The SaaS magic number measures sales efficiency: how many dollars of new annual recurring revenue each dollar of sales and marketing spend produced. It is usually calculated each quarter as the increase in revenue, annualized, divided by the previous quarter's sales and marketing spend.
A magic number of 1 means a dollar spent on sales and marketing last quarter brought in a dollar of new annual revenue this quarter.
The SaaS magic number formula
Revenue version:
Magic number = (this quarter's revenue − last quarter's revenue) × 4
/ last quarter's sales and marketing spend
ARR version:
Magic number = net new ARR this quarter
/ last quarter's sales and marketing spendThe ×4 in the revenue version turns one quarter's increase into an annual figure. The ARR version is already annual, so it doesn't need it. Both use the previous quarter's spend, because a deal won in October usually started with marketing and sales work in July, August and September.
A worked magic number calculation
| Input | Value |
|---|---|
| Q2 revenue | $1,500,000 |
| Q3 revenue | $1,650,000 |
| Q2 sales and marketing spend | $750,000 |
quarterly increase = 1,650,000 − 1,500,000 = $150,000 annualized = 150,000 × 4 = $600,000 magic number = 600,000 / 750,000 = 0.80
Every dollar of sales and marketing in Q2 produced 80 cents of new annual revenue in Q3. With 80% gross margin, that is 64 cents of annual gross profit per dollar, so the spend takes about 19 months to earn back (1 / 0.64 × 12), longer than the 12 months many investors look for in CAC payback.
Magic number calculator
In a spreadsheet, put quarterly revenue in column B and sales and marketing spend in column C, one row per quarter, oldest first:
Magic number, revenue version (D3): =(B3-B2)*4/C2 Magic number, ARR version (D3): =E3/C2 (E3 = net new ARR in the quarter) Payback in months at 80% margin: =12/(D3*0.8)
Fill down and chart column D. One quarter can mislead; four quarters in a row show the trend.
A benchmark you can cite
Scale Venture Partners, where Rory O'Driscoll coined the metric around 2005, published a history of it in September 2020. In it, Scale describes a magic number of 0.7 as a fairly healthy efficiency baseline for most SaaS businesses. David Skok's "SaaS Metrics 2.0" makes the link to payback: ignoring gross margin, a sales efficiency of 1 means about 12 months to recover acquisition cost.
How to read your number against that baseline:
- Well below 0.7: find out which channel or team isn't converting before adding more spend.
- Around 0.7 to 1: reasonably efficient. Growth spending is producing revenue at a sensible rate.
- Above 1: spend is coming back fast. That is usually a sign you can spend more.
Common magic number mistakes
- Using revenue that includes services or one-time fees. Only recurring revenue reflects new subscriptions.
- Using the same quarter's spend. It mismatches timing, especially when spend is growing.
- Ignoring churn. The revenue version uses net change, so a quarter with heavy churn looks inefficient even if sales did well. Compute a gross version with new and expansion ARR only if you want to judge sales alone.
- Counting the wrong costs. Sales and marketing spend should include salaries, commissions and tools, not customer success for renewals.
- Reading one quarter. Seasonality in deals and spend makes single quarters noisy.
Related metrics
- CAC payback period: the same efficiency question in months.
- Burn multiple: total net burn, not just sales and marketing, per dollar of net new ARR.
- CAC: the per-customer view of acquisition spend.
- Annual recurring revenue: the numerator of the ARR version.
Get the inputs automatically
The Stripe weekly MRR report posts net new MRR every Monday; a quarter of those, times 12, is net new ARR. QuickBooks expenses by category and the QuickBooks monthly P&L summary give sales and marketing spend from your books. Have your agent compute the magic number once a quarter and post it as a metric card, so the history stays in one place.
Questions
Who invented the SaaS magic number?
According to Scale Venture Partners, its partner Rory O'Driscoll coined it around 2005 while looking at Omniture, which was producing more than $2 of first-year revenue for every $1 of sales and marketing spend.
What is a good magic number?
Scale Venture Partners describes 0.7 as a fairly healthy efficiency baseline for most SaaS businesses. Around 1 or above means each dollar of sales and marketing returns roughly a dollar of new annual revenue within a year.
Should I use revenue or ARR?
ARR, if you track it reliably: net new ARR for the quarter divided by the previous quarter's sales and marketing spend. The revenue version exists because public companies report revenue, not ARR.
Why use last quarter's spend?
Because spend takes time to turn into customers. Dividing this quarter's new revenue by last quarter's spend lines up cause and effect better than comparing two numbers from the same quarter.