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Magic number calculator

How much new recurring revenue each dollar of sales and marketing bought. It is the bluntest efficiency measure in the set and the quickest to expose a go-to-market motion that is spending its way to growth.

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Annual recurring revenue at the close of the quarter you are measuring.

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ARR one quarter earlier, on the same basis. The difference between the two is what the spend is being judged against.

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Fully loaded S&M for the *previous* quarter, because that is the spend that produced this quarter's growth. Using the current quarter's spend is the most common error in this calculation.

MAGIC NUMBER

1.33

Above 1 — efficient, and possibly underfunded

Each dollar returned more than a dollar of annualised ARR. Often a signal that the constraint is capacity rather than demand, and that the motion could absorb more investment than it is getting.

The formula

Magic number = (current quarter ARR − prior quarter ARR) × 4 ÷ prior quarter S&M spend

Published because a calculator that hides its arithmetic is asking to be trusted rather than checked. Every input above is defined precisely in the note under its field — most disagreements about these numbers turn out to be disagreements about what went into them.

WHERE THIS FAILS

It attributes a quarter's growth to the previous quarter's spend, which is a crude lag assumption. In a business with a nine-month sales cycle the spend that produced this quarter's ARR was committed three quarters ago.

It cannot separate new business from expansion. A high magic number driven entirely by existing customers expanding says nothing about whether acquisition is working.

It is net of churn, so a strong acquisition motion can be hidden by a retention problem — and the fix for one is nothing like the fix for the other. Read it next to NRR.

The thresholds are conventions, widely repeated rather than measured. They are a reasonable starting frame and should not be treated as a pass mark.

DEFINITIONS USED HERE

OTHER CALCULATORS

Run the whole audit, not one number

These calculators each answer one question. The courses here build the full picture — inventory, process, measurement — with interactive tools that keep your data and export it as a workbook.

See the trainingFree audit templates

COMMON QUESTIONS

What is a good magic number?
Above 0.75 is conventionally treated as efficient enough to justify adding spend, and below 0.5 as a signal to fix the motion first. These are widely repeated operating conventions rather than measured optima, and they should be read alongside CAC payback — a business can post an acceptable magic number while taking two years to recover acquisition cost, which is a cash problem the magic number cannot see.
Should the magic number use current or prior quarter spend?
Prior quarter, because that is the spend that produced the growth you are measuring. Using the same quarter's spend is the most common error and it flatters a business that is cutting spend while still harvesting pipeline built earlier. Whichever you choose, keep it constant, because the trend matters more than the absolute figure.
Why is the magic number multiplied by four?
To annualise a quarterly change so it is comparable to the annual recurring revenue basis. The quarterly ARR increase multiplied by four expresses the growth at an annual run rate, which is what makes the ratio against a quarter of spend interpretable.
How is the magic number different from LTV:CAC?
Magic number is net and immediate: it measures what a quarter of spend produced in net new ARR after churn, using numbers you already have. LTV:CAC is gross and forward-looking: it estimates the lifetime return on acquiring a customer, and depends heavily on a churn assumption that extends well beyond observed data. The first is harder to argue with and tells you less; the second tells you more and is easier to get wrong.