Once a subscription-based company, whether SaaS or Consumer, leaves the startup stage and enters the growth stage, the efficiency of growing revenue becomes (or should become) top-of-mind. ‘Sales efficiency’ as a concept is basically the repeatability of the company at growing revenue. To have a repeatable revenue model, the company must have a GTM machine that generates more revenue than the expenses used to obtain that revenue. Ideally, the measure lets us ask “does each additional sales hire lead to more revenue than it costs us to add and generate pipeline for that hire?”
There are a ton of metrics to measure Sales Efficiency, and to be blunt there is no one great metric. I’ve seen a combination of Annual Contract Value (ACV), Lifetime Value (LTV), Customer Acquisition Cost (CAC), Bessemer CAC ratio, payback periods, and the like. Like any KPI, each have their pros and cons. To pick one, we need to make sure we can use it to operate:
I’ll be frank. I hate the Magic Number as a metric to track, but there isn’t a better option that encapsulates all factors included in the efficiency of adding new revenue.
Why?
** I’m not proposing any operator should ever use the metrics VCs promote as their guidelines. VCs use their metrics to qualify a company for investment or benchmark their portfolio companies against other companies. Rarely should a company use these metrics for running a business. Operating a business is very different than investing in one. Even so, Magic Number has a bunch of pros that outweigh the cons.*
Ultimately the SaaS magic number is a metric intended to uncover just how efficient our total go-to-market efforts are. By measuring our magic number, we’ll be able understand how to drive efficiency in our GTM teams and decide when the time is right to add new hires to our GTM teams.
Definition:
( Current Quarter ARR - Previous Quarter ARR ) * 4
/ ( Previous Quarter Sales & Marketing Spend )
If we made $100 revenue in the last quarter, $200 revenue in the current quarter, and spent $600 to make it happen, our magic number would be .67. We spent $600 to grow quarterly revenue by $100 or yearly revenue by $400 ($100 * 4).