When we talk about measuring product growth, our mind suddenly hits the SaaS magic number. But what is Saas Magic Number? The SaaS magic number helps to measure the outcome for every sales and marketing dollar that was spent. Hitting the right SaaS magic number is no less than getting a lottery. Getting the right SaaS number can be done by implementing proper strategic plans.
In this article, we’ll discover how to be intentional about the important sales efficiency metric, how it is calculated, and why it is important for the success of any business. Moreover, you’ll get to know about how marketing teams can easily tackle this SaaS magic number calculation, even in the early stages.
What is The SaaS Magic Number?
The SaaS Magic Number is used to measure the sales efficiency of the company, it means how efficiently its sales and marketing (S&M) spend are generating recurring revenue. In short, the SaaS magic number is a metric that measures sales efficiency.
In other words, it helps to measure how much cash worth of revenue is being generated per cash spent on acquiring a new customer through sales and marketing. The SaaS magic number formula provides you with a basic idea to track sales efficiency so that you know when additional tools or training are required on your sales team.
Importance of The SaaS Magic NumberÂ
1. Helps in optimizing your market expenses:
The SaaS magic numbers are an important step for understanding the sales and marketing efficiency of your SaaS company. The magic number helps you reduce the customer acquisition cost wherever possible and optimize your marketing expenses.
2. Helps in focusing on customer expansion or conversion rate:
It also tells you when you should reduce marketing spend under new customer acquisition and rather focus on things like customer expansion or conversion rate optimization.
3. Serve as an indicator:
Finally, it serves as an indicator to find out whether you require more tools or training to increase your rate of investment.
How Do You Calculate the SaaS Magic Number?
The SaaS Magic Number is calculated by using 3 numbers:
1. Your current quarter’s ARR multiplied by four.
2. Your previous quarter’s ARR multiplied by four.
3. Your previous quarter’s total sales and marketing spend is also called your Customer Acquisition Cost, or CAC.
Saas Magic Number FormulaÂ
The SaaS Magic Number formula is :
SaaS Magic Number = (Current Quarter Revenue’s ARR – Previous Quarter Revenue’s ARR) / Previous Quarter Sales and Marketing Spend
If you’re unfamiliar with ARR, (Annual Recurring Revenue), you can calculate it using the following:
SaaS Magic Number = (Current Quarter Revenue ×4) – (Previous Quarter Revenue ×4) / Previous Quarter Sales and Marketing Spend
To calculate the SaaS Magic Number, simply collect the necessary data, put the data into the formula, and analyze the result
SaaS Magic Number Benchmarks: What is the ideal SaaS Magic Number?Â
SaaS magic number benchmarks should be the top priority of your SaaS companies as they tell about the product growth of the business. Here are the three most important situations given and how you should respond to each.
1. A magic number lower than 1 or <0.75 ( Inefficient)Â
If your magic number is lower than 1 then it might be time taking for you to recoup. It might take more than a year to recoup your initial investment for one quarter.
In this situation, you should look out for better sales efficiency strategies by focusing on the channels that bring you the highest ROI (Return on investment)
However, low results on the sales efficiency metric aren’t the end since marketing costs can far exceed revenue growth.
Your marketing teams might be increasing your brand value so that existing customers don’t shift to other SaaS companies.
2. Magic number 1 (Moderately Efficient)
A magic number equal to 1 is considered efficient. If your magic number equals 1, it means the sales expenses payback period from the last quarter is 1 year. It means you will recoup the costs from the last quarter in 12 months.
3. A magic number higher than 1 (Highly Efficient)
A magic number higher than 1, then it is considered highly efficient since you are generating a lot of revenue as compared to the money spent on marketing efficiency.
However, it might also be a sign that you are not investing that much in marketing and sales and that is why your payback periods are this much shorter.
Strategies for Improving the SaaS Magic Number
Now you might be wondering what strategies your SaaS companies should adopt to improve their magic number and your sales efficiency. Here are some strategies given below, let’s take a look at them:
1. When your magic number is equal to 1
If your magic number equals 1, it means the sales expenses payback period from the last quarter is 1 year. It means, your business is at the situation equilibrium as per the financial data that shows your marketing expenses are bringing in your recurring revenue.
2. When your magic number is greater or lower than 1
If your magic number is greater than 1 or lower than 1, it indicates that you should start looking at your sales and marketing strategies to figure out where you have to work to improve your strategies. You should also be cautious of your cash runway to make sure that you break even on sales and marketing costs.
A. When your magic number is lower than 1
If your magic number is lower than 1 then it might be time taking for you to recoup. It might take more than a year to recoup your initial investment for one quarter. The one way to recover is to decrease your spending on strategies that contribute the lowest results and shift that capital where you get high ROI to maximize your returns.
B. When your magic number is greater than 1
If you have a magic number that is greater than it may seem like everything is perfect as it should be but you can also work on scaling up your campaigns and teams.
The marketing framework should be optimized for the performance of the company and growth sustainability in the long term rather than keep focusing on short-term sales efficiency metrics
Conclusion
To sum up all this, the SaaS magic number is one of the excellent ways to monitor your sales and marketing efficiency overall in the campaigns. The SaaS Magic Number when combined with other SaaS metrics, helps you tailor a capital-efficient growth model that enables your organization to scale without being deficient in your cash.
If your magic number is less than 1 you might consider it as an issue and want to start implementing upsell prompts and churn surveys. At Perimattic we are there to help you. Contact us now to increase your SaaS Magic Number!
