The SaaS 3.0 Imperative: Managing Your Magic Growth Number

The SaaS 3.0 Imperative: Managing Your Magic Growth Number

This is the first of a two-part series where I help B2B company CEOs and CMOs plan their leadership in our new era of SaaS company growth — SaaS 3.0.

Hundreds of Silicon Valley companies emerge every year with amazing new technologies — but without sufficient focus on their go-to-market strategy or the execution ability to make it happen. That’s a big reason why venture capitalists tell you that people — not the product or the market — are the most important part of the investments they make.

That’s doubly true in the SaaS era, where technology, metrics, and modern processes have flipped the marketing organization from a large group of hard-working people to a smaller team of highly efficient experts. It’s all about efficiency today, and marketing organizations need to operationalize those efficiencies to accelerate growth.

To understand why, you have to understand the evolution of SaaS — and the most important metrics that have defined SaaS business models through the eras.

SaaS 1.0 (pre-2005): SaaS Companies Emerge

Led by Salesforce, SaaS was a new concept with a new sales and marketing model. While the customer relationship changed from a perpetual agreement to a recurring one, the growth model was largely the same. Marketing was certainly a part of the equation back then, but the sales team took a much larger role in generating pipeline than it does today. The growth formula was overly simplistic: Grow revenue by growing the sales force. Problem was, new reps would come into cold territories, so onboarding would take a long time — with too much on-going sales time spent creating and qualifying leads, not closing deals.

In this era, investors would look at growth rates as the single biggest determinant of the company’s valuation. Below are some of the key marketing metrics of SaaS 1.0. (Note: I use the term “Magic Number,” which is an indicator of sales and marketing efficiency. You can read more about it here and here, but essentially a number above 1 means you’re doing ok, a number above 1.5 is great, and anything below 1 means something’s amiss.)

SaaS 1.0 metrics:

  • Magic Number: .5 – .85
  • Inside sales rep quota: <$750k ARR
  • Inside sales quota attainment rate : <60%
  • Percentage of sales-owned pipeline: >30%

Sales and marketing efficiency was very low for reasons mentioned above, and sales was too big of a pipeline contributor. But this changed quickly during the SaaS 2.0 era.

SaaS 2.0 (2005 – 2015): Perfecting Funnel Economics

The second generation of SaaS is where most companies are at today. Private and public investors look at two primary metrics when valuing a company: growth rate and Magic Number or CAC (cost of acquiring new customers). Internally, the conversation shifted significantly from “Do I adopt SaaS technologies?” to “What SaaS vendor should I buy from?” That shift alone helped improve sales efficiency, but so did the maturing of CRM and marketing automation solutions. Fewer marketing people could do more by using these tools, and leads moved through the funnel faster. Inbound marketing became the preferred pipeline growth engine. Companies, deals, people, and metrics could all be tracked better, which equated to a more efficient use of marketing program dollars.

SaaS 2.0 metrics:

  • Magic Number: 1.25 – 1.75
  • Inside sales rep quota: >$1M ARR
  • Inside sales quota attainment rate: ~70%
  • Percentage of sales-owned pipeline: <20%

During the SaaS 2.0 era, we solved an important problem: How to most effectively move buyers through the funnel as quickly and effectively as possible. And we could organize the sales and marketing teams to play their position with specific weekly and monthly goals tied to their pay. But one component of the growth equation was still missing — enter SaaS 3.0.

SaaS 3.0 (2015 – ??): Top of the Funnel Growth Marketing

So, here we are. The market is educated and maturing, but there are nowhere near enough people with modern marketing experience to fill the need for great inbound marketing experts. Marketing has proven to be an effective lead creator and lead qualifier, so sales spends most of their time closing deals instead of trying to build pipeline. With the maturing of CRM (bottom of the funnel) and marketing automation (middle of the funnel) technologies, the inefficiencies are largely a top of the funnel challenge — a numerator challenge. If your lead-to-close ratio is 10 percent, then 100 leads in the top of the funnel will yield about 10 customers. So how do marketing leaders increase the number of high-quality new leads coming into the top of the funnel?

This is the crucial challenge for today’s growth marketers. Proactively managing funnel economics and operationalizing marketing teams with specific monthly goals that maximize growth and efficiencies. What used to be called “demand generation” is now being called “growth marketing,” and I’m seeing more companies shifting the content marketing budget from product marketing to the growth marketing team. The fundamental challenge is for sales and marketing to use an integrated playbook to most effectively document, manage, and predict the future growth of the company. Done successfully, the inefficiencies become transparent — as do the opportunities to accelerate growth while improving CAC.

It all starts with marketing, but how can marketers make this happen? That’s our aim here at Captora. We believe that revolutionizing the top of the funnel is the next big growth opportunity. Envision the marketing metrics that I mentioned before looking like this:

SaaS 3.0 metrics:

  • Magic Number: 1.5 – 3.0
  • Inside sales rep quota: >$1.5M ARR
  • Inside sales quota attainment rate : ~70%
  • Percentage of sales-owned pipeline: <20%

Marketing generates more leads at a lower cost than ever and turns those leads into customers faster than ever. A magic number of 3.0 means you are getting back your marketing spend as revenue in just a few months. What’s more, your company’s valuation will lead your market because you are growing faster than the competition and with a better Magic Number.

The seminal challenge is to continually improve a new metric, your Magic Growth Number.

What is a Magic Growth Number?

Here’s the simple equation:

Magic Growth Number (MGN) = Growth% X Magic Number

So if your growth rate is 40 percent and your annualized Magic Number is 1.2, then your Magic Growth Number is 48 (40 x 1.2). But if your company’s growth rate is 10 percent and its annualized Magic Number is .75, the Magic Growth Number is 7.5. These two scenarios will have dramatically different valuation multiples.

We’re entering a new phase of SaaS growth, and the smartest companies are figuring out how to operationalize their “funnel efficiencies” by optimizing their people, processes, and systems across each phase of the buyers’ journey. My experience is that the biggest opportunities for improvement exist in the top of the funnel. Use new technologies to take the guesswork out of growth marketing — and leverage automation tools to launch and optimize new campaigns that engage new buyers by promoting your best content for each persona and stage of interest.

The magic number is a great metric to track your evolution and to predict where to spend your budget for the best possible outcome — growth acceleration!

Check back next week as I’ll dig deeper into the Magic Growth Number and share best practices for marketers to succeed in the SaaS 3.0 era.

demand generation, funnel economics, growth marketing, magic growth number, SaaS