SaaS Magic Number

I first learned about the SaaS Magic Number when I attended my first board meeting as the VP of Sales.

Even after learning the definition, I forgot what it mean't shortly after. It's a straightforward metric, but not something you hear about very often.

In this article, I will walk you through:

• What is the SaaS Magic Number?
• How to calculate your SaaS Magic Number
• What is a good SaaS Magic Number?

What is the SaaS Magic Number?

The SaaS Magic Number is a formula for measuring the efficiency of your sales and marketing efforts over a given period of time.

The standard formula takes into account your current quarter’s revenue minus your previous quarter’s revenue, and divides that by how much you spent on sales and marketing during your previous period. 

It can be useful for:

• Deciding when to accelerate sales and marketing efforts (a high Magic Number).
• Deciding when to take a step back and reevaluate (a low Magic Number). 
• Giving yourself, investors, and other stakeholders a view of the company’s financial health and sustainability. 
  

For best visibility, you may want to integrate this metric into your own dashboards or financial models. I use this Sales Forecast Model and Marketing Budget Template to forecast our monthly costs and expected revenue.

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How to calculate your SaaS Magic Number

All you need is your Annual Recurring Revenue (ARR) from the current and last quarters, as well as the total sales and marketing spend from the previous quarter. Remember, you must include everything you spend on sales and marketing in order to obtain paying customers.

This is more than just ad spend. It includes all advertising spend for ads/programs, tools/software and headcount costs.

Here is the formula for the SaaS Magic Number:

• (Current quarter’s ARR - Previous quarter’s ARR) / Previous quarter’s sales and marketing spend.
  

And here’s an example of a SaaS Magic Number calculation that hits the sweet spot of 1:

• Current quarter’s ARR of $800K - previous quarter’s ARR of $600K / previous quarter’s S&M $200K = 1.

What is a good SaaS Magic Number?

You're looking for a Magic Number of 1 or above. When using Annual Recurring Revenue (ARR), this implies a 12 month payback or better if the Magic Number is >1.

Here is a breakdown of benchmark figures for the SaaS Magic Number:

Less than 0.5: Bad. Something’s wrong with your sales and marketing approaches, or your product-market fit isn’t quite there yet. Time to go back to the drawing board.

0.5-0.75: A decent balance between growth and spend, but there is a lot of room for improvement before pouring money into your existing strategies.

0.75-1: Good. You’re ready to increase your sales and marketing activities to quickly drive growth further.

1-1.5: Excellent. You’re now growing revenue quickly and efficiently. You can be more aggressive to acquire market share.

The SaaS Magic Number is one of many sales and marketing metrics you can use to inform your readiness to increase your investment in customer acquisition.

You'll want to understand your LTV:CAC ratio and Churn Rate as well.