Magic Numbers for SaaS Companies
The Magic Number
The magic number “MN” is a metric that can be used to tell you the health of your company from the perspective of growing monthly recurring revenue “MRR”. It is a common mode metric to compare companies MRR scaled by sales and marketing spend. The MN provides insight into the effectiveness of previous quarter Sales and Marketing spend on MRR growth. Your MN will be penalized if the spend is wasted bad marketing, bad sales execution, if your churn is high or if the market has issues saturation, competitive forces. It also has a very high correlation with Q/Q growth rates so in general, high Magic Numbers are good.
QRev[X] = Quarterly Recurring Revenue for period X
QRev[X-1] = Quarterly Recurring Revenue for the period preceding X
ExpSM[X-1] = Total Sales and Marketing Expense for the period preceding X
Magic Number = QRev[X] â€“ Qrev[X-1]4/ExpSM[X-1]
For example, consider a hypothetical company with the following financials
Q1 Q2 Q3
Revenue recurring total 1M 1.2M 1.5M
S&M Expense 800K 900K
Then the magic number is 1.0 for the end of Q2 and 1.33 for Q3.
Fundamentally, the key insight is that if you are below 0.75 then step back and look at your business, if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth. If you are anywhere above 1.5 call me immediately.