The SaaS, or Software as a Service, model is common to many companies. Performance metrics are key indicators of success. As we scale revenue and other KPIs, a key metric should ease investors’ and budget holders’ minds: the SaaS Magic Number.
This metric is not just a number or a statistic, but a practical application in determining how efficient the business is. It indicates how much worth the return on investment in sales and marketing is by measuring the growth in MRR. With customer acquisition costs rising, we must watch this metric. It’s key to ensuring the company scales healthily.
In this blog post, we are going to further understand the concept of SaaS Magic Number. Accordingly, we will touch on its benefits, how to work it out, and how the metric can help the company operate successfully in the long term.
What Is the SaaS Magic Number?
SaaS companies with a magic number metric track their use of the sales and marketing budget to boost Monthly Recurring Revenue (MRR). In short, it is the increase in monthly revenue from new customers. It compares this to the cost of acquiring those customers.
Let’s say that you run a SaaS business. You may have spent thousands on advertisements, email outreach, or hiring sales representatives. If this expenditure results in a large increase in revenue, oh great! But if there is negligible change in revenue, then there is a cautionary sign to look at the strategy.
The formula for calculating the SaaS Magic Number is simple
SaaS Magic Number is equal to Quarterly Revenue Growth divided by Sales and Marketing Expenses for the Previous Quarter
This formula gives you an explanation regarding the sales and marketing spend and the returns on them.
What Is The Significance Of The SaaS Magic Number?
It is not simply a financial indicator. But, a metric that is important and can be used for deciding growth strategy as well as performance to the investors. Here’s why it’s so important:
Measures Growth In Relation To Cost
The number of resources used to grow a business is the focus of the metric that is the SaaS Magic Number. If there is heavy reliance on sales and marketing expenditure with less growth achieved, the metric will show this.
That Affects The Budget Allocation
Once you have a thoughtful grasp of this metric, you can make decisions regarding your sales and marketing budget. For instance, if the magic number is low, then we should rethink some strategies or minimize spending.
Drawing in Investors
Potential investors need to be assured of your business’s capacity for both growth and profitability. For them, a high SaaS Magic Number is good news since it means resources are well managed.
Supports Future Orientation
With time, you can always learn to change the strategies fairly quickly because you do not want to be losing a high magic number over time. Be it with improving your customer churn or enhancing your sales funnel, the metric clearly has scope for improvement.
Approach of Computation for SaaS Magic Number
Let’s take a step-by-step approach for calculating this number, starting with the partial growth template.
Step 1: Determine Quarterly Recurring Revenue (QRR) Growth
QRR can be defined as the revenue you make from subscriptions every quarter. If we need to compute growth, we make use of the following formula.
QRR Growth=QRR (Current Quarter)−QRR (Previous Quarter)
For example, if your QRR was $500,000 in Q1 and $600,000 in Q2
Your growth is 600,000−500,000=100,000
Step 2: Calculate the Total Sales and Marketing Expenses
Next, these two questions need to be further elaborated, and that is to quantify how much sales and marketing have been done in the previous quarter. These are, broadly, wages for staff, advertising, tools, and related expenses.
Step 3: Now Apply the Formula of SaaS Magic Number
Now, the growth in Quarter Over Quarter Revenue (QRR) earned for the last quarter is divided by the marketing and sales costs for that quarter.
Example of Calculating the SaaS Magic Number
Here’s a practical example:
QRR in Q1: $800,000
QRR in Q2: $1,000,000
Sales and Marketing Expenses in Q1: $300,000
First, calculate QRR growth:
QRR Growth=1,000,000−800,000=200,000
{QRR Growth} = 1,000,000 – 800,000 = 200,000
Now, calculate the SaaS magic number.
SaaS Magic Number = 200,000/300,000 = 0.67
A magic number of 0.67 means the business is moderately efficient but could improve its strategies to scale faster.
How to Make Sense of the SaaS Magic Number
You use this formula to measure, in this case, the value you derive from it in relation to the performance of your business:
Less Than 0.5: Negative Growth
A SaaS Magic Number less than 0.5 means that your revenue growth is far less than what it should be given your sales and marketing efforts. Perhaps be strategic about what you do next and even cut down on your expenditure.
0.5-1.0: Normal Performance
This range indicates your business isn’t doing that badly, to be honest, but there is definitely some gap to be filled. Probably look at making some small tweaks to your sales and marketing or looking at improving the retention of your customers
Greater Than 1.0: Substantial Growth
A Magic number greater than 1 signifies that your business is growing in size very efficiently. It’s a good time to boost your sales and marketing budget. Their spending is efficiently growing the revenue a lot.
Improving the SaaS Magic Number
Provided that your SaaS Magic Number is lower than 1.0, it can surely be amended through several ways.
Minimize Customer Churn
The cost of retaining an existing customer is always lower than that of acquiring a new customer. So, empower customer success teams to do bespoke onboarding. Also, ensure assistance reagents are available and follow up often.
Decrease the Sales Cycle
Shortening the sales cycle will also decrease the cost of doing business while enhancing revenue growth. Effectively orient your sales personnel on how to close the deals in a single call and configure the sales process using CRM solutions.
Acquire High-Churn People
Encourage individuals who are likely to purchase premium plans or who will remain subscribed for long periods. These people boost your income margins without necessitating additional income outlay.
Refine and align Marketing Efforts
Use A/B testing strategies to assess the general and specific return on investment on each of your marketing campaigns. Identify and invest more in the successful channels while scaling down on the unsuccessful ones.
Promote Upselling
Tempt your current customers into buying more of your offerings. For instance, make customers want to buy the premium offering, the apps, services, or discounts for upgrading plans.
Common Mistakes to Avoid When Using the SaaS Magic Number
Keeping track of your SaaS Magic Number and ever improving on it is really important but there are mistakes that should be avoided:
Overly Spending with No Plans
There is no direct correlation between higher sales ROI and revenue growth as a result of increasing sales spending. Try to always keep a look out for the ROI of your spending.
Disregarding Customer Reengagement
If you focus only on acquiring new customers, retention will suffer. So, growth will be hard. No pun intended here, but new revenue will come at high churn rates.
Settling For Quick Returns
Do not employ approaches that only generate revenues for a short period, as these pose risks to your business over time. Think about growth over the long haul.
Conclusion
The SaaS Magic number is a key metric. It shows how effective your sales and marketing efforts are and hints at growth opportunities within your company. It also shows you when to increase your input into marketing or selling or when to cut back on it.
Always remember that there is a unique SaaS Magic Number that a company can have that ensures its sustainable growth. Treat customers well. Manage your business growth. Revise your marketing options to keep your business in check.
Start leveraging the SaaS Magic Number right away to activate growth for your company!
FAQs
Which SaaS magic number is the best?
Ideally, a number greater than 1.0 is good. It means you are well able to manage and grow your business.
When should I calculate the SaaS Magic Number?
Every quarter is recommended so that the desired outcome is achieved and any changes required are made in time.
Are there other identifiers that I need to monitor along with this?
Other important metrics are CLV, CAC, and MRR. They are: customer lifetime value (CLV), customer acquisition cost (CAC), and monthly recurring revenue (MRR).