What is the Magic Number?
Magic Number is a SaaS sales efficiency metric that measures how much new annualised recurring revenue (ARR) a company generates for every dollar spent on Sales and Marketing (S&M) in the prior period. Coined by Scale Venture Partners and popularised by Lars Dalgaard, Magic Number is widely used by growth-stage investors to assess whether incremental S&M spend produces proportional growth — i.e., whether the go-to-market motion is scaling efficiently.
Magic Number formula
Magic Number = (Current Quarter ARR – Prior Quarter ARR) × 4 / Prior Quarter S&M Spend
- Numerator: annualised net new ARR added in the current quarter.
- Denominator: S&M spend in the prior quarter (lagged because S&M investment generates revenue with delay).
- Result: dollar of new ARR generated per dollar of S&M.
Magic Number benchmarks
- <0.5: S&M inefficient — pause growth investment, optimise.
- 0.5-0.75: mediocre; review channel mix, sales productivity.
- 0.75-1.0: efficient — consider scaling S&M.
- >1.0: highly efficient; aggressive growth investment justified.
- >1.5: exceptional — common at early-stage product-led growth companies.
Magic Number caveats
- Excludes expansion: uses net new ARR which captures expansion AND new logo; some variants split for clearer signal.
- Lag mismatch: S&M payback varies by segment (SMB 3-6 months, enterprise 12-18 months); single-quarter lag may misstate.
- Macro distortion: demand spikes/collapses (COVID-era SaaS boom) inflated Magic Numbers temporarily.
- Gross vs. net Magic Number: gross uses Net New ARR; net subtracts churn-driven attrition; net is more honest at scale.
Magic number in financing decisions
The magic number — net new ARR per dollar of prior-quarter sales-and-marketing spend — answers the scaling question: above ~0.75 the go-to-market machine earns more fuel; below ~0.5 spending more buys inefficiency. Its legal-document echo is in growth-stage diligence and venture-debt underwriting, where efficiency metrics gate covenants and tranche releases: when a document borrows the metric, define the ARR basis, the S&M cost perimeter (include or exclude customer success?) and the quarter-lag convention. Boards using it for budget approvals should record the channel-level version — a blended 0.8 can hide one channel at 1.5 and another burning cash, and the minutes that show the analysis are the minutes that protect the decision.
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