From $0 to $1M: The Magic Number
First-time founders, finding themselves running a fast-moving SaaS software company, often run headlong into a particular knowledge gap: the endless number of SaaS performance metrics and the endless number of opinions on which matter most. The metrics available for tracking Sales Efficiency are no exception. So we thought we’d share the efficiency metric we use ourselves when analyzing potential investments, and for counselling our portfolio companies as they grow. It’s called the Magic Number.
First the basics:
- The recurring revenue business model allows for all sorts of useful tracking and measurement.
- Sales efficiency metrics track business activities related to winning new customers.
- The Magic Number is a GAAP revenue-based sales efficiency metric that allows comparison between companies (where other sales efficiency metrics do not).
- Magic Number tracks the amount of new revenue generated for every dollar invested in selling and promoting.
From your first dollars in revenue, you’re going to want data on how well your business is attracting customers. How much growth is generated by the dollars you’re investing in Sales and Marketing? We prefer the Magic Number for that metric because (1) it tells you just that and (2) allows benchmarking between companies. That means you can use a tool like Scale Studio to see how your sales motion compares to other startups at similar revenue levels. Which tells you whether or not you should step on the gas and direct more dollars into S&M.
The Magic Number formula:
Basically, you’re calculating annualized new (GAAP) revenue as a percentage of last quarter’s Sales & Marketing expense. One assumption here is that the prior quarter’s spending impacts the next quarter’s sales growth.
As you accumulate more and more quarters’ Magic Number data, you’ll give yourself a quantitative basis to evaluate all those processes and people hard at work bringing new customers in the door.
For further reading, check out Scale’s series of articles on sales efficiency:
Originally published September 14, 2021.