Are you a SaaS startup looking to grow big and get some significant funding? If the answer is yes, you would want to ace your SaaS Magic Number.
That’s because Saas is a different animal. So is SaaS marketing.
And you and your potential investors know that.
Many businesses can sustain on single, one-time purchases.
It depends on month-on-month and year-on-year continued subscriptions.
That means not just acquiring new customers, but more importantly, retaining them!
Of course, the product has to find its sweet spot.
But once that’s done, selling and marketing are what keeps the ledgers in green. Notwithstanding continued research and development. Or new market entries.
Hence sales and marketing become that much more critical to SaaS businesses.
No wonder, we see SaaS CEOs taking a personal interest in everything that marketing and sales do. And that includes cost per lead, content marketing, and customer retention strategies. Sometimes, we even see them hunched over promotional creatives, reviewing fine copy and graphics.
Yes, SaaS marketing and sales budgets are always under great scrutiny. And SaaS CMOs like to keep a tab on every penny. So how do you judge if all is going well? And if your efforts are in the right direction?
Therein comes the SaaS Magic Number.
What is a SaaS Magic Number?
It is a measure of growth in revenue with respect to the cost spent on sales and marketing. Through this, you can measure how competent a business is in terms of generating recurring revenue at the cost of its marketing spent.
It is one of the most useful SaaS metrics for the investors to know the health of a business.
It serves as a litmus test of sorts. To help you gauge whether your sales and marketing variables need any tweaking. And, in which direction!
Why is SaaS magic number important?
As a SaaS business owner, you would want as much control over your business as possible. By using different metrics, you would want to keep the health of your business under check. If a metric allows you to know what areas of the business you must improve, then it becomes indispensable. Through this magic number you can have following benefits.
Through this magic number, you can identify different strategies needed to improve your sales and marketing efforts. Different readings suggest different areas to work on. We will see that in the below sections.
Cost reduction by measuring ROI
When you start investing with a right ratio on your customer acquisition cost and measure the ROI, you would know the exact amount to spend for further growth. This metric will show you when to stop investing further on CAC and rather work on improving its efficiency.
Create better team
This magic number tells you when you need to stop investing more on sales and marketing. And rather invest on the process efficiency. This helps you upgrade the skills and competency of your sales team or buying a higher end sales tool. This is a useful step towards enhancing the overall performance of your sales department.
How to Calculate your SaaS Magic Number
To find this metric, you need the following data points.
- Recurring revenue from your last quarter (A)
- Recurring revenue from the quarter before your last quarter (B)
- Sales and marketing costs from the quarter before your last quarter (C)
Once you have the above figures with you, you can use the below SaaS magic number formula to get this metric:
SaaS Magic Number = [(A – B) *4] / C
It is your ‘annualized’ incremental recurring revenue as a percentage of your sales and marketing expenses.
So, what does it denote? Read on!
What is your SaaS Magic Number telling you?
It tells you how efficient your sales and marketing activities are, in hitting the gong.
A SaaS magic number below 1 means that you may not be able to recover a quarter’s worth of sales and marketing cost even after a year, considering all other factors stay constant over the next three quarters.
Similarly, when it is above 1 means you will be able to recover the same in less than a year.
It stands on the idea that, on average, it could take a year for a SaaS startup to recover its sales and marketing expenses.
Why is it important to keep your SaaS Magic Number benchmarks at one or above?
It is among the top SaaS business metrics that matter to the C-suite, the investors, and the shareholders.
It helps them gauge how fast and efficient the business model is in growing its revenue compared to the capital pumped in.
Naturally, this number is critical to make or break investor confidence in your SaaS subscription business.
What to do if your SaaS Magic Number lies between 0 and 1?
If it is below 1, it could indicate poor sales or marketing efficiency. If it is one or more, it could suggest a strong sales and marketing framework – based on which you can confidently pursue further growth.
Below are the common prescriptions offered in each scenario:
|If SaaS magic number lies||Prescription to the business|
|Between 0 and 0.5||Improve sales efficiency|
|Between 0.5 and 1||Improve capital efficiency|
|Above 1||Invest more|
Having a SaaS magic number below one means there’s scope for recalibrating your customer acquisition efforts and strategies to make them more dollar efficient.
To improve your sales efficiency:
Do you think your sales strategy struggles to acquire and retain customers? You could look at gaps in your sales recruitment and enablement process, salesforce automation, sales and marketing collaboration, or even issues with your ideal customer profile.
To improve your capital efficiency:
When we say capital efficiency, we mean the marketing spends you have committed to growing your customer base and market presence. Your SaaS number may indicate gaps in your marketing strategy.
If that’s the case, you could look at your acquisition cost per lead, the acquisition cost per customer, content marketing ROI, channels used for reaching your ideal customer profile, and the positioning changes to better appeal to your chosen market segment.
Common pitfalls to avoid when working with your SaaS magic number
Like every other metric, it is essential to look at this metric in combination with other associated parameters, and not in isolation, lest you end up missing the obvious.
Sometimes, a SaaS magic number above 1, which looks perfect on its own, might reveal customer acquisition weaknesses when we look at the sources of revenue.
In subscription businesses, revenue growth can come from:
- Existing customers renewing their subscriptions, or
- New customers added
Your periodic revenue growth must be well-distributed between both new and existing SaaS subscriptions.
Leaning too heavily on just one of them could expose the business to potential risks and raise questions on its sustainability.
Similarly, a magic number above one may not necessarily mean that all is well with your business.
For it doesn’t take into account your customer service costs and costs of delivery and operations. You may have to wait much longer than a year to recover them all.
Hence, depending on the stage of your startup, at some point, you will have to move beyond just the SaaS magic number and start looking at your gross margins.
If there’s one quick metric that helps you check the pulse rate of your SaaS subscription business, it is the SaaS magic number.
For best results, you must calculate and evaluate it consistently, quarter after quarter, and year after year.
This way, you can monitor the improvements and view the big picture trends going beyond temporary fluctuations.