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What Is the Magic Number in SaaS? How to Calculate It, Benchmarks, and Examples

The SaaS Magic Number is a useful sales efficiency metric. Explore what the Magic Number in SaaS is, how it’s calculated, and when to use it.

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Revenue growth is all-important for SaaS companies. Yet, growth at all costs is not healthy. One of the most common metrics used to assess the sustainability of revenue growth is the SaaS magic number.

So what is the Magic Number in SaaS? The SaaS Magic Number quantifies how much new incremental recurring revenue is generated for every dollar sales and marketing (S&M) spends. Your company’s SaaS Magic Number lets you and potential investors gauge your sales and marketing efficiency.

In this article, we’ll cover everything you need to know about the SaaS Magic Number and what it can do for your business.

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Why is the SaaS Magic Number important?

The SaaS Magic Number is an important metric because it allows you to: 

  • Gauge your company’s S&M efficiency - Your SaaS Magic Number offers a quick overview of how sustainable your customer acquisition via sales and marketing is by comparing them to the ARR they create.
  • Decide if you need to spend more on acquiring new customers or boosting retention – A low Magic Number usually indicates aspects of your business need improvement before investing more into sales and marketing. If your CAC remains stable but ARR is decreasing, you need to focus on customer retention and reducing churn before increasing CAC. As your Magic Number rises, you can revisit investing more in S&M to acquire more customers.
  • Figure out whether your CAC is maximizing ROI - Use the insight provided by your SaaS Magic Number and LTV:CAC ratio to calculate what your allowable CAC should be to maximize ROI.

How to calculate the SaaS magic number

You can calculate the SaaS Magic Number for your business by using the formula: 

Formula for SaaS Magic Number, which equals the difference between the current and previous quarter’s revenue multiplied by 4 and divided by the previous quarter’s sales and marketing expenditure.
SaaS Magic Number Formula.

Example of a SaaS Magic Number calculation

Here is an example of how to calculate the SaaS Magic Number calculation for a hypothetical Company A with the following:

  • Previous Quarter revenue = $2,000,000
  • Current Quarter Revenue = $2,100,000
  • Previous Quarter S&M Expenditure = $500,000
The SaaS Magic Number for Company A equals the difference between 2,100,000 dollars and 200,000 dollars multiplied by 4 and divided by 500,000 dollars, with a result of 0.8.
Example calculation of the SaaS Magic Number for Company A.

To calculate your CAC payback period, divide 12 months by your SaaS magic number and gross margin. For example, a SaaS Magic Number of 0.8 with a gross margin of 80% means Company A’s CAC payback period is 18.75 months.

SaaS Magic Number calculator

Use our free calculator to determine your SaaS company’s magic number. 

What is a good SaaS magic number?

So what is the ideal Magic Number? According to Drivetrain, a good SaaS Magic Number benchmark is anything 1.0 and above. 

The lack of recent studies on the SaaS Magic Number means many businesses still follow outdated benchmarks. The table below lists Magic Number ranges according to Scale Venture Partners

These ranges take into account decades of reported SaaS Magic Number benchmarks, but this does not mean they hold true today.

A Magic Number of less than 0.50 is low, which can indicate that you’re not ready to invest in sales and marketing yet. With a SaaS Magic Number between 0.51 and 0.69, you’re approaching a healthy threshold but should still evaluate the potential benefit before investing in sales and marketing. With a Magic Number greater than 0.70, you’re ready to invest in sales and marketing.
Benchmarks for SaaS Magic Number and what they can tell you about your business. 

So why do we recommend a minimum threshold of one? This threshold makes sense intuitively. A company with a Magic Number of 1.0 is adding $1 in subscription ARR for every $1 it spends on sales and marketing.

Limitations of the SaaS magic number

Although the SaaS Magic Number is useful for tracking growth and informing your decisions during SaaS scenario planning, like most metrics, it has its drawbacks.

Only accounts for top-line growth

The SaaS Magic Number only accounts for top-line revenue growth. Increases in expenses outside of customer acquisitions (like the cost of goods sold or developing new products) are not included in its calculation. As a result, it cannot fully measure profitability or be used without context when making SaaS revenue projections.

Does not differentiate between different types of MRR 

The SaaS Magic Number gives a general overview of company health but does not differentiate between churn, expansion, contraction, new, or reactivation MRR. In some cases, a good Magic Number result can hide a leaky bucket.

Take hypothetical Company A and Company B as an example. 

Each company reports the following data for the same period: 

Table with revenue and churn data for two example companies. We’ll use these numbers in the following example to calculate their SaaS Magic Numbers. All numbers in this table are reported in dollars. For Q3, Company A reported a beginning revenue of 2,000,000, new revenue of 450,000, expansion revenue of 100,000, churn of 80,000, and ending revenue of 2,470,000. For Q4, Company A reported a beginning revenue of 2,470,000, new revenue of 480,000, expansion revenue of 120,000, and churn of 100,000. In Q3, Company B reported a beginning revenue of 2,000,000, new revenue of 450,000, expansion revenue of 100,000, churn of 200,000, and ending revenue of 2,350,000. In Q4, Company B reported a beginning revenue of 2,350,000, new revenue of 600,000, expansion revenue of 120,000, and churn of 220,000 for an ending ARR of 2,850,000.
Reported revenue and churn for Company A and B. 

Both companies report S&M expenditure of $2,000,000 in Q3. 

Their SaaS Magic Numbers are:

Example calculations of two companies' SaaS Magic Number. Company A’s SaaS Magic Number is equal to 2,770,000 dollars minus 2,470,000 dollars, multiplied by 4 and then divided by 2,000,000 dollars, resulting in 1. Company B’s SaaS Magic Number is equal to 2,850,000 dollars minus 2,350,000 dollars, multiplied by 4, and then divided by 2,000,000 dollars resulting in 1. 
SaaS Magic Number calculations for Company A and Company B.

Although both companies have the same SaaS Magic Number result, their difference in churn is significant. Company B’s churn is far higher but its Magic number does not capture this nuance. Instead, top line new subscription revenue growth hides churn. Clearly, despite similar Magic Number results, Company A is a more attractive and sustainable investment option.

Contextualizing your SaaS Magic Number using additional metrics is thus important when conducting scenario planning. In the above example, examining Company B’s LTV:CAC along with the Magic Number would have painted a better picture of its prospects.

Does not solely account for S&M expenditure

Churn affects ARR, and therefore also affects your SaaS Magic Number. However, churn is typically a customer success (CS) team concern, not that of the S&M team. Because of this, your SaaS Magic Number does not only measure S&M efficiency on its own merits. It also involves CS efficiency. 

Despite this, CS expenditure is not included in the SaaS Magic Number formula, and as a result most SaaS Magic Number results will be skewed. 

Skewed for early-stage companies

Early-stage SaaS companies tend to rely heavily on founder involvement in their sales and marketing efforts and have unusually high or low Magic Numbers as a result. It’s only once they achieve stable sales processes and the right product-market fit that the SaaS Magic Number provides an accurate gauge of marketing and sales efficiency. 

How Drivetrain simplifies sales efficiency analysis

Analyzing marketing and sales efficiency accurately requires taking several additional metrics into account. 

Drivetrain makes it easy for you to monitor and analyze your SaaS company’s sales efficiency by continuously tracking important metrics and creating accurate forecasts based on historical data.

With Drivetrain, you get access to:

  • Powerful SaaS metrics tracking and calculations – Track all relevant business metrics and compare actuals to projected values. Change model inputs and project their after effects effortlessly. 
  • A central, consolidated data source – Having all your company’s metrics in one place allows your company’s leadership to make informed decisions to boost marketing and sales efficiency.
  • Data-based variance analysis – Automating the real-time consolidation and tracking of plans versus actuals makes predicting sales efficiency metrics simpler and more accurate.
Want to learn more about how Drivetrain can help you track sales efficiency in your SaaS business and assess how sustainable your growth really is? Reach out to us.
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What is the SaaS Magic Number?

The SaaS Magic Number quantifies how much new incremental recurring revenue is generated for every dollar sales and marketing (S&M) spends.

What is a good SaaS Magic Number?

A good SaaS Magic Number is anything 0.70 and above. At this stage, you’ve achieved a good product to market fit, and your company is ready to invest in its sales and marketing engines to boost revenue growth.

How to calculate the SaaS Magic Number?

You can calculate your company’s SaaS Magic Number using the following formula: 

SaaS Magic Number = [(Current Quarter Revenue - Previous Quarter Revenue) x 4] / Previous Quarter's Sales & Marketing Expenditures

What are some of the limitations of the SaaS Magic Number?

The SaaS Magic Number metric has several limitations, including: 

  • Only accounting for top-line growth.
  • Not accounting for churn.
  • Not differentiating between different types of MRR.
  • Being skewed for early-stage companies.
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