SaaS Magic Number

The term “magic number” in the Software-as-a-Service (SaaS) world has come up several times over the past month in casual conversations. Early last year, the term was popularized on Will Price’s blog via a guest post from Lars Leckie titled Magic Number for SaaS Companies. Generally, the magic number is a reflection of how efficiently a company is growing their recurring revenue relative to sales and marketing expenses.

To calculate your magic number, take the difference in quarterly recurring revenue between your last quarter and the one before, multiple that by four, and then divide everything by all the sales and marketing costs of the  quarter before last.

Magic Number = (((Last Quarter Recurring Revenue) – (Quarter-Before-Last Recurring Revenue)) * 4) / (Quarter-Before-Last Sales and Marketing Expense)

The general idea is that if the magic number is greater than one, more should be invested in sales and marketing. If the magic number is less than .7, additional energy should be invested in making customer acquisition more cost effective.

I’d recommending reading the original article and evaluating the equivalent magic number for your company.

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