SaaS Magic Number Calculator Formula
Understand the math behind the saas magic number calculator. Each variable explained with a worked example.
Formulas Used
SaaS Magic Number
magic_number = previous_quarter_sales_marketing > 0 ? (current_quarter_arr - previous_quarter_arr) / previous_quarter_sales_marketing : 0Net New ARR
new_arr = current_quarter_arr - previous_quarter_arrVariables
| Variable | Description | Default |
|---|---|---|
current_quarter_arr | Current Quarter ARR(USD) | 5000000 |
previous_quarter_arr | Previous Quarter ARR(USD) | 4500000 |
previous_quarter_sales_marketing | Previous Quarter Sales & Marketing Spend(USD) | 400000 |
How It Works
How to Calculate the SaaS Magic Number
Formula
Magic Number = (Current Quarter ARR - Previous Quarter ARR) / Previous Quarter Sales & Marketing Spend
The magic number measures how efficiently sales and marketing dollars convert into new recurring revenue. A value above 0.75 suggests you should invest more in sales and marketing. Between 0.5 and 0.75 indicates decent efficiency. Below 0.5 means your go-to-market engine needs tuning before scaling further.
Worked Example
ARR grew from $4.5M to $5M. Last quarter, the company spent $400,000 on sales and marketing.
- 01Net New ARR = $5,000,000 - $4,500,000 = $500,000
- 02Magic Number = $500,000 / $400,000 = 1.25
- 03Every dollar of S&M spend generated $1.25 in new ARR.
Frequently Asked Questions
What magic number means I should invest more in growth?
Above 0.75 is the signal to step on the gas. Your sales and marketing engine is converting efficiently, and additional investment should yield strong returns. Below 0.5, focus on improving conversion before spending more.
Why use previous quarter spend instead of current?
Sales and marketing spend typically takes one quarter to produce results due to the sales cycle. Comparing this quarter's ARR growth to last quarter's spend aligns cause and effect more accurately.
Ready to run the numbers?
Open SaaS Magic Number Calculator