SaaS magic number: formula and interpretation

SaaS magic number

The SaaS magic number measures sales and marketing efficiency: the annualised increase in revenue in a quarter divided by sales and marketing expense in the prior quarter. A value of 1 means a quarter’s spend produced an equal amount of new annualised revenue.

Formula

Magic number = (quarterly revenue − prior quarterly revenue) × 4
               ÷ prior-quarter S&M expense
ARR form     = net new ARR in the quarter ÷ prior-quarter S&M expense

Worked example

Illustrative figures. The ARR form, for one quarter.

Magic number = 1,350,000 ÷ 1,500,000 = 0.90

Revenue or ARR

The original form, popularised by Scale Venture Partners, uses the change in quarterly GAAP revenue; many companies substitute subscription revenue. Recognised revenue lags ARR because new contracts contribute only part of a quarter. The ARR form uses net new ARR directly and responds faster. State which is used.

Lag

Prior-quarter expense reflects the time between spend and revenue. Long sales cycles can justify a longer lag.

Gross and net

Net new ARR deducts churn, so a retention problem lowers the magic number even when sales performance is unchanged. A gross version, using new and expansion ARR only, isolates acquisition.

What Revnewed provides

Revnewed’s three-month ARR bridge sets out new business, expansion, reactivation, contraction, churn and FX on separate lines, so either the net or the gross form can be calculated.

Sales and marketing expense comes from the general ledger.

Common misstatements

Revenue and ARR mixed: Use one basis for the numerator and keep it between quarters.
Same-quarter expense: Spend in the quarter rarely produces revenue in the same quarter.
FX in the numerator: Translation is not sales performance.