SaaS Magic Number
The SaaS Magic Number measures how efficiently your sales and marketing investment generates new recurring revenue. It divides the change in quarterly ARR by the previous quarter's sales and marketing spend. A magic number above 0.75 suggests efficient growth; below 0.5 signals you are burning cash faster than you are growing.
Why SaaS Magic Number Matters for SaaS Companies
The magic number answers a critical question: for every dollar you spend on sales and marketing, how much new ARR do you get back? For Seed to Series B companies deciding how aggressively to invest in growth, this metric tells you whether adding more fuel will accelerate the engine or just burn cash faster.
Formula
Magic Number = (Current Quarter ARR - Previous Quarter ARR) / Previous Quarter Sales & Marketing Spend
Benchmark
Strong: above 0.75 (invest more). Acceptable: 0.5-0.75 (optimize). Weak: below 0.5 (fix efficiency before spending more).
Tools for Measurement
An Operator's Take
I use the magic number to diagnose whether a growth problem is an efficiency problem or a capacity problem. If the magic number is above 0.75, you have an efficient engine — the answer is to invest more. If it is below 0.5, spending more will not help — you need to fix conversion rates, sales process, or targeting first. At one company, the magic number was 0.3 despite increasing ad spend by 40%. The problem was not reach — it was that they were targeting the wrong ICP. We restructured targeting and the magic number went to 0.8 within two quarters without increasing budget.
Common Mistakes
What I see go wrong at Seed to Series B companies.
Calculating the magic number with MRR instead of ARR. The standard formula uses quarterly ARR change.
Not accounting for seasonality. One quarter's magic number can swing based on contract timing. Use trailing 4-quarter average.
Using the magic number to justify more spending without understanding why it is high. A high magic number from one-time enterprise deals is not repeatable.
What to Do This Week
Concrete steps you can take right now.
Calculate your magic number for the last 4 quarters. Look for trends, not single-quarter snapshots.
If below 0.5, audit your sales funnel: where are prospects dropping off? The bottleneck determines the fix.
Use the Sales Efficiency Calculator to complement the magic number with additional efficiency metrics.
Related Resources
Try These Tools
Further Reading
Frequently Asked Questions
What is a good SaaS magic number?
Above 0.75 indicates efficient growth — you should invest more in sales and marketing. Between 0.5 and 0.75 means the engine works but needs optimization. Below 0.5 suggests you should fix efficiency before increasing spend. The median for Seed-B SaaS companies is around 0.6.
How is the magic number different from LTV:CAC?
LTV:CAC measures lifetime return on acquisition investment. The magic number measures quarterly efficiency of sales and marketing spend. The magic number is more actionable for short-term spending decisions because it reflects current performance, not lifetime projections.
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