The term “magic number” in the SaaS world has come up frequently. The term SaaS magic number became popular on Will Price’s Blog.

Generally, the SaaS magic number reflects how efficiently a SaaS company is growing their recurring revenue relative to their expenses.  Pretty simple right?

How to Calculate Your SaaS Magic Number

To calculate your SaaS magic number, simply take the difference in quarterly recurring revenue between your last quarter and the one before, multiply that by four, and then divide everything by ALL the sales and marketing costs of the quarter before last. And voila!

Magic Number = (((Last Quarter Recurring Revenue) – (Quarter-Before-Last Recurring Revenue)) * 4) / (Quarter-Before-Last Sales and Marketing Expense)

Interpreting the data is pretty easy. If the magic number is greater than one, you should be investing more into sales and marketing. If the SaaS magic number is less than .7, then you should spend your time making customer acquisition more effective.

Another way to think about the SaaS magic number is that you’re penalized if you waste sales/marketing spend (bad marketing programs, bad sales execution, wasted advertising), if your churn is high or if the market has issues (market saturation, competitive forces, failure to address needs). It also has a very high correlation with Q/Q growth rates so in general, the higher the magic number the better.