The key to understanding the formula is to recognize that SaaS companies bleed cash with every new customer they acquire — the complete opposite of what happens when a conventional software company lands a new account and pockets a huge upfront license fee.
GAAP forces the cost to be expensed upfront but has no way of recognizing that each Omniture customer generally starts returning a profit by the end of the year, and much sooner in the case of smaller customers.
Omniture was relying on a simple calculation that produces a ‘magic number’ telling you when you should hire more sales reps to fuel your growth as a SaaS business. The formula takes the incremental growth in the current quarter, multiplies by four to annualize it, and then divides it by the amount spent on sales and marketing in the prior quarter.
clipped from: blogs.zdnet.com