I stumbled across one possible answer to these questions on Will Price's blog. Lars Leckie, guest posting on Will's blog, gives a formula that Josh James (CEO of Omniture) uses for calculating the "Magic Number". The Magic Number helps you determine the effectiveness of your sales/marketing spend and your likely quarter on quarter growth.
QRev[X] = Quarterly Recurring Revenue for period XThe key, of course, is in interpreting the number:
QRev[X-1] = Quarterly Recurring Revenue for the period preceding X
ExpSM[X-1] = Total Sales and Marketing Expense for the period preceding X
Magic Number = (QRev[X] – Qrev[X-1])*4/ExpSM[X-1]
Fundamentally, the key insight is that if you are below 0.75 then step back and look at your business, if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth. If you are anywhere above 1.5 call me immediately.PreScouter, the business that I'm working on, is a long way from having quarter-on-quarter financial data. However, as we think about modelling how the scaled up business could work, the Magic Number provides some guidance as to whether we even have the right business model to begin with.
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