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A number below 0.75 implies that your business should refrain from scaling up sales and marketing spend because it doesn’t translate into recurring revenue efficiently enough. In other words, your customer acquisition cost of $1 has been recovered within 1 year and the customer starts to contribute profit thereafter.Īs a rule of thumb, a SaaS magic number over 0.75 is required to justify pouring money into sales and marketing teams. The magic number formula is:Ī value of 1.0 means that for every $1 you spent on sales and marketing, you generated exactly $1 in annual recurring revenue (ARR). The reason is that these expenses fuel future growth, but with a delay. That is divided by the sales and marketing expenses incurred in the previous quarter. In its original form, the SaaS magic number is calculated by taking the difference between the recurring revenue of the current quarter and the recurring revenue of the last quarter and multiplying it by 4 to get the annualized new recurring revenue. It is a sales efficiency metric widely used by CFOs and investors. The SaaS magic number measures recurring revenue relative to sales and marketing expenditures.

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He has over two decades of experience with software and subscription businesses. Lars Leckie, the managing director of Hummer Winblad Venture Partners and Aspenwood Ventures, introduced the SaaS magic number in 2008. What is the SaaS magic number and why is it important? You can also download our template to calculate the SaaS magic number and some related metrics for your company.

Moreover, you will know what actions to take to boost the number.

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In this article, you will learn how to calculate and interpret the SaaS magic number. The number can help you know when your sales and marketing machine is ready to scale, and when it still needs to be optimized and premature scaling would break the bank.

This is to ensure that you are neither overspending nor under-investing. The SaaS Magic Number can help you make sure your sales and marketing investments are appropriate relative to your sales growth. It is a key SaaS performance metric that measures your sales and marketing efficiency. The SaaS magic number is a KPI to help you balance revenue growth with your sales and marketing spending. SaaS Magic Number: How to Calculate, Consider, & Act On Yours

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