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May 31, 2022

If you’re in the software-as-a-service (SaaS), then you know that one of the most important metrics to track is your Magic Number SaaS . This number tells you how much revenue each customer brings in, on average, over the course of their subscription. But what if you don’t know how to calculate your Magic Number SaaS? Don’t worry – this blog post will show you everything you need to know. In just a few minutes, you’ll be able to see exactly how much money each of your customers is worth. So let’s get started!

What is Magic Number SaaS?

The “SaaS magic number” is a metric that shows how much revenue a company gains from every sales and marketing dollar spent. It shows how efficient the company is at generating revenue from its marketing expend.

SaaS Magic Number calculation in Q2

The company had 700,000 in monthly reoccurring sales in the second quarter, and 500,000 in the first month. Their sales and marketing expenses were 600,000 in the first quarter.

The 1.3 million number comes from dividing 600,000 by 1.3.

((700,000 – 500,000) * 4) 600,000 = 1.3.

SaaS Magic Number – Tracking Your Data

Klipfolio PowerMetrics is a free analytics tool that you can use to monitor your data.

What is good SaaS Magic Number benchmarks?

The magic number is between 1 and 1.5, which signals that your company is efficiently using sales resources. Most investors and analysts will also accept this range, as it indicates that the company is heading in the right direction.

A good SaaS Magic Number benchmark is between 0.5 and 1. This shows that the company is progressing well and is likely to be successful.

5 may show that the company is under-investing in Sales & Marketing. A Magic Number below 0.5 could indicate unsustainable growth and sales efficiency, while a number above 1.5 might suggest the company is underspending on Sales and Marketing.

How to visualize SaaS Magic Number?

The best way to visualize your SaaS Magic Number is by using a summary chart. This will allow you to see how the value has changed over time, and identify any trends.

SaaS Metrics: A History of the Magic Number Part 2

Today, subscription-based revenue models are better understood and account for a larger percentage of software-related venture capital investment. In 2005, subscription-based revenue models accounted for only 10% of all software-related venture capital investment.

While in the process of reviewing potential investments, Scale Capital was looking at whether a company was growing its sales & marketing spend in line with its revenue growth.

He claimed it was magic because the company was able to generate more than $2 in revenue for every $1 they invested in their marketing efforts.

(Source)

Scale SaaS – An Analysis of Private and Public SaaS

In the 2000’s, cloud computing and Software as a Service (SaaS) were new concepts that many businesses were unfamiliar with.

Both Amazon and SalesForce are major players in the Software as a Service (SaaS) and cloud-computing worlds.

Subscription based models are nothing new, but there have been previous attempts in other industries.

The advent of cloud and SaaS models forced companies to reevaluate how they should be evaluating their IT spending.

Telemarketing has come a long way in 20+ years. What this evolution has brought us is 20+ years of experience on how the industry has progressed, right down to individual companies.

When we compare the progress of SaaS and cloud to other industries, it is clear that a lot of capital investment has been necessary to achieve the current level of advancement. Without this funding, the industry would not have been able to make the same leaps and bounds.

Many SaaS and Cloud companies have gone public, raising hundreds of millions in the process.

We are always trying to understand how the SaaS ecosystem is changing.

How has the SaaS industry evolved over the past decade? What changes have there been and what trends have there been? What will it take to build the next great software company?

We wanted to take a closer look at how capital spending in the software-as-a-service (SaaS) industry has evolved over the years.

We looked at two data points: the amount of private company data being shared and the amount of public company data being shared.

We found that, for private companies, the magic number was 4.1 times the revenue. For publicly traded ones, it was 10.8. The median magic number for a private company was 4.1, while for a public one it was 10.8. We looked at these numbers from 2010 to 2019. This data gives us insight into how public and private companies are performing.

It’s important to note here that our analysis only looked at how magic numbers in the private equity world are affected when the public market goes through a downturn.

The Past Decade of Private Company Magic Numbers

A rule of thumb for a healthy average conversion rate is 0.7x.

For every $1 a company spends on Sales and Marketing, it generates $0.70 in profit after one year.

As long as a company can acquire customers for less than their lifetime value, this acquisition model can be very profitable.

The median long-term value of a sales lead in our software-as-a-service (SaaS) data over the last decade has been 0.7x, or $700.

While the average for median ARR does remain relatively consistent, this doesn’t hold true for private, venture-backed software-as-a-service (SaaS) startups.

7X, it’s fluctuated a lot recently, and it’s been going down.

(Source)

Just make a note for now, and we’ll get back to it.

The Last Decade of Public Company Revenue Multiples

We wrote a piece a few years ago on long term SaaS valuation, in which he showed how the Enterprise Value Annual Recurring revenue (EV ARR) ratio has changed over time.

We updated the revenue multiples in the chart below to match the time period of our Magic Number chart. This shows that, as of this writing, we’re well above the long-term median SaaS revenue multiple of 5.0x.

(Source)

The median valuation for software-as-a-service (SaaS) businesses is 5.0x, which is much higher than the 2.5x-3.5x range that these businesses typically trade at. This points to investors’ continuing enthusiasm for the business model.

As of the close of the most recent quarter, EVrevenue for SaaS and cloud companies hit a high of 11.7x. This points to the market’s continued enthusiasm for these industries, which are expected to see strong growth in the coming years.

The investors believe that this sector will continue to grow as more and more things are being converted to digital formats.

And with the coronavirus pandemic, people are increasingly turning to virtual meetings.

Magic Number x Revenue Multiple

We’ve noticed some fluctuations between public and private companies in the software as a service (SaaS) space. The biggest shock comes from looking at these two sets of data on the same graph.

There is a correlation between these two things, and it’s bad.

(Source)

Generally, the more a company is worth in the public markets, the less efficient it is at selling products or services privately.

What to Make of This?

Why does the data show an inverse relationship? Here is one theory.

For many venture-backed startups, the allure of an open IPO window with high valuation multiples can be tempting to achieve critical mass as quickly as possible. However, it’s important to consider if this is the right move for your company.

Some SaaS businesses are able to stay efficient as they grow.

The successful stories are the ones you hear, but they aren’t as frequent as you may think.

It’s common for early-stage startups to scale up too quickly, only to see their efficiencies rapidly decline because of poor process, a lack of true market demand, or intense competition.

These companies have the potential to achieve significant revenue growth, but they will need to invest a lot of cash to get there.

As a founder, it’s important to keep in mind that in today’s business climate, SaaS companies have access to cheap capital which they can use to finance their growth. This means that founders should be prepared to raise money from investors on a regular basis in order to keep their businesses growing.

Startups with early- and mid-stage funding have an increasing number of options when it comes to finding venture capital.

The risk of inefficient growth is when companies start preparing for an IPO or raise more capital and the cost of that new money increases.

In these instances, it is critical for management to implement a strategy that will get the company back on track to a more efficient go-to-market model. If they don’t, the company risks facing a discount from late-stage or public investors due to their cash-hungry and inefficient go-to-market model.

How to Calculate the SaaS Magic Number

The “SaaS magic number” is a commonly used metric that measures the efficiency of your sales team. It calculates how much revenue your marketing teams generate for every year of growth.

For every $1 you spend on sales and marketing, how much (in ARR) do you generate?

(Source)

If you spend $1 on marketing in 1 quarter, and your revenues increase by 25% in 2 quarters, your magic number is 1.

A magic number of 1.0 means that you were able to recoup your customer acquisition costs within one year. This is a good metric to track, as it shows whether or not your business is sustainable in the long run.

After one year, you should be generating a profit from that client (if ARR – CAC is a positive number). This doesn’t distinguish between new and repeat customers. It’s simply a measure of your revenue growth in all departments.

It tracks all sources of traffic.

See the table above for what your targets should be.

(Source)

Conclusion

Magic Number SaaS: How to Calculate it in Q2 If you’re in the business of software-as-a-service, then you know that one of the most important saas metrics to track is your SaaS Magic Number. This number tells you how much revenue each customer brings in, on average, over the course of their subscription. But what if you don’t know how to calculate your Saa

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