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The Magic Number: Revealing the Secret of This Key Saas Metric

Joseph Garafalo
Posted on
October 19, 2020
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Your magic number can help you understand how efficient your sales and marketing engines are in a specific time period, and can tell you when to invest more or less in those engines

Much of the work modern engineering, sales, and marketing teams do seems like pure magic to the rest of us. Thousands of large companies were able to pivot to remote operations on a dime thanks to the magic of cloud computing and collaborative software. The way your sales team satisfies its quarterly quotas just in time to meet your bookings goal seems like some sort of sorcery. And the uncanny ability of marketing functions to serve up the perfect ad at the perfect time—that’s straight-up ESP.

Luckily, finance doesn’t have to understand how engineering builds incredible, innovative products or how marketing is always able to offer customers a perfectly timed, personalized solution. But you do need to do a little magic of your own: You need to be able to measure how efficiently sales and marketing are helping the business grow—and to do it, you need to know your magic number.

(Insert dramatic flourish here.)

The Magic Number: What Does It Mean?

There are several “magic numbers” out there. In sports, the magic number clarifies how many losses will eliminate a trailing team; in computer programming, “magic numbers” refer to unique, unambiguous values; and for De La Soul, the magic number is simply “three.” But we’re talking about the SaaS magic number, a commonly used efficiency metric for the majority of software companies. At a basic level, the magic number asks: “For every dollar we spend on sales and marketing, how many dollars’ worth of annual revenue do we create for the company?” So, what's the magic number formula? 

How Do You Calculate the SaaS Magic Number?

Subtract your prior-quarter annual recurring revenue (ARR) from your current-quarter ARR and divide that by your prior-quarter customer acquisition spend. You can also get the SaaS magic number calculation by doing this monthly or annually, as opposed to quarterly, depending on your normal sales cycle.

Why Does the Magic Number Matter?

Your magic number can help you understand how efficient your sales and marketing engines are in a specific time period, and can tell you when to invest more or less in those engines. A number greater than .75 usually indicates that you should invest more in customer acquisition, while anything under 0.75 means you may need to reassess your acquisition strategy and dial back your CAC.

A magic number of 1 means you’ll pay back the selected quarter’s sales and marketing spend (the denominator in your equation) from the incremental revenue generated over the next four quarters (the numerator).

If your magic number is not where you want it to be, don't worry. There are plenty of ways to improve this metric. Try optimizing your ad spend, or refining your customer persona so you're targeting the right buyer. You can purchase sales automation tools that increase your outreach and automate follow ups to help reduce sales and marketing labor costs as well.

A Better Way to Track Your Magic Number

Historically, tracking your magic number took manual effort, and as soon as you pulled data down into Excel and calculated it, it was already stale. With Mosaic, you get a SaaS magic number calculator that enables you to track your magic number in real time, which means you can know exactly when to dial up your marketing spend to reach more people or when to reduce spend for safety.

Seeing your magic number is helpful, but even more powerful is the ability to quickly swap out different components of your calculation, updating your magic number formula. For example, replacing ARR with gross profit could be a better indicator for your specific business—and being able to quickly compare the two calculations could help you unlock insights a static calculation would miss.

Why Your Business Needs More Than a Magic Number

Hopefully we don’t wind up on any magicians’-guild blacklists for divulging this, but the magic number isn’t actually all that magical. It’s a useful snippet, but looking at a single metric will never tell you the full story. You need to be able to see a complete picture of the financial health of your business, in one place, in real time, at any time. 

Mosaic plugs into all of your financial-data-generating tools, normalizes that data, and automatically calculates all kinds of useful metrics, such as customer acquisition cost (CAC), lifetime value (LTV), average revenue per customer (ARPU), and cost to serve (COGS). You can easily experiment with different inputs, tweak your calculations to better map to your business’ KPIs, and share your findings cross-functionally with clean, clear representations. No manual data pulls, no error-prone calculations, no dizzying dashboards, just a holistic view of your business’ efficiencies and financial outlook. (That’s magic.)

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