Formula
How to Calculate Magic Number
A sales efficiency ratio: the quarter-over-quarter change in recurring revenue, annualized, divided by the prior quarter's sales and marketing spend.
SaaS Magic Number
Magic Number = Net New ARR (Q) / S&M Spend (Q-1)
Where
- Net New ARR
- = New ARR added this quarter
- S&M Spend
- = Sales & marketing spend from the prior quarter
What Is Magic Number?
The magic number measures how much recurring revenue a dollar of sales and marketing spend buys. Rory O'Driscoll of Scale Venture Partners states the method as taking the change in subscription revenue between two quarters, annualizing it by multiplying by four, and dividing by the sales and marketing spend for the earlier of the two quarters. The lag is deliberate: prior-period spend is assumed to drive current-period growth. A second version divides net new ARR by sales and marketing spend with no multiplication by four, because that numerator is already annual. Scale developed the GAAP-revenue version as a workaround so the metric would be computable and comparable across public companies.
Worked Example
From the original published example, which the post labels hypothetical. A company reports recurring revenue of $1,000,000, $1,200,000 and $1,500,000 across three quarters, with sales and marketing expense of $800,000 in the first quarter and $900,000 in the second, and the post states the magic number is 1.0 for the second quarter and 1.33 for the third. Check both: the second quarter change is $1,200,000 - $1,000,000 = $200,000, annualized $200,000 x 4 = $800,000, and $800,000 / $800,000 = 1.0. The third quarter change is $1,500,000 - $1,200,000 = $300,000, annualized $300,000 x 4 = $1,200,000, and $1,200,000 / $900,000 = 1.33.
Why Magic Number Matters
It is the cheapest read on whether more sales spend will buy proportional growth, and it is computable from public filings because it uses GAAP revenue rather than an unaudited ARR figure. The thresholds are published and tight: 0.75 in the original post, 0.7x as Scale's healthy baseline, above 1x compelling and below 0.5x a model that is not working. Its author is equally explicit about what it ignores, which is churn, gross margins and the split between new sales and upsells.
Related Terms
Frequently Asked Questions
How do you calculate Magic Number?
Magic Number is calculated using the formula: Magic Number = Net New ARR (Q) / S&M Spend (Q-1). A sales efficiency ratio: the quarter-over-quarter change in recurring revenue, annualized, divided by the prior quarter's sales and marketing spend.
What is a good Magic Number?
What constitutes a "good" Magic Number depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.