Sales and marketing budgets drive business growth. But spending money is the easy part. Knowing if that spend is actually working is where it gets tricky. That’s why you need the Magic Number.
This metric gives you a clear, quantifiable answer to the efficiency question. It tells you exactly how much revenue growth you generate for every dollar you invest in sales and marketing. It separates sustainable scaling from inefficient cash burn. Finance teams use this specific signal to dictate strategy:
- When to pour gas on the fire and ramp up spending.
- When to tweak the sales funnel for better efficiency.
- When to pause and fix underlying issues before growing.
In this guide, you’ll get the concrete formulas, industry benchmarks, and the steps required to track the magic number in your own financial model.
Defining the magic number
The magic number shows how well your sales and marketing spend turns into new recurring revenue. It answers a big question: for every dollar you use to win and grow customers, how much annual revenue do you pick up?
Scale Venture Partners created the magic number to help teams compare SaaS companies easily. The formula started with public companies and GAAP revenue, but now you’ll find it works great with ARR for private companies, too.
Magic number = (current quarter net new ARR × 4) ÷ previous quarter S&M spend
The magic number tells you how efficient your sales process is. A high score means your go-to-market (GTM) model is working. A low score says you’re spending without seeing enough return. You’ll find answers to key questions like: Should we hire more reps? Can we boost the marketing budget? Is now the time to scale?
Why it matters and how it’s used
The magic number drives your decisions on growth and capital allocation. It turns signals into clear action items for your team to follow.
Finance teams rely on this metric to plan sales hiring. Understanding the values helps you decide when to push forward or hold back:
- Above 0.75: You have a green light to hire more sales talent. This score shows high sales efficiency, meaning you generate significant revenue for every dollar spent. Your return on investment justifies adding headcount.
- Below 0.5: You need to pause and look at your go-to-market strategy. This score indicates you spend heavily to acquire customers without a quick enough return. Adding more people now would only amplify an inefficient process.
Magic number tracking brings sharp focus to your marketing spend. Test new channels and measure efficiency to spot what works constantly. If a channel keeps your magic number high, grow it. If it drags you down, tweak costs or reallocate the budget.
Key magic number formula variations
There’s a few common ways to calculate the magic number, but every formula aims for the same outcome: measure how efficiently you turn sales and marketing spend into fresh revenue.
Standard magic number formula
The most common version looks at net new ARR and last quarter’s sales and marketing spend:
Magic number = (Current quarter net new ARR × 4) ÷ previous quarter S&M spend
Multiply by 4 to annualize the revenue change. Always use last quarter’s spend to match investments and results. This formula covers new customers, expansions, contractions, and churn.
Here's an example: You added $100K in net new ARR this quarter and spent $300K on sales and marketing last quarter. Your magic number is 1.33. Every dollar of S&M spend created $1.33 in annualized revenue. A score of 1.33 signals high efficiency. It means your sales engine creates significantly more value than it costs to run. Since anything over 1.0 usually indicates a healthy go-to-market motion, you have a green light to scale.
Gross magic number
The gross version shows only new revenue (no churn or contraction):
Gross magic number = ((New customer ARR + expansion ARR) × 4) ÷ previous quarter S&M spend
This angle highlights acquisition and expansion efficiency. It’s useful for drilling into new business when you want to set aside retention. If gross looks good and net looks weak, you know it’s a retention issue.
Net magic number
This version covers the entire scope of your revenue performance.
Net magic number = ((New ARR + expansion ARR - churned ARR - contraction ARR) × 4) ÷ previous quarter S&M spend
Most teams start here to get a realistic view of growth. It combines your positive inflows from new business and expansion revenue with your negative outflows from churn and contraction. By subtracting what you lose from what you gain, you see the true yield of your sales and marketing investment.
This metric proves whether your growth engine is actually efficient or if you're simply spending money to fill a leaky bucket.
CAC payback period as an alternative
Some teams track CAC payback period for a different efficiency read:
CAC payback (months) = CAC ÷ (ARPA × gross margin % × (1 - churn rate))
CAC payback tracks how long it takes to earn back your cost to land a customer. Magic number around 1.0 usually means about a year to recover CAC. The difference is that CAC payback is about the customer level. Magic number is about your whole sales effort.
Essential components and considerations
Get your inputs right. Even small errors on ARR or which costs go into sales and marketing can throw off your magic number. That means wrong decisions.
ARR vs. MRR and annualization
Pick ARR or MRR and stick with it. If you use MRR, multiply it by 12 for the annual view. If you use ARR, keep it consistent across your calculations. Don’t mix monthly numbers with annual ones in the same math.
Defining net new ARR
Net new ARR has four parts:
- New customer ARR: revenue you get from brand new customers this quarter
- Expansion ARR: extra revenue from upsells, cross-sells, or more usage for existing customers
- Contraction ARR: lost revenue from downgrades or lower usage
- Churned ARR: revenue from customers who left
Add new customer ARR and expansion ARR. Subtract contraction ARR and churned ARR. That’s your net new ARR. Track these pieces carefully. If a customer downgrades before churning, count both steps; contraction and churn.
What to include in sales and marketing spend
Include only costs tied to winning and expanding customers. Here’s what to count:
- Sales team salaries, commissions, and bonuses
- Marketing team salaries, bonuses, and benefits
- Payroll taxes for both teams
- Advertising and paid marketing
- Sales and marketing tools and software
- Sales operations and enablement
- Recruiting and training for sales hires
- Travel, events, and conferences
- Content production and demand generation
Skip product development, general admin, and most customer success. Only tie in customer success if it’s directly linked to expansion. Focus on isolating investment that creates new revenue.
One-time vs. recurring S&M costs
Treat one-off spikes carefully. Big events or brand campaigns can inflate your spend in one quarter and drop your magic number. You may want to average these costs over several quarters or look at a version that leaves out these one-time spends.
Ramping sales rep productivity
New sales reps cost money before they hit full speed. If you hired five reps last quarter, expect your magic number to dip while they ramp. Track efficiency by cohort or adjust your expectations during heavy hiring cycles. This helps keep your insights sharp.
Sales cycle length and revenue recognition timing
The basic formula assumes a one-quarter lag between spend and revenue. If your sales cycle runs longer, shift the timing. Maybe it’s revenue from two or three quarters later. Adjust to match your sales cycle for a clear read.
Watch your revenue recognition, too. If you sign annual contracts but recognize revenue monthly, track ARR by the contract size, not just what’s recognized this month.
Special scenarios
If you price by usage, customers’ behavior changes revenue up and down. Smooth it over time, or focus on committed minimums for magic number math.
Annual contracts can throw off timing. A $120K annual contract jumps right into ARR, but the revenue lands over a year. Always base the magic number on ARR or bookings, not just recognized revenue.
Leave out significant services revenue. One-time projects make your ARR look bigger than it really is. Stick to recurring revenue for a true look at sustainable growth.
Tying it to other key SaaS metrics
The magic number sits at the heart of your SaaS growth stats. Here’s how it connects:
- CAC payback period measures efficiency for a single customer. Magic number looks at your whole GTM. Track both to see what’s working and where.
- LTV/CAC shows how much customers are worth relative to what it cost to get them. A healthy ratio above 3:1 with a magic number above 0.75 is a strong combo. If only one looks good, dig deeper.
- Magic number ties straight to sales efficiency and scalable growth. You need a strong magic number before ramping up your team.
- The Rule of 40 brings balance between growth and profit. Magic number is all about growth efficiency. You can have a high magic number while burning cash, or the opposite. They answer different questions.
Benchmarks and rules of thumb
Benchmarks shift with your sales style, deal size, and market. But these numbers give you quick guideposts:
- Above 1.0: exceptional efficiency. Invest more in sales and marketing. Every dollar translates to a dollar-plus in annual revenue.
- 0.75 to 1.0: healthy, sustainable growth. You can scale with confidence in this range.
- 0.5 to 0.75: moderate efficiency. You’re growing, but there’s room to tighten up before you scale big.
- Below 0.5: need to optimize your GTM before growing spend. Work on improving efficiency first.
Recent industry data shows a median magic number of 0.90. Top performers see above 2.0.
Enterprise sales usually scores lower (longer cycles and bigger deals). Product-led growth companies often see higher magic numbers, since they earn more with less spend. Early-stage companies will see swings.
Common pitfalls to avoid
Teams run into the same traps with magic number:
- Mixing up magic number with CAC payback or LTV/CAC. Each tells a different story, use them together, not interchangeably.
- Forgetting to account for lag between spend and recognized revenue. Align your timeline to your sales cycle for accuracy.
- Ignoring gross vs. net new ARR. If gross is high, but net is low, check retention.
- Treating all S&M spend as equal. Brand and direct sales have different paybacks. Track separate numbers if it helps.
- Not adjusting for sales cycle length. Big deals that close after nine months will spike or sink your magic number in just one quarter.
- Missing seasonality. Some quarters always run hot or slow. Normalize for a real view.
- Not counting ramp time for new sales reps. During hiring, expect your magic number to dip before reps produce revenue.
- Benchmarking across very different companies. What’s weak in one model is great for another. Compare apples to apples.
- Inflating numbers with channel partners or reseller revenue. Make sure you’re backing out what you didn’t truly earn from S&M spend.
- Letting one-off events mislead you. Big spends or large deals shouldn’t throw off your strategy.
- Mixing up new logo and expansion efficiency. Track both when you need real insight.
- Not adjusting for large pricing changes. If you raise prices, magic number rises too. Dig in to see if there was real efficiency change.
How to calculate magic number in Runway
The SaaS Magic Number measures sales efficiency by comparing new recurring revenue against the sales and marketing money you spent to get it. Here is how you build that calculation directly into your Runway model.
1. Get clean ARR and expense data into Runway
Connect your revenue system and accounting software to establish your baseline. You can pull automated data from Stripe for revenue, and integrate accounting platforms like QuickBooks Online, Xero, or NetSuite for expenses.
Once the data is in, ensure your General Ledger accounts are organized so that Marketing and Sales expenses roll up correctly in your P&L. If your business model relies on contracts, you might need to build revenue recognition logic first to get accurate ARR figures.
2. Create a new ARR driver
Go to your revenue database and create a column for New MRR. Use logic that checks if the previous month's MRR was zero and the current month is positive, similar to the method described in the Stripe integration. You can build this using standard functions and operators.
Next, add a driver column for New ARR and use a default column formula to multiply New MRR by 12. This ensures every customer row in your database inherits the same calculation automatically via database formulas.
3. Aggregate data by quarter
The Magic Number usually looks at quarterly performance. Create a KPI database with a Quarter dimension, such as FY25 Q1. Define the timeframe for each row using date functions found in our functions list, which helps with quarterly date math.
Add a Quarterly New ARR driver that sums up your New ARR column, filtering specifically for the months in that quarter using database formulas. Do the same for Quarterly S&M expense by summing your GL accounts tagged as Sales and Marketing for that same period.
4. Shift S&M to the prior quarter
To calculate the Magic Number, you compare current new revenue against the previous quarter's spend. In your KPI database, add a driver for S&M prior quarter. Use a formula that references the total S&M expense from the preceding quarter's row.
5. Define the SaaS Magic Number driver
Create a numeric driver called SaaS Magic Number. Set the default formula using this standard definition and Runway's basic operators:
SaaS_Magic_Number = (Quarterly_New_ARR * 4) / S&M_prior_quarter
Wrap this formula in an ifError function to prevent divide-by-zero errors when there is no prior spend, as described in our error handling documentation.
6. Use the metric in models and scenarios
Add your new driver to a model or a driver table to visualize the data. Turn on scenarios to see how changes in hiring or marketing budgets impact your efficiency score. You can also track your actual performance against your plan using budget vs. actuals.
Power your growth with efficient modeling
The magic number shows if your growth engine is ready for more. Track it, understand your inputs, and let it guide your critical GTM choices.
Runway lets you model this number right alongside your full plan. Build scenarios, test budgets, and link metrics to decisions. All in a single platform.
Want to see how Runway helps you track sales efficiency and lead growth planning? Book a demo and we’ll walk through a magic number model that always stays current as your business grows.