What is Magic Number?
The Magic Number is a SaaS sales efficiency metric showing how much new ARR you generate per dollar of sales-and-marketing spend, on an annualized quarterly basis. Coined by Scale Venture Partners, it’s a one-quarter readout on whether to accelerate or decelerate go-to-market investment.
Formula
Magic Number = (Q4 ARR − Q3 ARR) × 4 / Q3 Sales & Marketing Spend
Annualized new ARR added divided by prior-quarter S&M spend. Result is a ratio.
Interpretation
- >1.0 — Highly efficient; invest more aggressively in S&M
- 0.75-1.0 — Healthy; current spend level is justified
- 0.5-0.75 — Acceptable but examine channel mix
- <0.5 — Inefficient; cut spend, fix the funnel before investing more
Net vs Gross Magic Number
- Gross: uses new ARR only (excluding churn) — measures pure acquisition efficiency
- Net: uses net new ARR (new + expansion – churn – contraction) — measures overall growth efficiency including retention
Net is preferred for mature companies with significant base; Gross for early-stage where churn is small relative to new ARR.
Practical implications
Calculate monthly with rolling-quarter spend and review with leadership weekly. Below 0.5 → don’t hire more reps; fix conversion first. Above 1.5 → you’re under-investing relative to opportunity. In Series B+ DD, expect 8 quarters of Magic Number history.