Like the benchmarking of any key metric, you will drive operational efficiency and better use of your resources, when you see the variance between your company and your peers at the same stage and with a similar business model. You can then also compare your current metrics against the benchmarks for companies that have already achieved your future goals in order to plot out how to get to your goals.
In addition, it is important to understand how you compare to the current performance of peers and leading companies in order to communicate your strategy with investors, stakeholders, and key players within your company.
What is the Magic Number?
Traditionally, the sales and marketing expense ratio (current sales and marketing expense as a % of current revenue) has been used as an indicator of how much money to spend in these critical areas: high is bad, and low is good. While it is important to know current trends in sales and marketing spending for peer companies, this ratio doesn’t give much indication of how efficient your spending is in increasing your revenue growth, one of the leading metrics for valuing software and SaaS companies.
Particularly for SaaS companies, a better metric measures the sales and marketing expense against revenue growth with some lag between the time the expense is spent and the time when revenue growth is recorded.
Magic Number Defined
This metric has been called “the Magic Number” of sales and marketing efficiency and was made famous by Omniture and their investor Scale Venture Partners. The way the Magic Number works is to take the difference in revenue between two quarters, annualize it by multiplying it by 4, then divide it by the sales and marketing expense from the earlier of the two quarters.
(Quarter 2 revenues minus Quarter 1 revenues) ÷ Quarter 1 Sales and Marketing Expense
Interpreting the Magic Number
If the result is more than 1X, then your sales and marketing efforts are relatively efficient, you’ve got a good model and you can pour on the gas for even greater results. If the result is 0.5X or less then you need to identify and fix problems in your sales and marketing before investing any more or you may be wasting precious resources.
= 1X – you have an efficient sales and marketing machine – keep investing!
= 0.5 – improve sales efficiency before investing more in sales and marketing!
For an excellent comparison of a number of public SaaS companies’ Magic Numbers in their first quarter after hitting annual revenue of at least $20M, their growth, and variations of models, see Rory O’Driscoll’s post at Scale Venture Partners.
Magic Number Benchmarks Vary by Company Stage and Business Model – Subscribe to OPEXEngine’s Benchmark Engine
OPEXEngine’s Benchmark Engine provides the system and data to see your Magic Number variance (and many other critical financial and operational metrics) quickly and efficiently. To subscribe to OPEXEngine’s comprehensive 2022 benchmarking and get the numbers you need to grow efficiently to $100M and beyond, contact us at: email@example.com.