SaaS Magic Number
What is SaaS Magic Number?
The SaaS Magic Number measures sales efficiency by dividing annualized quarter-over-quarter recognized revenue growth by sales and marketing expense in the preceding quarter.
The SaaS Magic Number relates annualized quarterly revenue growth to the previous quarter’s sales and marketing expense. This guide follows Scale Venture Partners’ revenue-based definition. A ratio using net new ARR measures a related form of sales efficiency, but should not be mixed with this formula in a peer comparison.
Also known as: Magic Number, Sales Efficiency Magic Number
Formula
Magic Number = (Current Quarter Revenue − Prior Quarter Revenue) × 4 / Prior Quarter S&M Spend | Variable | Meaning |
|---|---|
Current Quarter Revenue | Recognized revenue for the current quarter, using a consistent accounting basis. |
Prior Quarter Revenue | Recognized revenue for the preceding quarter on the same basis. |
Prior Quarter S&M Spend | Sales and marketing expense for the preceding quarter. |
How to use it
- Take recognized revenue from two consecutive quarters using the same accounting scope.
- Subtract prior-quarter revenue from current-quarter revenue, then multiply the change by four to annualize it.
- Divide by sales and marketing expense from the prior quarter. Inspect several quarters and the length of your sales cycle before changing a budget.
Worked example
Hypothetical worked scenario
A fictional SaaS company records $500,000 revenue in Q1 and $575,000 in Q2. Its Q1 sales and marketing expense was $400,000.
Magic Number = (($575,000 − $500,000) × 4) ÷ $400,000 = 0.75×.
The numerator is a $300,000 annualized change in quarterly revenue. Entering a separately computed net new ARR figure would be a different model, even if it happened to produce the same numerical result.
Calculate with your numbers
Magic Number = (Current Quarter Revenue − Prior Quarter Revenue) × 4 / Prior Quarter S&M Spend | Variable | Meaning |
|---|---|
Current Quarter Revenue | Recognized revenue for the current quarter, using a consistent accounting basis. |
Prior Quarter Revenue | Recognized revenue for the preceding quarter on the same basis. |
Prior Quarter S&M Spend | Sales and marketing expense for the preceding quarter. |
Worked example
- Recognized revenue (this quarter)
- $575,000
- Recognized revenue (prior quarter)
- $500,000
- S&M Spend (prior quarter)
- $400,000
- → Magic Number
- 0.75
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Open the SaaS Magic Number calculator for a focused view of the inputs.
What the result tells you
Use the ratio as a prompt to investigate sales efficiency. A one-quarter lag may fit some sales motions poorly, and expansion from existing accounts can contribute to revenue growth. Compare the result with acquisition CAC, gross margin, and retention before assuming that extra sales spending will reproduce it.
Assumptions and common mistakes
- Revenue change can be negative; a negative result signals contraction under this model rather than an efficient acquisition engine.
- Zero prior-quarter sales and marketing expense makes the ratio undefined.
- The calculation does not adjust for gross margin. A revenue return and a gross profit payback are different measurements.
Compare related measures
Frequently asked questions
Why multiply by four?
The difference between quarterly revenue totals is annualized to a yearly revenue scale. Do not multiply an already annualized ARR change by four.
Is net new ARR divided by prior-quarter spend wrong?
It can be a useful ARR-based sales efficiency measure. Label it separately and use a comparable definition when reading benchmarks or another company’s results.
Sources and methodology
The references below explain the underlying methods. Our worked scenarios use hypothetical figures; they are not company results or current market benchmarks.
- Scale Venture Partners: Magic Number Math
Original quarterly revenue formula, published in 2010.
- Scale Venture Partners: A Primer on SaaS Sales Efficiency
Distinguishes the GAAP revenue Magic Number from ARR-based sales efficiency.
Found an error or a definition that differs from your reporting? Send a correction with the page URL and the method you use.