Magic Number
SaaS Magic Number
The Magic Number measures sales efficiency: how much new ARR you generate for each dollar spent on sales and marketing. Formula: (Current Quarter Revenue - Previous Quarter Revenue) × 4 ÷ Previous Quarter S&M Spend. Above 0.75 is strong. At 1.0, you recover S&M costs in one year. Below 0.5, something's broken.
Q1 revenue: $2.5M. Q2 revenue: $2.8M. Q1 S&M spend: $500K. Magic Number = ($2.8M - $2.5M) × 4 ÷ $500K = $1.2M ÷ $500K = 2.4. This is excellent — every $1 of S&M is generating $2.40 of annualized new revenue. Typical interpretation: spend more on S&M, the GTM engine is highly efficient.
The Magic Number is the investor metric that tells them whether to fund your growth. Above 0.75, they say "pour more fuel on the fire." Below 0.5, they ask hard questions about unit economics.
Here's what the Magic Number really reveals: your go-to-market efficiency. It combines CAC, sales cycle, win rate, and ACV into a single efficiency score. A Magic Number of 1.0 means: for every $1 you spend on S&M this quarter, you generate $1 of ARR that you'll collect over the next year. That's roughly 12-month CAC payback assuming decent gross margins.
The trap: Magic Number can look good if you're benefiting from cheap expansion revenue. A company with 120% NRR has ARR growth partially fueled by existing customers expanding — not just S&M spend acquiring new logos. That's why sophisticated investors look at new-business Magic Number separately.
Define ItOther Definitions
“The Magic Number measures sales and marketing efficiency by dividing the increase in quarterly recurring revenue (annualized) by the sales and marketing spend from the prior quarter. A Magic Number above 0.75 indicates efficient growth.”
“The SaaS Magic Number shows the output of sales and marketing spending. It was designed to help determine how much should be invested in sales and marketing, with 0.75+ being the threshold for aggressive investment.”
“A Magic Number of 1.0 implies that you paid back your customer acquisition costs in a one-year timeframe. Below 0.5 suggests inefficient sales and marketing spend; above 0.75 suggests sales and marketing efficiency.”
The Magic Number measures how efficiently S&M spend converts to recurring revenue. Bessemer's benchmark: 0.75+ indicates efficient growth. Scale Venture Partners emphasizes the investment decision: above 0.75, invest more aggressively. SaaS CFO connects it to CAC payback: 1.0 = 12-month payback.
The standard formula uses GAAP/recurring revenue quarter-over-quarter delta, annualized (×4), divided by prior quarter S&M spend. The lag (prior quarter spend → current quarter revenue) accounts for the delay between spending and booking.
Benchmarks: Below 0.5 = inefficient, fix the GTM before scaling; 0.5-0.75 = acceptable, optimize while growing; 0.75-1.0 = strong, invest more; Above 1.0 = very strong, pour fuel on the fire. Note: early-stage companies with small denominators can have volatile Magic Numbers.
MistakesCommon Mistakes
Forgetting to annualize (×4) the quarterly revenue delta
Using current quarter S&M instead of previous quarter (lag matters)
Including total revenue instead of recurring/subscription revenue
Not accounting for expansion revenue inflating the number
Comparing Magic Numbers across companies with different revenue recognition
Magic Number below 0.75?
We diagnose whether it's a CAC problem, a pricing problem, or a churn problem — then fix the GTM leaks.
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