What is the SaaS Magic Number?
SaaS Magic Number is a measure of growth or sales efficiency which is built from the revenue growth rate and the cost of acquiring new customers.
How is SaaS Magic Number calculated?
The formula for SaaS Magic Number is Revenue Growth divided by Customer Acquisition Costs. The measure can be calculated using any time period. Here we show the calculation for a quarter or 3 months.
As an example, if you spend $100 on marketing in Q4 2022, and revenue increases by $25 in the quarter (or $100 annualized), the Magic Number will be 1.0. This implies that you paid back the acquisition costs in 1 year.
Finance teams will frequently question whether total revenue or recurring revenue should be included in calculating SaaS Magic Number. There is no hard and fast rule. If recurring or subscription revenue is the vast majority of total revenue, it can be used in this calculation. Otherwise, total revenue works well.
What is a good result for SaaS Magic Number?
A higher Magic Number is better.
A SaaS magic number below 1 indicates that the company needs longer than a year to recoup the cost of acquiring a new customer. If customers are sticky and stay for many years and Gross Margin is high, this may not be a cause for concern.
A magic number below 0.5 usually indicates that it is too early to invest in sales and marketing.
This being said, it is important to keep in mind that the SaaS magic number can vary over time driven by a wide range of factors including the cost of acquiring new customers, the ability to cross sell to existing customers, net dollar retention, even churn. The Magic Number is just one financial metric and should be considered in the context of a company’s overall financial performance and business model.
What are the Magic Number SaaS benchmarks?
- 1.0+ with a healthy Gross Margin. Consider investing in sales and marketing
- Between 0.5 and 1.0: Depends on business specific factors
- Below 0.5: Not ready to invest in sales and marketing
SaaS Magic Number Visualization Example
ScaleXP fully automated SaaS Magic Number calculations. Data is compiled automatically from your accounting or financial system. Your internal budgets, targets and forecasts are automatically added to the graphs. All you need to do is click to share the insights with your team. Click here to learn more.
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