How to calculate the SaaS magic number
The magic number tells you how much new recurring revenue each dollar of sales and marketing generated, with a one-period lag to reflect that spend takes time to convert. It is a fast read on whether to press the accelerator.
The lag is the subtle part. This quarter's revenue came from last quarter's spend, so the formula pairs net new ARR with the prior period's investment.
- Net new ARR / prior S&M The formula
- 0.75+ Efficient, invest more
- Under 0.5 Fix efficiency first
Short answer
The SaaS magic number measures sales and marketing efficiency. Divide net new ARR added in a period by the sales and marketing spend of the prior period. If you added 750,000 dollars of net new ARR after spending 1,000,000 dollars last quarter, the magic number is 0.75. Above 0.75 signals efficient growth worth funding.
Step by step
Measure net new ARR
Take the change in ARR over the period (new plus expansion minus churn and contraction). Some use gross new ARR; net is more conservative and common.
Take prior-period S&M spend
Use the total sales and marketing spend from the previous period, reflecting the lag between spend and revenue.
Divide net new ARR by that spend
The magic number equals net new ARR divided by prior-period sales and marketing spend. It is a ratio, not a percentage.
Interpret the result
Above 0.75 means efficient growth and a case to invest more. Between 0.5 and 0.75 is acceptable. Below 0.5 means fix efficiency before adding spend.
Worked example
In Q2 you spent 1,200,000 dollars on sales and marketing. In Q3, ARR grew from 8,000,000 to 9,000,000 dollars, so net new ARR was 1,000,000 dollars.
Magic number = 1,000,000 / 1,200,000 = 0.83. That is above 0.75, which says your go-to-market is efficient and you can justify increasing spend to grow faster. A result of 0.4 would say the opposite: fix conversion before spending more.
How Ardovo handles it
Ardovo computes the magic number from live ARR movement and connected spend, with the correct one-period lag built in. Rook tells you whether the number supports leaning into spend or signals an efficiency problem to fix first.
Frequently asked questions
What is the SaaS magic number formula?
Net new ARR added in a period divided by the sales and marketing spend of the prior period. The one-period lag reflects that spend takes time to convert into recurring revenue.
What is a good magic number?
Above 0.75 signals efficient growth and a case to invest more. Between 0.5 and 0.75 is acceptable. Below 0.5 means your go-to-market is inefficient and you should fix conversion before adding spend.
Should I use gross or net new ARR?
Net new ARR (including churn and contraction) is the more conservative and common choice. Using gross new ARR ignores losses and overstates efficiency. Pick one and apply it consistently.
Why does the magic number use prior-period spend?
Because sales and marketing spend takes time to produce revenue. Pairing this period's net new ARR with last period's spend reflects that lag and gives a fairer read of efficiency.