How is the magic number calculated?

Net new ARR in a period divided by sales and marketing spend in the prior period. The lag matters — using the same period ignores that spend takes time to produce revenue.

What is a good magic number?

Above 1 is conventionally read as efficient growth worth funding, below 0.5 as a signal to fix efficiency before spending more. Both are conventions rather than findings.

What are its main weaknesses?

It assumes a one-period lag, which is wrong for any business whose sales cycle is longer, and it ignores gross margin entirely — a low-margin business scoring well is not efficient.

Is it better than CAC payback?

It is faster to compute from figures you already report. Payback is more precise because it uses margin and per-customer cost. Use the magic number as a check, not a decision input.

Magic Number

A sales efficiency measure comparing new recurring revenue produced to the sales and marketing spend that produced it.

The calculation

Net new ARR in a period divided by sales and marketing spend in the preceding period. The result is roughly how much recurring revenue each unit of go-to-market spend bought.

The lag assumption is the whole model

A one-quarter lag suits a business with a short cycle. Where deals take two or three quarters, the numerator and denominator describe unrelated periods and the number becomes noise. Set the lag from your own median cycle before reading anything into the result.

Using it defensibly

Set the lag from your measured sales cycle, not from the convention.
Use net new ARR — after churn and contraction — or you are measuring gross acquisition and calling it efficiency.
Load the spend fully, including salaries, or it flatters headcount-heavy motions.
Read it beside CAC payback. Where the two disagree, payback is the more precise instrument because it uses gross margin.

Where it misleads

It ignores gross margin entirely, so a low-margin business can post a strong number while adding unprofitable revenue.
It improves when you cut spend, which looks like efficiency and is often contraction.
A single large deal can dominate a quarter's numerator in any business without high deal volume.

RELATED TERMS

CAC Payback Period

How long it takes for a customer's gross profit to repay the cost of acquiring them. The bridge between sales efficiency and cash flow.

Customer Acquisition Cost (CAC)

The fully loaded cost of acquiring one new customer: sales and marketing spend for a period divided by new customers acquired from it.

Rule of 40

A heuristic that revenue growth rate plus profit margin should sum to at least forty, used to judge whether growth and profitability are in a defensible balance.

Sales Efficiency Ratio

New revenue produced per unit of sales and marketing spend, in one of several closely related formulations.

COMMON QUESTIONS

How is the magic number calculated?: Net new ARR in a period divided by sales and marketing spend in the prior period. The lag matters — using the same period ignores that spend takes time to produce revenue.
What is a good magic number?: Above 1 is conventionally read as efficient growth worth funding, below 0.5 as a signal to fix efficiency before spending more. Both are conventions rather than findings.
What are its main weaknesses?: It assumes a one-period lag, which is wrong for any business whose sales cycle is longer, and it ignores gross margin entirely — a low-margin business scoring well is not efficient.
Is it better than CAC payback?: It is faster to compute from figures you already report. Payback is more precise because it uses margin and per-customer cost. Use the magic number as a check, not a decision input.