SaaS Magic Number
Date created: Oct 12, 2022 • Last updated: Mar 28, 2024
What is SaaS Magic Number?
The SaaS Magic Number is a ratio showing yearly recurring revenue growth gained for every sales and marketing dollar spent. It indicates the level of operational efficiency of a company, as well as the sustainability of sales and marketing expenditure.
SaaS Magic Number Formula
How to calculate SaaS Magic Number
A company’s recurring revenue in Q2 is 700K, and their recurring revenue in Q1 was 500K. Their Sales & Marketing investment in Q1 was 600K. When calculating the SaaS Magic Number in Q2, the company will subtract 500K, the previous period recurring revenue, from 700K, to get Q2’s recurring revenue growth of 200K. This quarterly figure is annualized by multiplying by 4 to get 800K. Finally, this number is divided by Q1 Sales & Marketing investment of 600K to get a SaaS Magic Number of 1.3. ((700K - 500K) x 4)/600K = 1.3
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What is a good SaaS Magic Number benchmark?
The ideal benchmark for the Magic Number is between 1 and 1.5, indicating efficient and sustainable sales and marketing efficiency. Most investors also accept Magic Numbers ranging from 0.5 to 1 because it shows that the company is on the right track. However, a Magic number below 0.5 likely indicates unsustainable growth and sales efficiency, while a Magic Number greater than 1.5 may show that the company is under-investing in Sales & Marketing.
SaaS Magic Number benchmarks
How to visualize SaaS Magic Number?
The SaaS Magic Number is usually represented as a number or single metric value. It's best to visualize your magic number in a summary chart, comparing how the value has changed over time.
SaaS Magic Number visualization example
Summary Chart
SaaS Magic Number
Chart
Measuring SaaS Magic NumberMore about SaaS Magic Number
The SaaS Magic Number is a metric that is useful in measuring the health of a SaaS business. It is the ratio of yearly revenue growth to Marketing & Sales expenditure. Typically, the previous period’s Marketing & Sales dollars are compared to the annualized revenue growth in the current period.
The SaaS Magic Number represents sales and marketing efficiency, as well as revenue growth sustainability. Due to this, it can be a strong indicator when sales and marketing are healthy but it needs to be considered along-side other metrics, such as payback periods, churn and gross margin. For example, if the Magic Number is 1 but gross margins are low, it indicates that although there is growth, lack of profits may prevent the business from covering costs.
In general, tracking the SaaS Magic Number is a way to either rectify inefficient spending on Sales & Marketing, or consider expansion of successful investments.
If the SaaS Magic Number is < 1:
- Review ROI positive marketing channels and cut low return ones
- Reduce churn
If the SaaS Magic Number is > 1:
- Invest more in ROI positive acquisition channels
- Consider expanding sales and marketing teams
SaaS Magic Number Frequently Asked Questions
What is a good Magic Number for SaaS?
In general, a good SaaS Magic Number falls between 1 and 1.5, indicating sustainable and efficient sales and marketing spend.
Recommended resources related to SaaS Magic Number
Scale Venture Partner’s Rory O’Driscoll shows Magic Number performance by revenue run rate here (Vital Sign #2). More on how to calculate your Magic NumberMetric Toolkit
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