on the resources you’re using to achieve those results. 

For example, if you go heavy on ad spend, you might generate a lot of sales, but you may also find that your profit margin is lower than you expected. 

On the other hand, if you focus solely on making things as efficient as possible, then you might cut too many corners and the quality of your service could suffer. Or you might find that you’re less productive as a result. 

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How to Maximize Productivity and Efficiency

As we mentioned before, you want to aim for maximum productivity, as efficiently as possible, but only to the point that you maintain a high quality product or service. 

Use your sales, revenue, and profit goals to guide you when optimizing for productivity and efficiency.

You might have a specific number in sales and revenue you want to hit. This is your productivity goal that would guide how many people you need to hire, the resources that go into promoting a product, etc. 

Then you have your profit goal, which will help guide you when you’re trying to maximize efficiency. The fewer resources you can use to reach your revenue goals, the greater your profit in most cases. 

Here are a few tips to maximize productivity and efficiency. 

Productivity 

Efficiency

Final Thoughts on Productivity vs. Efficiency

Productivity is the output that you produce as a business, such as products and services. Efficiency measures how well you use your resources to achieve that output. 

As a business, your goal is to reach that optimal balance in performance where you’re highly productive, but you’re using the least amount of resources necessary without compromising the quality of your work or services. 

What are some areas of improvement in your business when it comes to efficiency? What potential steps can you take to improve how you use resources to maximize output, without affecting the experience for your clients or customers?

David Hehenberger's avatar

David Hehenberger

David is the CEO and founder of Flamingo. He is a serial entrepreneur, and has built and exited multiple successful SaaS companies, and started Flamingo in 2021 to make it easier to track and manage leave in his own companies.

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