The magic number answers one question: when you spend a dollar on sales and marketing, how much new annual recurring revenue comes back? It is one of the simplest ways to judge whether pouring more money into growth makes sense.
How it works
Take the increase in quarterly revenue and multiply it by 4 to annualize it. That is the new annual revenue the quarter produced.
Divide by last quarter's sales and marketing spend. The previous quarter is used because deals take time to close, so this quarter's revenue mostly comes from last quarter's effort.
Common rules of thumb: above 1, growth is efficient enough to invest more; 0.75 to 1 is healthy; 0.5 to 0.75 needs tuning; below 0.5, fix the go-to-market motion before spending more.
A worked example
Revenue grew from $1,100,000 to $1,300,000, an increase of $200,000. Annualized, that is $800,000. Divided by last quarter's $600,000 of sales and marketing spend, the magic number is 1.33, so each $0.75 of spend produced $1 of new annual revenue.
Questions people ask
Should I use revenue or ARR?
Either works if you are consistent. Some teams use the change in ARR directly instead of quarterly revenue × 4. Using gross-margin-adjusted revenue gives a stricter version of the metric.
Why is my magic number negative?
Revenue fell quarter over quarter, usually because churn outpaced new sales. The number then tells you nothing about spend efficiency; look at churn first.
Does the magic number work for early startups?
It becomes meaningful once sales and marketing spend is steady. With tiny, lumpy numbers, one large deal can swing it wildly from quarter to quarter.
Guides
- The SaaS Magic Number: Is It Time to Spend More on Growth?The magic number measures how much new annual revenue each dollar of sales and marketing produces. Here's how to calculate and read it.
- How to Calculate Customer Acquisition Cost (CAC) HonestlyCAC is sales and marketing spend divided by new customers. What you include decides whether the number helps you or flatters you.