Digging into SaaS’s “Magic Number” Calculation
In his article on SaaS Metric, David Sacks discusses the importance of the "Magic Number," which is calculated as New Sales ARR divided by all sales and marketing expenses (S&M) and is considered ideal when it is above 1. This indicates a one-year payback on revenue, but as the author points out, this payback is based on revenue and not necessarily a true payback unless the incremental software margins are 100% before sales and marketing expenses.
The article doesn't delve into the distinction between fixed and variable sales and marketing expenses or the potential for scaling these expenses up or down. For example, a company that relies on performance-based marketing and sales partnerships may have a majority of its S&M expenses classified as lean and variable, rather than fixed costs such as salaries, benefits, and support. These costs, while necessary for driving revenue growth, are often not included in the cost of winning revenue.
There is often a tradeoff, but I would argue that if you have no major bottlenecks to growth you may want to consider levels to increase speed more nimbly. If you can’t grow more than 20% / year because of fulfillment capacity, say, you may be in a different situation than a company trying to keep up with a 80 - 100% growth rate and requiring little to no extra support to add meaningful revenue. A perfect storm, in my opinion, is if you can find yourself in the position below it lends better to being able to accelerate even faster from status quo, and it can be done without adding expensive fixed resources like more staff:
Large, untapped addressable market (TAM)
Ability to accelerate revenue growth without corresponding staff hiring for support
Net dollar retention > 120%
Fast close cycles, high % of discovery converting to close
How does your company stack up? Here is a free SaaS data aggregator and dashboard creator to help founders and sales leaders. For companies growing fast that want to grow faster with lean growth can check out a rought before/after calculator we made here, for when adding performance-based sales partnerships like our software reselling service for $15K - $50K+ ACV software and data solutions.
If you are looking for support to help you grow your B2B business, contact Silver Birch Growth today. We offer a free consultation to discuss your growth goals and how we can help you achieve them.
