What is the SaaS Magic Number?
The SaaS Magic Number metric measures a company’s sales efficiency, i.e. how efficiently its sales and marketing (S&M) spend can generate incremental recurring revenue.
How to Calculate SaaS Sales Efficiency (Step-by-Step)
There are various sales efficiency metrics that compare a SaaS company’s new recurring revenue generated in a specified period to the amount spent on sales & marketing.
Practically all sales efficiency metrics are answering the question, “For each dollar spent on sales and marketing (S&M), how much in new revenue was earned?”
One sales efficiency metric is gross sales efficiency, which divides the new gross annual recurring revenue by the S&M spend.
- Gross Sales Efficiency = Current Quarter Gross New ARR / Prior Quarter Sales & Marketing Expense
The main shortcoming to this metric is that churn is NOT accounted for.
An adjacent metric is called the net sales efficiency, which does indeed account for new sales, as well as churned customers.
In order to calculate the net sales efficiency, the “Net New ARR” metric must first be calculated.
The net new ARR calculation begins with the net ARR from new customers.
From there, the expansion ARR from existing customers is added and then the churned ARR from lost customers (or downgrades) is deducted.
- Net New ARR = Net ARR + Expansion ARR − Churned ARR
In the final step, the net ARR of the current quarter is divided by the S&M spend of the prior quarter to arrive at the net sales efficiency figure.
- Net Sales Efficiency = Current Quarter Net ARR / Prior Quarter Sales & Marketing Spend
SaaS Magic Number Formula
The problem with the net sales efficiency metric is that public companies are under no obligation to disclose the necessary figures required in the formula.
In response, Scale Venture Partners (SVP) developed its own “Magic Number” metric to bypass this hurdle and enable practical comparisons among public SaaS companies.
The solution here is to replace “Net New ARR” with the difference between the two most recent quarterly GAAP revenue figures, annualized.
The SaaS magic number formula is shown below:
- SaaS Magic Number= [(GAAP Revenue Current Quarter − GAAP Revenue Previous Quarter) × 4] / (Sales & Marketing Spend Previous Quarter)