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 annualised Revenue Growth divided by Customer Acquisition Costs. The measure can be calculated using annual results or a shorter, annualised, time period. Here we show the calculation for a quarter, or 3 months. In this case we assume that the benefit of sales and marketing cost is attained within the same period as it is spent, but a widely accepted alternative calculation is to use spend in the month prior to the new sales generation.
As an example, if you spend $100 on marketing in Q4 2022, and revenue increases by $25 in the quarter (or $100 annualised), the Magic Number will be 1.0. This implies that you paid back the acquisition costs in 1 year.
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?
The SaaS magic number can vary widely depending on the industry and business model. Magic Numbers are much harder to compare across companies. If you are looking for comparable and widely researched benchmarks, CAC Payback may be a better measure of sales efficiency.
Rather than using external benchmarks, it is more useful to compare a company’s SaaS magic number to its own historical performance or to the performance of similar companies in the same industry.
As a very rough rule of thumb:
- 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 Visualisation Example
ScaleXP fully automates 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 share the insights with your team, click here to learn more.
You may also be interested in
Net Dollar Retention
Measures growth in revenue from a group of customers. Typically split into upgrades, downgrades, renewals and losses.
CAC Payback
Measures how long it takes for a company to recoup the costs of acquiring a new customer.
MRR Growth Rate
Percentage increase in MRR over a certain period of time, most typically a quarter or a year.
