Know the Figures

SaaS Magic Number

How much new annual revenue each unit of last quarter’s sales and marketing bought.

Replaces: Sales-efficiency benchmarking reports

How to use it

Enter recurring revenue for the quarter just ended and the one before, what you spent on sales and marketing in that earlier quarter, and your gross margin. The result is how much new annual revenue each unit of spend was followed by, the same in gross profit, and roughly how long that spend takes to earn back.

Where the number comes from

  • Net new revenue is this quarter’s revenue minus last quarter’s. Multiplying by 4 turns the quarterly change into an annual run-rate.
  • The magic number divides that annualised change by last quarter’s sales and marketing spend. The one-quarter lag assumes spend takes about a quarter to show up as revenue.
  • The gross-margin-adjusted figure multiplies by gross margin, because only gross profit can repay the spend.
  • Implied CAC payback is 12 months divided by the adjusted figure: at 1.0, a year of the new gross profit equals the spend. When the adjusted figure is zero or negative the spend is not recovered.
  • The table re-runs the ratio as if spend had been 70% to 130% of the actual, holding the revenue change fixed, to show how sensitive the ratio is to the denominator.

What goes wrong

The part most calculators leave out.

  • The one-quarter lag is an assumption. With a six-month sales cycle, this quarter’s revenue came from spend two quarters ago, and in a business growing its spend that flatters the ratio.
  • It is built on net new revenue, not gross new. Churn and contraction sit inside the change, so a team that sold well into a leaking base shows a poor number, and a quiet quarter for churn makes the spend look better than it was.
  • Seasonality distorts a single quarter. A strong fourth quarter followed by a weak first one swings the ratio well beyond any change in efficiency; compare like quarters or average several.
  • The answer depends on what counts as sales and marketing. Leaving out salaries, commissions or a founder who sells full time raises the ratio without changing anything real.
  • The sensitivity table holds revenue fixed while spend moves, which is not how spend works — more spend usually brings some more revenue. It shows how much the ratio leans on the denominator, not what a budget change would produce.

A quarter of 10% growth

Revenue rose from 3,000,000 to 3,300,000 in the quarter, a 300,000 increase that is 1,200,000 at an annual run-rate. Against 1,400,000 of sales and marketing spent the quarter before, the magic number is 0.86: each 1 of spend was followed by 0.86 of new annual revenue, which the commonly cited reading calls efficient. At a 78% gross margin that becomes 0.67 of annual gross profit, so the spend takes about 17.9 months to earn back — longer than the headline ratio suggests.

Questions

What is a good SaaS magic number?
The commonly cited reading is that above 1 makes a case for spending more on growth, 0.75 to 1 is efficient, 0.5 to 0.75 is middling, and below 0.5 means fixing efficiency before adding spend. These are conventions from software investing, not rules, and they are judged on the unadjusted figure.
Why multiply the revenue change by 4?
Sales and marketing spend is a quarter’s worth, while subscription value is usually discussed annually. Multiplying the quarterly change by 4 puts the new revenue on an annual run-rate so the ratio reads as annual revenue per unit of spend.
Should I use revenue or ARR?
Either, as long as both quarters use the same measure. Recognised recurring revenue is the classic version; using the change in ARR divided by 4 for each quarter gives the same arithmetic. Bookings overstate, because they include revenue not yet earned.
Why is my magic number negative?
Revenue fell between the two quarters, so the change being divided is negative. It means churn and contraction outran new business; it does not measure the spend in any useful way until the base stops shrinking.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is sent to us or logged, and there is no account to create. Your browser keeps the figures with this tab’s history so that Back and Reload bring them back, and Reset clears them.

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