Hitting your SaaS magical number is less about random luck and more about strategic plans.
In this article, we’ll take a look at how to be intentional about this vital sales efficiency metric, how it’s calculated, and why it’s important for your business success.
The SaaS magic number is an important metric to measure for both startups and established SaaS companies.
Read along to learn more about how marketing teams can tackle this magic number calculation… even (perhaps “especially”) in the early stages.
What is The SaaS Magic Number & How Is It Calculated?
There's no one answer for what the SaaS magic number is or how to calculate it, but there are a few things to keep in mind when trying to determine yours.
Knowing your churn rate, average customer lifetime value (LTV), and gross margin can help you figure out both your magic number and whether or not you're on track to reach it.
But your SaaS magic number is about much more than those simple metrics.
If you're not sure where to start, don't worry – we've got all the info you need! Keep reading to learn more.
What Is The SaaS Magic Number?
Think of the SaaS Magic Number as the metric that provides a crystal-clear picture of the health of your sales metrics.
For SaaS marketing teams at early-stage subscription businesses, generating new ARR is a commendable business model and marketing strategy.
But your SaaS Magic Number is about more than retention, MRR, or even revenue growth.
Sure, those metrics are the very definition of SaaS standard numbers so how can we associate the term SaaS magic numbers with it?
The metrics you track matter and they help you understand the profitability of your sales and marketing. They’re important beyond your marketing strategy or sales team's success.
But which ones, specifically, do you track? Let’s take a look…
SaaS Magic Number FormulaIn your SaaS business, there’s no shortage of numbers to track or SaaS metrics to measure.
- Recurring revenue;
- Gross margins;
- Marketing expenses (aka, marketing spend);
- Payback period.
These are generally the numbers you calculate to measure marketing efficiency.
But there are more nuanced metrics to measure, too. Your sales efficiency metrics:
- Customer acquisition cost (CAC);
- Churn or churn rate;
- Cash flow;
- Monthly recurring revenue;
Using a proven SaaS Metrics Template like ours can help you track a lot of important metrics in one place.
But to get a quick measure of your company's health - you just need three values. To calculate your SaaS magic number, use the following formula:
(Current Quarter’s Revenue) - (Previous Quarter’s Revenue) x 4
Previous Quarter’s Sales & Marketing Expenses
How to Calculate & Interpret your SaaS Magic Number
As outlined above, you’ll need a solid grasp of your business metrics in order to properly measure your SaaS Magic Number.
It’s far more than simply keeping tabs on the current quarter’s revenue vs. the previous quarter’s revenue and then multiplying by 4.
It’s not about tracking bookings vs. the cost of goods sold.
Your SaaS magic number formula is about your sales efficiency metrics.
It’s not your pricing. It’s your profitability.
It’s not the short-term sales cycle, it’s the lifetime value (LTV) of your SaaS magic number benchmarks.
But how can you properly calculate and interpret those metrics in a way that’s MAGIC for your business?
Let’s look in more detail:
How to Calculate & Interpret your SaaS Magic Number
I’ve already given you ONE calculation (above) for calculating your SaaS magic number. But once you do the equation, the bigger question becomes: how do you interpret what the number means?
I’ll give some exact guidelines in a minute, but for now, you need to know the numbers I told you above.
The current quarter’s revenue, your previous quarter’s revenue, and the previous quarter’s sales/marketing expenses.
As per the equation above, that’s all you need to know in order to figure out your Magic Number.
Here’s that equation again:
I’ll tell you what your number means in a minute.
The general rule of thumb is that if your calculation is LESS than 0.5, something is broken in your business model, everything from your pricing to operating expenses and even your product-market fit.
Once you hit your 0.75 mark, your business is in a much better position. It’s not time to celebrate (yet), but once you crest this magic number, you’re heading in the right direction in your business model.
If your SaaS magic number is above 0.75, it’s likely time to consider your growth plans. Your CAC payback period is probably healthy, as are a fair number of other metrics. You’re meeting your growth targets once you’re above 0.75.
As a broad statement, above 0.75 is good news and means your SaaS is heading in the right direction. Congrats!
Why is this Magic Number Important?
The SaaS magic number formula is crucial for your profitability. Why? It’s the number that tells you how much company revenue was created for every dollar spent on acquiring new customers with sales and marketing.
It shows your tangible results regarding how efficient your sales and marketing engines are in a specific time period. This information allows you to make informed decisions on your company’s growth, business model and sales and marketing expenditures.
There are few metrics you can look at and immediately understand the health and direction of your SaaS. This metric’s magic comes from its ability to show your business’ health at a glance.
Other Metrics related to the SaaS Magic Number
Of course, your SaaS Magic Number isn’t the only number to keep your eye on.
There are other metrics related to your magic number. Most notably, keep note of the Bessemer CAC ratio.
The ratio is closely related to the magic number, but with more nuance and relation to the new acquisition.
SaaS Magic Number Benchmarks to know
A magic number lower than 1
If your SaaS number is lower than one (1), this means you haven’t met your customer acquisition costs in a one-year timeframe.
This also indicates that your year’s revenue didn’t exceed your sales and marketing costs.
Be aware that different numbers under 1 imply different levels of concern. If your number is above 0.75, you’re on the right path. If the number is below 0.5, it’s time to evaluate your business model and figure out what isn’t working.
Magic number = 1
If you have a magic number of 1.0, this means that you’ve covered your sales and marketing expenses within the year. At this number, you have not covered your gross expenses yet.
While this is a break-even number, it should still give you the confidence that you’re on the right path. At this number, you’ve proven that your business is a product-market fit and you have a healthy CAC payback period.
Sales and marketing growth should certainly be considered at this number, as this is a good number for growth.
A magic number above 1
Any number above 1.0 indicates sustainable sales and marketing efficiency.
Once you’ve surpassed the number 1.0, you can start to be more confident in your sales and marketing expenditures.
This number signals the go-ahead to expand sales and marketing functions. Once you’re here, you can afford increased marketing expenses such as content marketing, digital advertising, and SEO.
How to Improve Your SaaS Magic Number
The SaaS Magic Number is a fairly simple metric. That also means it’s fairly simple to improve.
To improve your SaaS Magic Number, you’ll either need to earn more revenue or optimize your sales and marketing spend. Ideally you should do both.
Here are a few changes you could make to improve your Magic Number:
Sell to existing customers
Shorten your sales cycle
Eliminate underperforming paid channels
Invest in low-cost, high-yield marketing options
Working with a SaaS specialist can also help you improve your number.
Common Mistakes to Avoid When Working with the SaaS Magic Number
Just like any other metric, it’s essential that you don’t look at the SaaS Magic Number on its own as a sole metric. Doing so could lead to you missing something important.
Looking at this number in relation with other metrics gives you a better understanding of how you’re doing.
For example, a SaaS Magic Number above 1 looks great on its own. But if we look at the source of revenue, it could reveal weaknesses in new customer acquisition.
The Magic Number also doesn’t account for your costs of delivery and operations and customer service costs. These could take more than one year to recover.
The bottom line is that the SaaS Magic Number won’t tell you everything you need to know about your business. While it’s extremely important and helpful, don’t discount your gross revenue margins for your Magic Number.