Magic Number
TL;DR
Magic Number is a B2B SaaS efficiency metric that shows how much new recurring revenue you're generating for every dollar spent on sales and marketing. It’s a quick way to gauge whether your GTM investments are scalable or bloated. A Magic Number above 0.75 typically indicates efficient growth; below 0.5 suggests you're overspending without enough return.
What is the Magic Number?
The Magic Number calculates the ratio of new recurring revenue to your sales and marketing spend from the previous quarter.
Formula:
Magic Number = (New ARR in Current Quarter × 4) ÷ S&M Spend in Previous Quarter
Example:
You added $500K in new ARR this quarter and spent $600K on sales and marketing last quarter.
Magic Number = ($500K × 4) ÷ $600K = 3.33. That’s exceptionally strong.
This metric is often used by SaaS founders, CFOs, and growth leaders to assess capital efficiency.
Why It Matters in B2B SaaS
- It links growth to investment. Are your GTM dollars turning into actual revenue?
- It helps guide funding and burn. A high Magic Number shows investors you can grow without constant capital infusions
- It uncovers growth levers. If you improve conversion, win rate, or deal size, your Magic Number goes up
- It supports strategic shifts. Poor efficiency may signal the need to reallocate spend or re-segment your ICP
- It complements CAC Payback Period. Both together offer a full picture of GTM efficiency
How to Measure the Magic Number
- Calculate net new ARR or MRR added this quarter (expansion revenue can be included depending on your use case)
- Multiply that by 4 to annualize the impact
- Divide by Sales & Marketing spend from the previous quarter
- Segment by:
- Company segment (SMB, mid-market, enterprise)
- Channel (inbound, outbound, partner)
- Time (quarterly trending)
Best Practices
- Exclude churn from “new” ARR. This is about top-line growth, not net retention
- Use consistent definitions. Your CFO and RevOps team must align on S&M spend and revenue recognition
- Pair with CAC and Payback Period. Don’t rely on a single metric for GTM efficiency
- Benchmark quarterly. A dropping Magic Number signals deteriorating efficiency—dig in fast
- Don’t over-optimize. Some inefficiency is expected in product pivots or market expansions
Final Thought
The Magic Number is the litmus test for SaaS growth efficiency. It doesn’t just tell you if you’re growing—it tells you if that growth is sustainable. Whether you’re reporting to investors or realigning your GTM motion, this metric offers a fast pulse check on whether your revenue engine is working smarter, not just harder.
FAQs
What’s a healthy Magic Number for SaaS companies?
0.75–1.0 is considered strong and efficient. 1.0+ means you're generating $1+ in ARR for every $1 spent—a great sign. Below 0.5 may indicate unscalable GTM spend.
Why multiply by 4?
It annualizes your current quarter's growth to compare it against the prior quarter's spend.
Should I include expansion revenue?
You can—but be consistent. Some teams only include new logo revenue; others include upsells if they're driven by S&M efforts.
Can a high Magic Number be misleading?
Yes. If you pause S&M spend or focus only on high-intent renewals, it may spike artificially. Always pair with context.
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