Calculating Sales Efficiency In a Business: The Magic Number SaaS and How To Increase Your Score
Many articles have been written about ‘the magic number SaaS'. If you conduct your own research, you will discover that there are two groups of people: those who believe in its power, and those who believe it is nonsense. This is the ultimate guide to understanding this metric, its limitations and benefits, and how to improve your score.
Table of Contents
In the mid-2000s, Lars Leckie marketed the 'Magic Number' as a SaaS metric, citing it as a way to help companies decide "how much gas to pour on the fire" of your startup. In other words, it tells you how effective your sales are.
This magic number tells you if your sales efficiency is in good shape and assists you in understanding a company's economics. It answers the question of whether or not a company can scale. Besides, for investors, this is the most useful SaaS metric for evaluating the company's health and deciding whether or not to invest in it.
Definition - It is a measure of revenue growth in relation to the cost of sales and marketing.
Magic number formula -
What is a good magic number? - Ideal is above 1.
Everything above 1 indicates that your company will not crash and will be able to recover from any dips. You can also consider your sales and marketing investment profitable and efficient if the Magic number = 1.
If it’s below 1 - It means just the opposite. Your sales and marketing expenses are inefficient in terms of generating new revenue.
Why does this number should keep you up at night? - This is one of the most important SaaS business metrics for the investors, C-suite and shareholders.
You will attract investors based on the SaaS number. Which means: higher magic number = more investments. Lower magic number = zero investments.
Don’t rely on just this single lonely unit
Depending on how long your company has been running, you might be more concerned about growing your business and money balance to support it. There will be a point where you’ll have to go further than the magic number and focus on gross margins.
Tip: Don’t focus just on SaaS metrics and increasing the number. Rather, it would be more meaningful if you were to track other KPIs (such as: customer satisfaction, profit and loss, annual sales growth and more), that also help to determine the health of your business.
Metrics related to the magic number
Just like any other metric, SaaS magic number is influenced by other factors. Here are the main ones:
- Churn rate. The lower the number, the better, as it represents the percentage of subscribers who are leaving.
Focus on decreasing it:
- Promote annual contracts more. According to Patrick Campbell, longer contracts reduce churn rate, as opposed to monthly contracts;
- Investigate the reasons for customer cancellations and address the most common responses;
- Be proactive with communication, send personalized emails and provide excellent customer service. Simply put, introduce lead nurturing campaigns.
2. Increase revenue. The faster you do it, the sooner you can improve your service, and products, and secure customer loyalty.
3. Track average revenue per user (ARPU) to see how much you earn from each customer. If you find out your best customer acquisition channels and understand your month-to-month expenditure of your paying clients, you can then make data-driven decisions and build strategies on it.
4. Sales and marketing expenses. This is a no-brainer. You should keep track of your expenses in order to:
- Keep track of your money's whereabouts;
- Discover what generates the most profit;
- Compare your sales and marketing efficiency with that of your competitors;
- Ensure that your project's financial goals are met.
To increase the magic number SaaS become obsessed with knowing all about your sales and marketing spend. Know where your money goes and where it is coming from. This is the only way to get your efficiency UP!
How to increase your score?
As we mentioned, the ideal magic number is 1. If it is less than that, you should begin reviewing ROI-positive marketing channels and eliminating low-return ones:
1. Examine the gaps in your sales recruiting and enablement process.
Collect Employee Feedback. Surveys, focus groups, and one-on-one meetings can be used to identify gaps and learn about personal preferences. Discover what sales and marketing teams are attempting to combat and the challenges they face.
2. Automate salesforce.
Increase the speed of your processes by automating them. To ensure a steady and consistent workflow, eliminate manual data entry and potential human error. Not only will you save time, but you will also save money by spending it on software rather than a person.
3. Ensure that your sales and marketing teams are working together.
Bridge the gap between sales and marketing. When it comes to strategies and company growth, make sure that sales and marketing have the same goals and images in their heads. Communication is essential in this situation, so hold regular meetings and discuss any progress made to ensure that everyone is on the same page.
4. Double-check if your ads and marketing are targeting your ideal customer profile;
5. Shift to content marketing. It's a good way to start a subscription business because the initial investment will undoubtedly pay off in the long run.
Before you try to increase the score - analyze your business. Consider your product’s maturity, your investments in customer acquisition, and, most importantly, your product’s-market fit. There are many indicators to define if you have reached product-market fit.
But the easiest way to find out is to remember Eric Ries' words: ‘If you have to ask whether you have Product/Market Fit, the answer is simple: you don’t’.
Invest in analytics software. It is crucial that you track your key SaaS metrics and related KPIs in order to fully understand the value of a company's dollar. This number will provide you with useful data in the long run, so it is essential that you have accurate information when developing your sales and marketing strategies for the coming quarter.
Tracking important KPIs with Whatagraph is both simple and visually appealing. Keep an eye on your sales, advertising performance, conversion rate, and revenue. Now is the time to use an analytics tool to help you increase your SaaS score.