by Nicolas Jacobeus, on 17 February 2021
What’s the best way to measure the sales efficiency of your SaaS business? How do you know whether you're over- or under-investing in your sales and marketing efforts? And how do you work out whether or not you’re seeing a positive return on those investments?
These are all crucial questions that SaaS startups and SMBs have to contend with. In this post, we’re going to be showing you how to find the answer through the SaaS magic number.
We’ll be telling you what this magic number is and why it’s so important, and sharing the SaaS magic number calculation formula.
Let’s get started.
Put simply, the SaaS magic number is a metric that can help you determine whether or not you should be investing in customer acquisition by looking at the impact of your sales and marketing spend on annual recurring revenue (ARR) growth.
In other words, it tells you how many dollars you create in ARR for every dollar you invest in sales and marketing.
Why does this matter? Because once you know this, you’ll have a better idea of the influence of your current sales and marketing spending on your future performance, and thus will be better placed to make more strategic budgeting decisions.
Here’s the basic formula for a SaaS magic number calculation:
Let’s plug some numbers into that formula and run the math to see how it works. Let’s say you spent $100 on sales and marketing in Q1, and your revenue increased by $25 in Q2. Multiplying that figure by four gives us a monthly recurring revenue (MRR) increase of $100.
Divide this by the $100 on sales and marketing and we have a magic number of 1.0. This tells us we paid back our initial quarterly customer acquisition investments in one year.
Now, let’s do that again but this time, assume the current quarter’s revenue was only $12.50 more than the previous quarter.
Now, the calculation gives us a magic number of 0.5. This means we only managed to recover 50% of a quarter’s worth of customer acquisition costs in one year.
Once you’ve got your magic number, the next question is where do you go from there? What does it mean in terms of your sales or marketing efficiency?
Well, the first thing to do is to see how it stacks up to some general magic number benchmark targets.
What constitutes a “good” magic number will vary depending on who you ask. The ideal number will be different for every business—a number below 1 might indicate poor marketing efficiency for one business but be acceptable for another.
On the same note, one business might consider any number above 1 to be a strong signal that their sales and marketing framework is working, whereas another might not be satisfied with anything below 1.5.
That being said, here are some general benchmarks/targets you might want to think about.
If your magic number is below 0.75, you might want to recalibrate your customer acquisition efforts to improve efficiency.
Look carefully at all aspects of your existing sales and marketing strategy and try to work out where you might be able to improve. Some key metrics to look at are your cost per click (CPC), cost per lead (CPL), content marketing return on investment (ROI), and your overall market positioning.
Now that you know the formula, you should calculate the SaaS magic number every quarter and constantly evaluate it to monitor improvements to your customer acquisition strategy and see how things are moving.
Just remember: While the magic number is a powerful metric in your analytic arsenal, it doesn’t tell the whole story.
Even a strong magic number of 1 or above doesn’t take into account things like costs of delivery and operations. You can have a magic number of 1 and still have problems, as it doesn’t look at your current gross margins.
All SaaS metrics are much more meaningful when used in conjunction with other metrics, so make sure you’re also looking at things like payback periods, churn, and gross margins to tell a more complete story. The goal is to take a wide view that shows you the whole picture.
What next? Well, you can start by signing up for Belighted’s blog post updates here for more top tips to help you run your SaaS business.
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