The SaaS magic number is a sales efficiency metric that helps you measure the dollars’ worth of revenue generated per dollar spent on acquiring new customers through your marketing and sales efforts. Hence, the magic number in SaaS is a crucial metric to understand the efficiency of your campaigns.
To calculate the SaaS magic number, consider your current quarter’s recurring revenue minus the previous quarter’s. Then, multiply it by four (for annual run rate) and divide it by the cost of sales and marketing efforts in the previous quarter.
Here’s the magic number SaaS formula.
SaaS magic number = (Current Quarter ARR - Prior Quarter ARR)/ Prior Quarter Acquisition Spend
Though the SaaS magic number calculation considers quarterly revenue, you can also use your MRR or monthly recurring revenue to get your monthly SaaS magic number.
As mentioned, the magic number in SaaS calculation can help you understand the efficiency of your sales and marketing campaigns.
You can find out how well your campaigns perform and their impact on your business revenue. This, in turn, helps you optimize marketing expenses and lower the overall customer acquisition costs.
Tracking the SaaS magic number can also tell when to reduce your marketing spend focused on acquiring new customers and instead consider conversion rate optimization and customer expansion.
Overall, the magic number in SaaS can indicate whether you need training or more tools to increase your bottom line ROI.
The ideal SaaS magic number benchmark is between 1 and 1.5. It indicates efficient and sustainable sales and marketing efforts. However, most investors also consider SaaS magic numbers ranging from 0.5 to 1 as it signals that the company is on the right track.
Here’s a brief guide on interpreting your magic number calculation in SaaS.
· A magic number below 0.5 indicates something wrong with the business model. You may be investing too much in customer acquisition without a proper pricing strategy, your total SaaS service cost may be too high, your product may not resonate with the customers, and so on. There can be several reasons behind a low SaaS magic number.
· A SaaS magic number below 0.75 means you are on the right track with sales efficiency. However, you must look into your free cash flow, cash runway, and gross margins to determine if you should invest more in marketing or add to your sales team.
· A SaaS magic number above 0.75 is a green signal that your sales and marketing strategies are efficient. This level of the SaaS magic number indicates that you have proven product-market fit and acceptable CAC payback periods.