Magic number
MAJ-ik NUM-ber
Net new ARR divided by sales and marketing spend from the prior quarter. Measures how efficiently you convert marketing dollars into recurring revenue.
The magic number measures sales efficiency. Take the net new ARR added this quarter, divide by the sales and marketing spend from last quarter (to account for the lag between spending and closing). The result tells you how many dollars of ARR you generate per dollar of sales and marketing spend.
A magic number above 0.75 means your go-to-market engine is efficient. You should invest more. Between 0.5 and 0.75 is decent but needs improvement. Below 0.5 means you are spending too much to generate too little recurring revenue. Either your pricing is too low, your sales cycle is too long, or your lead quality is poor.
The magic number is popular because it is simple and directional. It does not replace a full unit economics analysis, but it gives a quick read on whether your sales and marketing spend is producing results. VCs use it as a screening metric. Companies with magic numbers above 1.0 get funded more easily.
Examples
Calculating the magic number.
Q2 net new ARR: $2M (starting ARR $10M, ending ARR $12M). Q1 sales and marketing spend: $2.5M. Magic number: $2M / $2.5M = 0.8. For every dollar spent on sales and marketing, the company generated $0.80 in new ARR. This is a healthy ratio.
A low magic number signals a problem.
Q2 net new ARR: $500k. Q1 sales and marketing spend: $3M. Magic number: 0.17. The company is spending $6 to generate $1 of recurring revenue. Either the product is not converting, the sales team is inefficient, or the target market is wrong. Time to diagnose before spending more.
Using the magic number to justify investment.
A startup's magic number is 1.2. For every $1 spent on sales and marketing, they generate $1.20 in new ARR. The CEO tells the board: "Our magic number says we should be spending more aggressively. If we increase S&M spend by 50%, we project an additional $3.6M in net new ARR." The board approves the budget increase.
In practice
Read more on the blog
Frequently asked questions
What is a good magic number?
Above 0.75 is good. Above 1.0 is excellent and means you should invest more in sales and marketing. Between 0.5 and 0.75 is acceptable but worth investigating. Below 0.5 means your sales and marketing spend is not efficiently converting to recurring revenue.
Why use last quarter's spend?
Because there is a lag between spending money on marketing and closing deals. Leads generated in Q1 typically close in Q2. Using the prior quarter's spend creates a more accurate picture of the relationship between investment and results. Some companies use a two-quarter lag for enterprise sales cycles.
Related terms
How much revenue you generate per dollar spent on sales and marketing. A measure of whether your go-to-market engine is working.
The total cost of sales and marketing divided by the number of new customers acquired in a period.
The annualized value of your active subscription contracts. The heartbeat metric of every SaaS business.
The revenue and cost associated with a single customer. Profitable unit economics mean each customer generates more revenue than they cost to acquire and serve.
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