SaaS Magic Number

The SaaS magic number measures sales efficiency. It answers a straightforward question: for every dollar you spent on sales and marketing last quarter, how much net new ARR did you generate this quarter? The formula was popularised by Scale Venture Partners and has become a standard board-level metric for growth-stage SaaS companies.

SaaS magic number formula

Magic Number = (Net New ARR in Current Quarter) / (Sales & Marketing Spend in Previous Quarter)

You use the previous quarter's S&M spend because there's a lag between spending on pipeline and closing revenue. If you spent $200,000 on sales and marketing last quarter and generated $150,000 in net new ARR this quarter, your magic number is 0.75.

Some teams substitute net new MRR annualised (multiplied by 12) if they don't track ARR directly. The result is equivalent.

What the benchmarks mean

Below 0.5 signals inefficiency. You're burning more on go-to-market than the revenue justifies. Between 0.5 and 0.75, things look promising, but there's room to optimise either spend or conversion. Above 0.75 is efficient, and above 1.0 is exceptional. At that level, every dollar of S&M spend pays for itself within a year.

Here's the thing: these benchmarks shift by stage. An early-stage company investing heavily in brand and top-of-funnel will naturally run a lower magic number than a mature business with an established pipeline. Context matters.

What the magic number misses

The magic number uses net new ARR, which means churn drags the result down. If your sales team closed $200,000 in new business but you lost $80,000 to cancellations and failed payments, net new ARR is only $120,000. Your magic number drops, and the sales team looks less efficient than it actually was.

Revenue churn from failed payments is particularly misleading here. It's not a sales problem or a product problem. It's a payments problem. Recovering involuntary churn through dunning lifts net new ARR without any change to your go-to-market spend, which directly improves your magic number.

Using it alongside other metrics

The magic number works best as part of a set. Pair it with LTV:CAC ratio to check whether the customers you're acquiring are actually valuable long-term, and with the SaaS quick ratio to understand the balance between growth and loss. A strong magic number with poor retention still means trouble. In practice, we've found the most useful read comes from tracking all three together over time rather than fixating on any one in isolation.