Finance
Magic number (Sales efficiency)
A SaaS efficiency ratio measuring how much net new ARR is generated for each dollar spent on sales and marketing in the prior quarter.
In plain English
Spent $500k on sales and marketing last quarter; this quarter added $400k in net new ARR. Magic Number = 400/500 = 0.8. Investors generally consider >1.0 healthy.
Example
Q1 S&M spend: $500k. Q2 net new ARR (annualised): $400k × 4 = $1.6M. Magic Number = 1.6M / (500k × 4) = 0.8. Above 1.0 means you should consider stepping on the gas; below 0.5 means cut spend until efficiency improves.
Formula
Magic Number = (Current Quarter Net New ARR × 4) / Prior Quarter S&M Spend × 4 A value of 1.0 means it takes 1 year of S&M to generate 1 year of ARR.
Why it matters
Investors use Magic Number to judge whether more capital deployed into sales and marketing will accelerate growth profitably. >1.0 = invest more; 0.5-1.0 = invest cautiously; <0.5 = fix the funnel first.
Common mistakes
- Using gross new ARR instead of net new — gross masks the churn drag
- Comparing to public SaaS peers without segment adjustment
- Optimising for the number short-term by underinvesting in S&M — defers the eventual fix