Metrics within your SaaS business
When measuring product growth within SaaS companies, there are many sales efficiency metrics you could consider implementing in the search for revenue growth.
Knowing which sales efficiency metric is right for you can be tricky, but education is the key. It would help if you learned as much as possible about each one and then compared it to the other metrics.
SaaS magic number is one of those metrics, but anything with "magic" in the title is always a little mysterious, so let's delve into this concept and see if it could benefit you and your business.
What is the SaaS magic number?
The SaaS (Software as a Service) magic number is used to determine the results of every dollar spent on the company's sales and marketing solutions.
By calculating your magic number, you can ascertain how many dollars worth of sales each dollar of marketing spend has brought in.
Why is the SaaS magic number important?
Knowing your magic number can give you a clear picture of the growth your business is experiencing relative to its marketing spend.
The SaaS magic number is also a valuable tool in giving you a nudge in the right direction regarding customer scope. It is vital to know when it is time to focus on customer expansion revenue or customer acquisition revenue.
To find out more on the SaaS magic number formula, read on.
How to calculate the SaaS magic number
Though financial data and related formulas can sometimes be confusing, calculating your SaaS magic number is relatively straightforward.
The formula for calculating your magic number:
Begin with the current quarter's recurring revenue generated
Subtract your previous quarter's recurring revenue generated
Multiply it by four (to determine the annual run rate)
Divide it by the previous quarter's sales and marketing dollars spent
There you have it, the SaaS magic number formula. This figure shows you the net growth that your business is achieving. It is also a great insight into whether or not your marketing strategy is successful and contributes to increased recurring revenue.
Some may say the SaaS magic number is just one of many sales efficiency tools. There are indeed several other metrics you could introduce - however, this is one of the best ways to measure ROI on your initial investment.
Unpacking your magic number
Due to the vast differences in COGS and business models between companies, SaaS magic number benchmarks shouldn't be referred to as the holy grail for revenue growth.
However, you may take away some valuable tips for improvement - so here are three SaaS magic number benchmarks and associated scenarios.
SaaS magic number less than 1
If your magic number is less than 1, you can expect it to take you longer than one year in order to make up for the money spent on sales and marketing efforts.
To improve your position, your focus point should be the streams that bring you the biggest ROI and, in doing so, strive for better sales efficiency.
Although on the low end of the magic number scale, these results aren't necessarily capturing all the benefits you've achieved through marketing.
For instance, your sales and marketing efficiency may be strengthening your brand in other ways, such as customer retention.
This is something that the SaaS magic number can't account for, as it's not directly tied to your revenue growth.
SaaS magic number equal to 1
Having a SaaS magic number equal to 1 means you are considered efficient. It indicates that the incremental revenue generated will cover your sales and marketing investment in one year.
In other words, you'll be able to recover your sales expenses from the last quarter in 12 months.
SaaS magic number greater than 1
If you're in the position of having a SaaS magic number greater than 1, you are considered highly efficient. The metric shows that you are generating much recurring revenue relative to your sales and marketing costs.
On the flip side, it may also be a good idea to check that you aren't under-investing in marketing and sales, which could also explain why your payback periods are short.
Improving your magic number
Improving on a SaaS magic number of less than 1
With a SaaS magic number of less than 1, the metric indicates that it will take you longer than a full year to reach your payback period and recover your initial marketing investment for the quarter. The most apparent solution is cost reduction which will, in turn, increase your gross margins.
Assess the strategies that produce the lowest results, and instead, divert that capital into your high ROI streams in order to improve your returns and your magic number.
Some other strategies to implement are:
- Research new sales and marketing channels
- Eliminate sales and marketing spending on low ROI streams
- Refine your business model
- Discover strategies to reduce your new customer acquisition costs
- Brainstorm how to increase the amount of incremental revenue generated from your existing customer base
- Look into revenue churn reduction
Improving on a SaaS magic number equal to 1
If your SaaS magic number is equal to 1, your quarterly payback period projection is one year. Given that your marketing expenses are confirmed to be bringing in consistent revenue, essentially, your business is in a state of equilibrium.
It is still crucial to keep on top of your financial position. Just as if your SaaS magic number was less than or greater than 1, review your company's performance regularly.
Improving on a SaaS magic number greater than 1
If your SaaS magic number is greater than 1, your biggest challenge is not to fall into a state of complacency.
It's essential to ensure you maintain the optimization of your marketing framework. Keep the focus on the company's long-term sales and marketing channels performance rather than putting all your energy into short-term efficiencies.
Whilst achieving a high SaaS magic number is positive, as your payback period is nice and short, it is no time to rest on your laurels. Never hesitate to upscale your teams and campaigns.
Benefits of a fast ROI
The main benefit of fast ROIs is that you don't need to hold dormant capital but rather transform it into even more revenue.
Doubling down on marketing avenues that have proven to bring in the best returns is the best course of action. Refining your sales and marketing efficiency can ensure that you stay on the right path and that the positive trend continues.
Broadening the scope of your potential customer base for your product and targeting new demographics can draw in more revenue and increase your magic number.
Key players in the Saas Magic Number Game
Sales and marketing teams
Sales and marketing teams can significantly impact your SaaS magic number, and as a result, your gross margins will benefit.
A sales team is made up of sales reps whose primary purpose is to meet the sales goals set by the organization. The sales team's efficiency impacts your cash flow, which is factored into your SaaS magic number.
A marketing team's primary function is strategizing and implementing effective marketing processes. ARR growth for every sales and marketing dollar spent is a good indication of your marketing team's success.
Using engaging, bold content marketing strategies to draw attention can attract new customers to your business and improve your revenue and your SaaS magic number.
Customer success teams
Customer success teams essentially do exactly what the title suggests. Provide a positive experience to all customers, increasing word-of-mouth reputation, which can result in new customers coming on board.
Through our dissection of the SaaS magic number, it should be clear that it is a handy tool at your disposal. This SaaS metric can help you to gauge your sales and marketing spend versus performance and increase those all-important gross margins.
Used in tandem with other sales tools, the SaaS magic number is an essential tool on the path to future profitability and growth sustainability.
It can help you develop a scalable SaaS business model with consistent monthly recurring revenue and annual recurring revenue growth.