Are you stuck in managing the cost of sales and marketing in your SaaS or subscription business?
There is a formula for success in the SaaS and subscription business, and it can be measured using metrics.
In particular, it is essential for subscription business planners to understand the balance between ARR and MRR acquisition and the cost of sales and marketing.
Therefore, among the various SaaS business metrics, Magic Number is one of the most important, as it measures the degree to which the sales and marketing costs paid to acquire sales are recovered.
In this topic, we will discuss Magic Number and why it is important for SaaS businesses, along with some benchmarks.
What is the Magic Number?
What exactly is the Magic Number in SaaS and what are the subscription metrics? Let me explain. Magic Number is a measure of the degree to which a business recovers the cost of its campaigns and sales efforts to generate revenue, and is used to determine sales efficiency based on a company’s MRR and ARR.
Magic Number can be used by companies to determine how much revenue they can expect to generate by investing in sales and marketing in a given quarter. Magic Number is used to determine how much revenue can be expected from sales and marketing investments in a given quarter. If you use the Magic Number as a criterion, you will be able to determine the degree of contribution of sales and marketing from the current quarter’s revenue.
Let’s take a look at how to calculate the Magic Number.
The Magic Number is calculated as
(Revenue for the current quarter – Revenue for the entire quarter) x 4 / Sales & Marketing Cost for the previous quarter + Customer Success Cost.
Sales Cost = Overall cost of sales, including labor cost and tool usage cost
Marketing Cost = Overall marketing cost including personnel cost, tool usage cost, and advertising cost
CS Cost = overall costs for customer success, including labor costs and tool usage costs
The reason why the numerator is multiplied by four is to compensate for quarterly sales with the annual value. To calculate the Magic Number, we need a total of 6 months of data from the previous quarter and the current quarter. Let’s look at a specific benchmark.
For example, let’s assume that you have 10 million in revenue for this quarter and 8 million yen in revenue for the previous quarter. In addition, you spent 3 million yen on Sales & Marketing Cost in the previous quarter and invested 4.8 million yen in CS Cost. When added together, the numerator is 8 million yen and the denominator is 7.8 million yen. The result of the calculation is a Magic Number of 1.025.
{(1000-800)×4} / (300 + 480) = 1.25
From the above example, the Magic Number of a company can be calculated and the relationship between sales and marketing costs and revenue can be evaluated as a numerical index of 1.025. In management decisions, the Magic Number can be used to make investment decisions for the following quarter.
For example, based on the calculated Magic Number, the company can make a preliminary decision to spend 0 on sales and marketing in order to increase ARR by 0. The Magic Number can be used to benchmark past ARRs for efficient improvement.
Why Magic Number?
Let’s discuss the importance of Magic Number as a management indicator for companies to evaluate their sales and marketing costs. As a SaaS business planner, you will be able to visualize the effect of using Magic Number on your sales and marketing efforts. Therefore, Magic Number can be used to improve sales and marketing efforts. Magic Number can be used to make the following improvements
Sales redesign
Cost reduction
Member education and training
Magic Number can be used in a business environment to determine, “Is this a capital efficient investment? Magic Number is a capital efficient investment in a business environment. Improvements based on managerial decisions include redesigning sales, controlling costs, and improving the skills of internal personnel.
In the case of sales redesign, the Magic Number can be used to determine at what point in time inappropriate investments are occurring. The Magic Number can be used to identify areas for sales improvement and to efficiently deal with inappropriate investment costs.
Magic Number can also be used to determine the degree to which ARR, MRR, and sales and marketing costs have been recovered, allowing you to implement appropriate cost reductions. Magic Number is able to determine the contribution of sales and marketing based on quarterly revenue, so that cost reductions can be implemented only when improvements are needed.
In addition, the Magic Number is a simple numeric metric that can be shared by all members of the business. Therefore, measures can be taken based on the evaluation of the Magic Number. For the members of the company, it can also be used for education and training, leading to the improvement of skills within the company.
How to measure Magic Number?
The Magic Number is an indicator of sales efficiency and measures for the planning manager to communicate to management. So, is there an appropriate Magic Number? For the SaaS business, the ideal Magic Number is 1.0. The reason for this is that the business can invest the revenue earned in this quarter during the current quarter.
If the calculated Magic Number is less than 0.5, you should not invest in sales and marketing. If the Magic Number is between 0.5 and 0.75, you should decide whether to invest in sales and marketing. If the Magic Number is higher than 0.75, you should invest in sales and marketing.
The Magic Number in the previous example is 1.025. The Revenue in the example is higher in this quarter than in the previous quarter, and the Sales and Marketing cost is lower than the increased Revenue. Therefore, when compared to the accurate numbers, it means that the company should invest in sales and marketing.
On the other hand, if the Magic Number is less than 0.5, the decision is made not to invest in sales and marketing. In this way, Magic Number can be used to evaluate the investment behavior of corporate assets based on three criteria.
Let’s output magic number of major Saas companies
From python analytics,, let’s output the magic number.
So here is the result of that.
As you can see, some are well balanced, and some are not. Please try this on your side whether this will help your prtfolio or not.