SaaS Magic Number Calculator

The SaaS magic number formula

Magic number = (current-quarter revenue − prior-quarter revenue) × 4 ÷ prior-quarter S&M spend. The revenue change is multiplied by four to annualise it (turning the quarterly gain into net new ARR), then divided by what you spent on sales and marketing the previous quarter — spend is lagged because it takes time to convert into revenue. An equivalent way to write it is net new ARR ÷ prior-quarter S&M spend.

The result is unitless: a magic number of 1.0 means every $1 of S&M generated $1 of new ARR over the following year.

What is a good magic number?

• Below 0.75 — inefficient. You're spending more on growth than it's returning; tighten targeting, pricing or sales motion before adding spend.
• 0.75 to 1.0 — efficient and sustainable. This is the healthy zone; keep funding growth at the current pace.
• Above 1.0 — step on the gas. Acquisition is paying back fast enough that adding S&M is likely accretive. Above ~1.5 is a top-decile outlier.

The 0.75 line is the widely-cited efficiency breakeven (popularised by VC Lars Leckie; the magic-number concept itself comes from Scale Venture Partners). Treat it as a directional signal over several quarters, not a single-quarter verdict — one lumpy enterprise quarter can distort it.

Gross magic number and CAC payback

The gross magic number — a stricter, margin-adjusted variant (not a standardised industry term) — multiplies net new ARR by gross margin before dividing by S&M, so it reflects the margin dollars actually available to recoup the spend. The calculator also shows your implied CAC payback period (≈ 12 ÷ magic number, in months): a magic number of 1.0 implies roughly a 12-month payback. Under 12 months is generally healthy; over 24 is a warning sign.

How much should SaaS spend on sales and marketing?

S&M as a share of revenue varies widely by stage: high-growth companies often spend heavily on it (frequently 40–50%+ of revenue), while mature, profitability-focused SaaS trends much lower (industry medians are around 20–25%). The magic number is the efficiency check on that spend — it tells you whether the S&M budget, whatever its size, is actually working.

Frequently asked questions

Is the magic number the same as the sales efficiency ratio?

Effectively yes — "sales efficiency ratio" and "S&M efficiency" are common alternate names for the same net new ARR ÷ S&M calculation. Don't confuse it with the SaaS quick ratio, which measures retention efficiency (new + expansion MRR vs churned + contracted MRR), not acquisition efficiency.

How is the magic number related to CAC payback?

They're two views of the same thing. The magic number measures ARR returned per dollar of S&M; CAC payback measures how many months it takes to earn that dollar back. As an approximation, payback months ≈ 12 ÷ magic number.

Should I use ARR or quarterly revenue?

Use recurring revenue for each quarter; the ×4 in the formula annualises the quarterly change into net new ARR. Keep the basis consistent quarter to quarter.

Why use prior-quarter S&M spend instead of the current quarter?

Sales and marketing spend converts to revenue on a lag — the deals you close this quarter were largely worked the quarter before. Dividing by prior-quarter spend lines up cause and effect.