Defining Your SaaS Magic Number & the Best Practices to Improve It

Your company’s SaaS magic number can give unique insights into the efficiency of your marketing and sales spend. Through this number, you’ll be able to figure out whether to focus your efforts on redesigning your sales process, refining your marketing strategy, or reducing churn.

At Churnkey, an online platform designed to minimize SaaS churn by deploying fully-customizable cancel flows, we will cover the basics you need to know about your SaaS magic number—including why it matters, how to calculate and understand it, and what other metrics can be used alongside it to create a comprehensive picture of your marketing budget’s efficiency.

What is the SaaS Magic Number?

Josh James, CEO of Omniture, delivered a 2008 talk at the Opsource summit where he discussed the importance of creating a solid product, developing a team of quota-bearing sales representatives, and “adding gas to the fire as the market opened up.”

But what would be the sign that the market had opened up? And how could a business know when to start pouring fuel on the fire? According to James, it was by looking at the SaaS magic number.

Your SaaS magic number is a key metric that reveals how efficiently SaaS businesses generate periodic revenue from the sales and marketing dollars they’re spending. This number will give you a broad picture of your return on capital investment.

Once you understand it, you’ll be able to see how sustainable your current growth is, and you’ll know whether to start pumping in additional marketing dollars or pulling back and refining your larger strategy.

Calculating the SaaS Magic Number

You don’t need a degree in statistics to perform your business’s magic number calculation. Instead, you’ll need three simple numbers.

• Current quarter revenue
• Previous quarter revenue
• Previous quarter sales and marketing expenses

Once you’ve gathered those three numbers, you can plug them into the SaaS magic number formula below. Then, you’ll have your SaaS magic number.

(Your Current Quarter’s Revenue – Your Previous Quarter’s Revenue) * 4

________________________________________________

Your Previous Quarter’s Sales and Marketing Expenses

Imagine you run a company that earned $35,000 in revenue last quarter and $50,000 in revenue this quarter. Let’s also pretend that you spent $60,000 on sales expenses last quarter. If that were the case, your SaaS magic number formula would look like this:

($50,000 – $35,000) * 4

____________________     =     1

$60,000

Under these circumstances, your magic number would be 1. Unfortunately, that doesn’t mean much to you if you’re unfamiliar with the concept of SaaS magic numbers or don’t know how to interpret them.

Understanding the SaaS Magic Number

Interpreting magic numbers isn’t an exact science. Different businesses and industries may require slightly different approaches to SaaS. However, there are a handful of general principles that normally hold true when reading a magic number.

• Magic numbers less than 0.75 indicate an inefficient allocation of sales and marketing dollars.
• Magic numbers between 0.75 and 1 let you know that your sales and marketing investment is getting a solid return, and you’ll make it back by the end of the year.
• Magic numbers over 1 make it clear that your marketing budget is very efficient. While this is good news, it likely means that you need to start pouring fuel on the fire of your marketing budget.

Using the SaaS Magic Number

So, now that you’ve got a general idea of what your SaaS magic number is indicating, you can start to think about the best ways to respond to it. It would be impossible to lay out every possible approach. But we can look at some basic principles and first steps you may want to take depending on where your SaaS magic number falls.

When Your Magic Number Falls Below 0.75

If your magic number is at 0.75 or below, you won’t recoup your initial marketing and sales investment for more than a year. This is an unsustainable position to be in as a SaaS company. That’s why you need to take immediate action if your business’s SaaS magic number falls in this range.

So, what can you do to respond?

• Evaluate your business model and look for any areas where you may be able to optimize things.
• Brainstorm customer acquisition strategies that are more cost-effective.
• Eliminate or reduce investments in any low ROI marketing efforts.
• Look for ways to upsell or boost revenue from current, loyal customers.

Along with these ideas, you’ll also want to find ways to reduce churn. In fact, reducing customer churn is a guaranteed way to improve your marketing spend efficiency – and your magic number.

Reducing Churn with Churnkey

Churnkey exists to unleash your business’s growth by minimizing churn with the help of personalized cancellation flows. These flows allow you to reach out to your current customers in creative ways.

With Churnkey, you’ll be able to segment your customers into unique groups and target them based on where they are in the subscriber’s journey. Then, you can create dynamic offers that are specially tailored to entice each customer back into the fold with exactly what they need.

Imagine this: A longtime customer suddenly cancels their subscription. Without Churnkey, you’d be left wondering what happened. Was it too expensive? Is it missing features they’re looking for? Is there some other problem?

Churnkey gives you the power to connect with your customers before they push that final cancellation button. Then, it gives you the ability to offer a solution that features targeted copy and perfectly fits their situation – whether a personalized message with a coupon for a free month, the ability to immediately connect them with customer service, or the chance to pause rather than cancel their subscription.

When Your Magic Number Falls Between 0.75 and 1.0

If your SaaS magic number is between 0.75 and 1.0, you should feel confident in the current state of your business’s marketing strategy. That means you should keep doing what you’re doing since it’s working.

The closer you get to 1.0, the more you should look at increasing your sales and marketing spend. Though this doesn’t mean you should forget about ways to make your efforts more efficient.

It’s always a good idea to evaluate your process and be on the lookout for ways to acquire new customers at a lower cost or retain current customers. Even if you’re right at 1.0, a tool like Churnkey can be a great way to reduce customer churn and position yourself for exponential growth.

When Your Magic Number Falls Above 1.0

If your magic number calculation indicates a number above 1.0, you should be proud. That means you’ve got a well-oiled machine on your hands. The best thing for you to do is to add “gas to the fire.” Increasing your marketing spend right now should leave you with a hearty return in future quarters.

Other Metrics & the SaaS Magic Number

While your SaaS magic number is essential for refining your company’s sales and marketing efforts, it’s not the only metric you should know. If you want a full picture of how things are going, don’t forget these valuable numbers, too:

• Profit. One of the SaaS magic number’s weaknesses is its focus on revenue. Your sales model may require a greater awareness and sensitivity to your profit in addition to revenue.
• Cash flow. Before you start throwing money at more marketing efforts, you should make sure your current cash flow can sustain it. A magic number above 1.0 is great. But it doesn’t mean every extra dollar should go to marketing.
• Churn rate. You must know your churn rate. Understanding and responding to this number can have a monumental impact on your business’s future. And while you will see it reflected in your magic number, it’s important enough to know in addition.

Your Magic Number Can Make All The Difference

SaaS businesses have to approach the way they guide their customers through the buyer’s journey differently than traditional businesses. A much higher premium must be placed on retaining current customers. That’s why the SaaS magic number is so very valuable.

Fortunately, now that you understand how to calculate and understand your business’s magic number, you’ll be able to create an effective strategy for improving it. And with Churnkey’s platform, accomplishing that is easier than ever.