Every growing SaaS company faces the same question: if we spend more on sales and marketing, will it pay off? The magic number is a quick way to answer it from numbers you already have.
The formula
Take the increase in quarterly revenue, multiply by 4 to annualize it, and divide by the previous quarter's sales and marketing spend. The previous quarter is used because deals take time to close; this quarter's revenue mostly reflects last quarter's effort.
New annual revenue
($1,300,000 − $1,100,000) × 4equals$800,000
Magic number
$800,000 ÷ $600,000equals1.33
A magic number of 1.33 means each dollar of sales and marketing spend produced $1.33 of new annual revenue. Put the other way, $0.75 of spend bought $1 of annual revenue.
How to read it
- Above 1: growth spend is paying back quickly. Many investors read this as a signal to spend more.
- 0.75 to 1: healthy. Keep going and watch the trend.
- 0.5 to 0.75: borderline. Tune channels and conversion before scaling spend.
- Below 0.5: inefficient. Fix the go-to-market motion before adding budget.
These thresholds are rules of thumb, not laws. A business with very high gross margins can accept a lower magic number than one with thin margins.
Common mistakes
Using the same quarter's spend overstates efficiency when spend is rising. Counting one-off services revenue inflates the numerator. And for small companies, one large deal can swing the result wildly, so look at a rolling average across several quarters.
Tip: For a stricter version, multiply the revenue increase by your gross margin first. It shows the return on spend in profit, not just revenue.