One SaaS KPI to rule them all - the Magic Number 💫
Updated: Aug 6, 2019
Last week I had a board meeting with one of my favorite and fastest growing SaaS companies in Europe, RedPoints from Barcelona. I wanted to share some insights on how to scale your SaaS sales machine efficiently and the one KPI that should be tracked by every Series B+ SaaS company with $5M+ in annual recurring revenues and exponential growth.
Led by the rockstar CEO Laura Urquizu, RedPoints is disrupting the massive and growing $1 trillion market of counterfeit and pirated products with the first tech solution for brands that automates an otherwise painfully manual and expensive detection and removal process.
RedPoints has all the ingredients of a world class SaaS company in the making. As reference, some important metrics VCs look at when evaluating SaaS startups: High growth (T2D3 or T3D3 👀...), an efficient and scalable lead generation, a healthy sales pipeline with high conversion rates driven by a frictionless onboarding process, short sales cycles and payback periods, high engagement ratio with customers using the product on a daily basis, low churn, high and growing proportion of annual contracts, healthy gross margin, strong upselling (land & expand) potential boosting topline growth further and an exciting product roadmap expanding the market opportunity even more. Finally, tech superiority should drive network effects and/or a proprietary data set creating deep moats against any potential competitors.
However, growing a business from sub $10M to $100M+ in revenues comes with a new set of challenges: 'Selling like crazy means an ever growing sales complexity'! Of course SaaS CEOs are obsessed with KPIs and they want one here as well to monitor the scaling of their sales 🤓.
So, as you enter the high growth stage, you will need to start tracking a new set of KPIs... but there is one KPI that rules them all in my opinion: The Magic Number 💫.
Magic Number = (QRev[X] – QRev[X-1])*4 / ExpSM[X-1]
QRev[X] = Quarterly Recurring Revenue for Quarter X
QRev[X-1] = Quarterly Recurring Revenue for the Quarter preceding X
ExpSM[X-1] = Total Sales and Marketing Expense (fully loaded!) for the Quarter preceding X
This metric allows you to tell the health of your sales organisation with a single number. To put it simply, it answers this question:
The money I spent yesterday and today on marketing and sales led to how much recurring revenues? Did I spend too little or too much? It provides insight into the effectiveness of previous quarter Sales and Marketing spend on MRR growth. And the strength of the Magic Number lies in the fact that it encompasses many other important metrics such as lead generation, pipeline health, payback period, retention/churn, upselling, pricing evolution, etc: One is penalized f.ex. if the spend is wasted (bad marketing, bad sales execution), if the churn is high or if the market has issues (saturation, competitive forces). It also has a very high correlation with Q/Q growth rates, so high Magic Numbers are good!
Fundamentally, the key insight is that if you are below 0.75 then step back and look at your business, if you are above 1 then start pouring on the gas for growth because your business is primed to leverage spend into growth. If you are above 1.5 please contact me immediately 😜
So what is your Magic Number?
If you have any questions around the magic number or any other SaaS KPIs at the early or growth stage, please feel free to reach out.