What Is the Magic Number in SaaS? How to Calculate It, Benchmarks, and Examples

Why is the SaaS Magic Number important?

The SaaS Magic Number is an important metric because it allows you to: 

• Gauge your company’s S&M efficiency - Your SaaS Magic Number offers a quick overview of how sustainable your customer acquisition via sales and marketing is by comparing them to the ARR they create.
• Decide if you need to spend more on acquiring new customers or boosting retention – A low Magic Number usually indicates aspects of your business need improvement before investing more into sales and marketing. If your CAC remains stable but ARR is decreasing, you need to focus on customer retention and reducing churn before increasing CAC. As your Magic Number rises, you can revisit investing more in S&M to acquire more customers.
• Figure out whether your CAC is maximizing ROI - Use the insight provided by your SaaS Magic Number and LTV:CAC ratio to calculate what your allowable CAC should be to maximize ROI.

How to calculate the SaaS magic number

You can calculate the SaaS Magic Number for your business by using the formula: 

Example of a SaaS Magic Number calculation

Here is an example of how to calculate the SaaS Magic Number calculation for a hypothetical Company A with the following:

• Previous Quarter revenue = $2,000,000
• Current Quarter Revenue = $2,100,000
• Previous Quarter S&M Expenditure = $500,000

To calculate your CAC payback period, divide 12 months by your SaaS magic number and gross margin. For example, a SaaS Magic Number of 0.8 with a gross margin of 80% means Company A’s CAC payback period is 18.75 months.

SaaS Magic Number calculator

Use our free calculator to determine your SaaS company’s magic number. 

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What is a good SaaS magic number?

So what is the ideal Magic Number? According to Drivetrain, a good SaaS Magic Number benchmark is anything 1.0 and above. 

The lack of recent studies on the SaaS Magic Number means many businesses still follow outdated benchmarks. The table below lists Magic Number ranges according to Scale Venture Partners. 

These ranges take into account decades of reported SaaS Magic Number benchmarks, but this does not mean they hold true today.

So why do we recommend a minimum threshold of one? This threshold makes sense intuitively. A company with a Magic Number of 1.0 is adding $1 in subscription ARR for every $1 it spends on sales and marketing.

Limitations of the SaaS magic number

Although the SaaS Magic Number is useful for tracking growth and informing your decisions during SaaS scenario planning, like most metrics, it has its drawbacks.

Only accounts for top-line growth

The SaaS Magic Number only accounts for top-line revenue growth. Increases in expenses outside of customer acquisitions (like the cost of goods sold or developing new products) are not included in its calculation. As a result, it cannot fully measure profitability or be used without context when making SaaS revenue projections.

Does not differentiate between different types of MRR 

The SaaS Magic Number gives a general overview of company health but does not differentiate between churn, expansion, contraction, new, or reactivation MRR. In some cases, a good Magic Number result can hide a leaky bucket.

Take hypothetical Company A and Company B as an example. 

Each company reports the following data for the same period: 

Both companies report S&M expenditure of $2,000,000 in Q3. 

Their SaaS Magic Numbers are:

‍Although both companies have the same SaaS Magic Number result, their difference in churn is significant. Company B’s churn is far higher but its Magic number does not capture this nuance. Instead, top line new subscription revenue growth hides churn. Clearly, despite similar Magic Number results, Company A is a more attractive and sustainable investment option.

Contextualizing your SaaS Magic Number using additional metrics is thus important when conducting scenario planning. In the above example, examining Company B’s LTV:CAC along with the Magic Number would have painted a better picture of its prospects.

Does not solely account for S&M expenditure

Churn affects ARR, and therefore also affects your SaaS Magic Number. However, churn is typically a customer success (CS) team concern, not that of the S&M team. Because of this, your SaaS Magic Number does not only measure S&M efficiency on its own merits. It also involves CS efficiency. 

Despite this, CS expenditure is not included in the SaaS Magic Number formula, and as a result most SaaS Magic Number results will be skewed. 

Skewed for early-stage companies

Early-stage SaaS companies tend to rely heavily on founder involvement in their sales and marketing efforts and have unusually high or low Magic Numbers as a result. It’s only once they achieve stable sales processes and the right product-market fit that the SaaS Magic Number provides an accurate gauge of marketing and sales efficiency. 

How Drivetrain simplifies sales efficiency analysis

Analyzing marketing and sales efficiency accurately requires taking several additional metrics into account. 

As a purpose-built enterprise performance management software, Drivetrain makes it easy for you to monitor and analyze your SaaS company’s sales efficiency by continuously tracking important metrics and creating accurate forecasts based on historical data.

With Drivetrain, you get access to:

• Powerful SaaS metrics tracking and calculations – Track all relevant business metrics and compare actuals to projected values. Change model inputs and project their after effects effortlessly. 
• A central, consolidated data source – Having all your company’s metrics in one place allows your company’s leadership to make informed decisions to boost marketing and sales efficiency.
• Data-based variance analysis – Automating the real-time consolidation and tracking of plans versus actuals makes predicting sales efficiency metrics simpler and more accurate.