Magic Number

TL;DR

A SaaS sales-efficiency ratio: net new ARR divided by sales and marketing spend in the prior period.

The Magic Number measures how efficiently sales and marketing spending converts into new ARR. The standard formula is net new ARR in the current quarter (annualized) divided by S&M spend in the prior quarter. A Magic Number above 1.0 means the company is generating more than $1 of ARR for each $1 of S&M; above 0.75 is generally healthy.

It's similar in spirit to the burn multiple but isolates sales efficiency rather than total capital efficiency. Companies use both to triangulate where to invest more or pull back.

Formula

Magic Number = (Net New ARR × 4) ÷ Prior-Quarter S&M Spend

• Net New ARR — ARR added in the current quarter (new + expansion − churn − contraction)
• Prior-Quarter S&M Spend — Total sales and marketing spend in the previous quarter

Multiplying by 4 annualizes the quarterly net new ARR for the comparison.

Worked example

Q3 net new ARR $1.2M; Q2 sales & marketing spend $1.4M. Magic number = (1.2 × 4) ÷ 1.4 = 3.4 — exceptional efficiency, suggesting room to step on the gas. Magic number above ~0.7 is the threshold to add more sales reps.

Common pitfalls

• Comparing Magic Number across quarters with very different deal mix.
• Using a single quarter's Magic Number rather than a smoothed view.
• Confusing Magic Number with CAC payback (related but different).

When this shows up in a pitch deck

Growth-stage SaaS decks include Magic Number alongside burn multiple and Rule of 40.

See Magic Number in context

Magic Number shows up most often in these scoring rubrics and investor profiles — jump straight to who cares about it and how to pitch them.

In VC frameworks

• 500 Global — pitch deck framework

Related terms

• Burn Multiple — Net new ARR divided by net burn — the dollars of capital consumed per dollar of new ARR generated.
• Rule of 40 — A SaaS health benchmark: revenue growth rate plus profit margin should sum to at least 40%.
• CAC — Customer Acquisition Cost — the total sales and marketing spend required to acquire one new paying customer over a given period.
• CAC Payback Period — The number of months required for the gross profit from a customer to repay the cost of acquiring them.
• Sales Velocity — A composite measure of how quickly a sales team converts pipeline into closed revenue, derived from deals × win rate × ACV ÷ cycle length.

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