Magic Number
A sales efficiency metric that measures how much new ARR is generated per dollar of sales and marketing spend. Indicates when to invest more in growth.
Formula
(Current Quarter ARR - Previous Quarter ARR) / Previous Quarter S&M Spend
Why magic number matters
The magic number answers a critical question: should you spend more on sales and marketing? A magic number above 0.75 suggests your go-to-market engine is efficient enough to justify increased investment. Below 0.5 means you should optimize before scaling spend.
It is one of the simplest ways to evaluate the return on your growth investments and is widely used by VCs to assess SaaS companies.
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How to calculate magic number
Take the change in ARR from one quarter to the next, and divide by the total sales and marketing spend in the first quarter. This gives you the incremental ARR generated per dollar of sales and marketing investment.
Magic Number Calculator
(Current Quarter ARR - Previous Quarter ARR) / Previous Quarter S&M Spend
What is a good magic number?
Above 0.75: invest aggressively in growth. Between 0.5-0.75: cautiously increase spend while optimizing efficiency. Below 0.5: focus on improving unit economics and conversion rates before scaling.
Common Mistakes
- -Using a single quarter - seasonal effects can distort the number
- -Not accounting for the sales cycle length when comparing spend to revenue generated
- -Including customer success costs that are retention-focused, not acquisition-focused
Pro Tips
- +Calculate the magic number quarterly and track the trend over at least 4 quarters
- +Segment by channel to find which acquisition sources have the highest magic number
- +Compare against your CAC payback period for a more complete efficiency picture
Related Terms
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer, including all marketing and sales expenses. It measures the investment required to convert a prospect into a paying customer.
LTV to CAC Ratio
The LTV-to-CAC ratio compares the lifetime value of a customer to the cost of acquiring them. A ratio of 3:1 or higher generally indicates a healthy, scalable business model.
Payback Period
The CAC payback period is the number of months it takes for a customer to generate enough gross profit to recover the cost of acquiring them. It measures how quickly your acquisition investment pays for itself.
Rule of 40
The Rule of 40 states that a healthy software company's combined revenue growth rate and profit margin should equal or exceed 40%. It balances the tradeoff between growth and profitability.
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