Formula
magic number = (this quarter's revenue − last quarter's revenue) × 4 / last quarter's S&M spend
SaaS magic number
The SaaS magic number measures sales efficiency by dividing the annualized revenue added in a quarter by the sales and marketing spend of the quarter before it.
Worked example
Quarterly revenue grows from €500,000 to €575,000 after spending €200,000 on sales and marketing the quarter before: (75,000 × 4) / 200,000 = 1.5.
Benchmark
Lars Leckie, who coined the metric, drew the lines that are still used: above 0.75, keep investing in the go-to-market; below 0.5, fix the model before spending more; in between, look deeper before deciding.
The metric answers one question: when this company puts a euro into sales and marketing, how much recurring revenue comes back out? A magic number of 1 means a quarter's spend recreates itself as annualized revenue within a year, which is the intuition behind the 0.75 threshold: at that level the spend pays back in about 16 months, close enough to justify continuing.
The one-quarter offset is deliberate. Money spent on sales and marketing takes at least a sales cycle to show up as revenue, so this quarter's growth is credited to last quarter's spend. Companies with long enterprise cycles sometimes need a two-quarter lag for the number to make sense.
One honest caveat: the formula runs on revenue, not gross profit. A company at 60 percent gross margin recovers its spend noticeably slower than its magic number implies, which is why the ratio reads best next to CAC payback rather than instead of it.
Related terms
Keep this number live
Plainhub computes saas magic number from money you record in plain words, so it is current when you need it rather than the night before a board meeting.
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