Magic Number

Imagine you spend $10 on signs and shouting to get people to buy lemonade. Next week, you have $15 more in regular customers coming every week.

The Magic Number asks: "For every dollar I spent telling people about my lemonade, how many dollars of new weekly sales did I get?"

In this case: $15 ÷ $10 = 1.5

That's a good Magic Number! It means your advertising is working well.

If you spent $10 but only got $3 in new weekly sales, your Magic Number would be 0.3 — not so good. Your signs aren't convincing enough people.

The Magic Number tells you: "Should I spend more on telling people about my product, or is that money being wasted?"

The Magic Number was created by Lars Leckie at Scale Venture Partners around 2008. It became one of the most important SaaS metrics for measuring sales efficiency.

In plain English: How much new annual recurring revenue did you generate for each dollar of sales and marketing spend?

The benchmarks:

• Below 0.5: Inefficient — slow down or fix the go-to-market motion
• 0.5 - 0.75: Moderate — room for improvement
• Above 0.75: Efficient — invest more, hit the gas
• Above 1.0: Excellent — your S&M is paying for itself within a year

Why "magic"? Because a single number captures the complex relationship between spending and growth. It tells the board: "Is our sales machine working?"

Magic Number has a direct relationship to CAC payback period — how long it takes to recover customer acquisition costs.

Why one quarter lag? S&M spend in Q1 typically converts to closed deals in Q2. The lag accounts for the sales cycle. Some companies use different lags depending on their sales cycle length.

Net vs. Gross Magic Number:

• Gross: Uses total new ARR added
• Net: Uses net new ARR (new ARR minus churned ARR)

Net Magic Number is more conservative and reflects the true efficiency of growth. A company with high churn might have a great Gross Magic Number but a terrible Net Magic Number.

The seasonality trap: Comparing Q4 (typically strong) to Q3 S&M spend can inflate Magic Number. Some analysts prefer trailing twelve month (TTM) calculations to smooth out seasonality.

What Magic Number doesn't capture:

• Customer quality (high LTV vs. low LTV customers)
• Expansion revenue (upsells, cross-sells)
• Marketing spend that builds long-term brand
• Product-led growth motion efficiency

Decomposing Magic Number: The metric can be broken down to identify what's actually driving efficiency:

This reveals the operational levers:

• Lead volume: More leads from same spend
• Conversion rate: Better qualification, sales process
• ACV: Move upmarket, better pricing
• S&M efficiency: Lower cost channels, automation

Segment-level Magic Numbers: Sophisticated operators calculate Magic Number by:

• Customer segment (SMB vs. Enterprise)
• Channel (direct sales vs. partners vs. self-serve)
• Geography (US vs. EMEA vs. APAC)
• Sales team/rep (for quota setting and capacity planning)

Magic Number and sales capacity planning:

If Magic Number is 0.8 and you want to add $10M ARR next quarter:

This informs hiring plans, marketing budgets, and fundraising needs.

The burn multiple connection:

While Magic Number focuses on S&M efficiency, Burn Multiple captures total company efficiency:

A company can have a great Magic Number but poor Burn Multiple if R&D or G&A is bloated.

Red flags:

• Falling Magic Number despite growing S&M spend → market saturation or execution issues
• Magic Number > 1.5 → likely underspending on growth, leaving money on the table
• Large gap between Gross and Net Magic Number → churn problem

The fundamental flaw: Magic Number treats all S&M spend as equal, but it's not:

• Performance marketing: Direct, measurable, short payback
• Brand marketing: Diffuse, builds over years
• SDR/BDR costs: Pipeline generation
• AE costs: Deal closing
• Customer success: Sometimes in S&M, sometimes not

Lumping these together can create misleading signals.

The PLG problem: Product-led growth companies often have low S&M spend relative to growth because the product does the selling. Their Magic Number might be 2.0+, but that doesn't mean they should 10x S&M spend — the motion is fundamentally different.

The expansion revenue gap: Traditional Magic Number ignores expansion revenue from existing customers. A company growing 50% through expansion and 50% through new logos has very different unit economics than one growing 100% through new logos, but Magic Number treats them the same.

Alternative metrics gaining traction:

• CAC Ratio: S&M Cost / New ARR (inverse of Magic Number, sometimes easier to interpret)
• LTV/CAC: Captures full customer lifetime, not just first year
• Payback-adjusted Magic Number: Weights by customer segment payback periods
• Cohorted efficiency: Track Magic Number by customer cohort vintage

The gross margin debate: Some argue Magic Number should use ARR contribution margin (ARR × Gross Margin) instead of raw ARR, since that's what actually covers S&M cost. This penalizes low-GM businesses appropriately.

Time-lag sophistication: The standard one-quarter lag is crude. Advanced models use:

• Weighted attribution across multiple quarters
• Segment-specific lag periods (SMB: 1 quarter, Enterprise: 3+ quarters)
• Multi-touch attribution from marketing automation data

The scaling paradox: Magic Number often declines as companies scale because:

• Early customers are often inbound, low-CAC
• Scaling requires moving outbound, higher-CAC
• Market penetration means harder-to-reach prospects
• Competition intensifies, increasing acquisition costs

A declining Magic Number isn't always bad — it may be inevitable at scale. The question is whether the decline is steeper than expected.

What experts argue about:

• Should expansion ARR be included in the numerator?
• How to handle PLG + sales-assist hybrid motions?
• Is quarterly calculation too noisy for board-level metrics?
• Should Magic Number targets vary by company stage and market?

The meta-insight: Magic Number remains popular because it's simple and actionable. Like all metrics, it's a model — useful but incomplete. The best operators use it alongside CAC payback, LTV/CAC, and Burn Multiple to get a complete picture of go-to-market efficiency.