SaaS Magic Number Calculator

The SaaS magic number formula comes from Rory O'Driscoll's April 2010 post at Scale Venture Partners: take the change in subscription revenue between two quarters, multiply it by four, and divide by the sales and marketing expenses of the earlier quarter. Most versions published since swap in GAAP revenue for the current quarter and the previous period.

The one-quarter lag comes from how sales and marketing efforts pay out. Ben Murray of The SaaS CFO notes there's typically a gap between the sales and marketing investment and the new MRR or ARR it produces, so marketing spend in Q1 shows up as new revenue from new customers in Q2.

GAAP revenue is total revenue, services included. Strip out large implementation fees and count new subscription revenue only, or a services spike moves the company's sales efficiency reading.

The ARR tab follows Wall Street Prep's definitions, updated September 2024. ARR is already annual, so neither ratio multiplies by four.

• Gross sales efficiency: the current quarter's gross new annual recurring revenue, from new customers plus expansion revenue from existing customers, divided by the prior quarter's sales & marketing expense.
• Net sales efficiency: net new ARR, gross new ARR minus ARR lost to churned customers and downgrades, over the same spend. The two sales efficiency metrics drift apart as churn rate rises.

CAC payback follows Bessemer Venture Partners' June 2019 definition: the time needed to repay sales and marketing expenses on a gross margin adjusted basis, gross margin being revenue minus cost of goods sold. The calculator takes prior-quarter spend, divides it by the quarterly revenue increase times gross margin, and multiplies by three months. That's customer acquisition cost measured in months of incremental recurring revenue.

These SaaS magic number benchmarks are the tool's only constants:

• 0.5x and 1x: Scale Venture Partners, April 2010.
• 0.7: Scale's Dale Chang, November 2015, the line between rethinking go-to-market and adding spend.
• 0.75 to 1.0: Software Equity Group's acceptable band for sales efficiency, December 2022.
• 6 to 18 months SMB payback, 24 to 36 months enterprise: Bessemer, June 2019.

A company booked $5,000,000 of GAAP revenue last quarter and $5,500,000 in the current quarter, after $2,400,000 of sales and marketing spend in the earlier quarter. The $500,000 of incremental revenue generated annualizes to $2,000,000. Divide by $2,400,000 and the SaaS magic number is 0.83, inside Scale's middle band.

At a 75% gross margin, CAC payback lands at 19.2 months, 1.2 months past the top of Bessemer's SMB range. The target table shows the current sales growth that same marketing spend needed: $300,000 of added revenue for a 0.5, $450,000 for 0.75, $600,000 for 1.0.

On the ARR tab, $1.5M new, $600K expansion and $300K churn give 0.88 gross, 0.75 net and $1.8M of net new ARR.

One quarter is a small sample for any of these SaaS metrics. A $400,000 deal slipping out of the quarter drops the 0.83 above to 0.17; one pulled in early lifts it to 1.5. Average four quarters before you cut your losses on a channel.

Industry benchmarks disagree on where the floor sits. Wall Street Prep labels anything under 0.75 inefficient, Scale's own cut sits at 0.5, and the 2015 Scale post uses 0.7. Treat all three as general rules: the clearest sign a business is on the right track is its own magic number rising quarter over quarter.

The fixed lag breaks on longer sales cycles. Six-month enterprise deals haven't paid out last quarter's spend yet, and for longer cycles Murray measures CAC payback against spend from a year earlier. The GAAP version nets churn inside revenue, so a company losing existing customers posts a lower magic number on the same new sales, and only the ARR tab shows why.

The SaaS magic number says nothing about customer lifetime value or churn rate on its own. A 1.2 bought with deep first-year discounts is a red flag once those contracts renew at list price. Read the magic number next to other metrics: the retention and CAC medians in our SaaS statistics report, the burn rate calculator for cash, and the Rule of 40.

It's the annualized revenue growth a SaaS company adds in a given quarter for each dollar of sales and marketing it spent the quarter before. Scale Venture Partners named it in 2010, and of the common sales efficiency metrics it's the one that needs only three lines from an income statement.

A good SaaS magic number sits above 1.0 by Scale's 2010 bands. Dale Chang's 2015 post at Scale put the decision line at 0.7: above it, step on the gas; below it, look at the go-to-market model. Software Equity Group calls 0.75 to 1.0 acceptable. Below 0.5, Scale reads the customer acquisition model as unproven. A 1.0 means sales and marketing costs come back in about a year of revenue, before gross margin.

There are a few ways to calculate sales efficiency, and the SaaS magic number formula is the shortest. Subtract last quarter's GAAP revenue from the current quarter's, multiply by four, and divide by last quarter's sales and marketing expense. The magic number can run monthly or quarterly. For a shorter time period, use monthly recurring revenue: multiply the month-over-month MRR gain by 12 and divide by the prior month's spend.

Murray describes the Bessemer CAC ratio as the magic number narrowed to new acquisition, and notes Bessemer no longer appears to publish it, having moved to the CAC payback period. The magic number counts all revenue growth, cross sell and upsell to existing customers included.

Cube's guide to the SaaS magic number lists four fixes:

• Shorten the sales cycle.
• Sell expansions to existing customers.
• Move budget to low-cost channels like content marketing.
• Cut paid marketing spend that underperforms.

Rank channels by customer acquisition cost before cutting any, because marketing efficiency moves on the cost per closed deal. Money doesn't grow on trees, and a low number adds pressure to raise capital sooner, since each dollar of growth costs more money. Tying each closed deal back to the spend that sourced it is the job of revenue intelligence software.

Drop this on any page and it renders the calculator above, live, with no login or install. It's free to use, and the only ask is leaving the credit link in place.