Magic Number measures how efficiently a SaaS company converts sales and marketing spend into new recurring revenue.

How it works

The common formula:

Magic Number = (Net new ARR in current quarter) ÷ (S&M spend in prior quarter)

Net new ARR includes new logos plus expansion minus churn and contraction, annualized. Some teams use revenue instead of ARR or adjust for one-time services—pick a definition and stick to it.

Rough benchmarks used in boardrooms: below 0.5 suggests weak efficiency—fix conversion or retention before scaling S&M. Between 0.5 and 0.75 is acceptable for many growth-stage companies. Above 0.75 often signals room to invest more in sales and marketing, provided CAC payback and churn support it.

Magic Number is a lagging indicator: it uses last quarter’s spend against this quarter’s bookings, so it smooths short hiring ramps but can miss sudden market shifts.

Why it matters

• Founders: A rising Magic Number with stable churn supports hiring AEs; a falling number with rising headcount is a warning to pause expansion.
• Investors: It complements LTV:CAC by focusing on incremental ARR yield from marginal S&M dollars, not lifetime averages.

Common mistake

Using gross bookings without netting churn, which inflates Magic Number when logo churn is high. Investors will reconcile against MRR bridges.

Related ideas

See also CAC, MRR, CAC payback, and burn multiple.