The Magic Number for SaaS

Way back in 2008 Lars Leckie published a seminal piece on SaaS metrics titled Magic Number for SaaS Companies. From the piece, here are the stages of evolution of the company:

  1. Product: build a rock solid product. Prove you can sell it as founders before moving past this step.
  2. Sell: Sell like crazy, build out a team, hire some QBSRs (Quota Bearing Sales Reps)
  3. Retention: focus on churn and retention issues, hire more QBSRs
  4. Marketing: spend on marketing, hire more QBSRs

Then, on to the magic number. The magic number is a ratio of the scaling of recurring revenue to the sales and marketing spend. Here’s the formula:

(Quarterly Revenue — Previous Quarter Revenue)*4 / (Previous Quarter Total Sales and Marketing Expense)

So, take the growth in revenue between the quarters, annualize it by multiplying by four, then divide by the total of all sales and marketing expenses. If this number is less than 1, things are going well and more should be spent on sales and marketing. If this number is greater than 1, the cost of customer acquisition relative to the value of the customer is too high and the focus should be on making sales and marketing for effective.

Scaling a SaaS startup is expensive. Use the SaaS Magic Number to understand how efficiently the business is growing based on relative growth to customer acquisition costs.

What else? What are some more thoughts on the SaaS Magic Number?


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