Metrics and go-to-market
SaaS magic number
Annualized quarter-over-quarter ARR growth divided by prior-quarter S&M. Should we add sales capacity?
The SaaS magic number measures sales and marketing efficiency on a quarterly cadence. Use it to decide quota capacity and channel spend. Use burn multiple to decide company-wide burn.
It ignores R&D and G&A on purpose. A company can post magic number 1.2 while burning 3× overall if engineering and G&A are bloated. Read both.
Concept
S&M is sales and marketing spend. Magic number uses prior-quarter S&M because today's pipeline was bought with yesterday's spend. ARR here is the ending run-rate, not recognized revenue.
Walking through the formula
Magic number = (ARR this quarter − ARR last quarter) × 4
/ S&M spend last quarterEquivalently: annualize the quarter-over-quarter ARR increase, then divide by prior-quarter S&M.
| Magic number | Read |
|---|---|
| 1.0 or above | Efficient — often worth adding sales capacity |
| 0.75–1.0 | Okay; improve conversion or ACV before hiring aggressively |
| 0.5–0.75 | Weak efficiency |
| Under 0.5 | Fix GTM before pouring fuel |
Q2 ending ARR $12.0M, Q1 ending ARR $11.0M, Q1 S&M $1.25M.
QoQ ARR increase = 12.0 − 11.0 = $1.0M
Annualized = 1.0 × 4 = $4.0M
Magic number = 4.0 / 1.25 = 3.2That 3.2 is very strong — either a breakout quarter, a mix shift to high-ACV deals, or S&M that was temporarily light. Always check trailing three-quarter averages; one spike lies.
A quarter of discounted new logos can spike magic number and poison GRR/NRR six months later. Always read efficiency next to retention.
Trade-off
Optimize magic number when the question is "should we hire five more AEs?" Optimize burn multiple when the question is "are we default alive / fundable?"
Common mistakes
- Using this-quarter S&M. The pipeline lag is the point. Use last quarter.
- Hiring off one spike. Trailing three quarters.
- Discounting to decorate the number. Retention will collect the bill.
Check yourself
Q2 ARR $12M, Q1 ARR $11M, Q1 S&M $1.25M. Magic number?
3.2. ($1.0M × 4) / $1.25M = 3.2.
Why prior-quarter S&M?
Today's new ARR was largely bought with last quarter's pipeline spend.
Key takeaways
- Magic number annualizes QoQ ARR growth over prior-quarter S&M.
- 1.0 or above often means you can add sales capacity.
- It ignores R&D and G&A. Pair it with burn multiple.
- Use trailing averages and read it next to retention.
Further learning
Next, company-level CAC payback.