SaaS Magic Number Calculator
The SaaS magic number measures sales and marketing efficiency: the new annualised revenue a quarter produced, divided by the sales and marketing spend of the quarter before. Above 1 is strong; below 0.5 means the model needs work.
By Suren, Founder & Growth Strategist at Gufy · Last updated
The formula
Magic number = (this quarter’s revenue − last quarter’s revenue) × 4 ÷ last quarter’s sales and marketing spend
Worked example: subscription revenue grew from $270,000 to $330,000 in a quarter, an increase of $60,000, or $240,000 a year. Sales and marketing spend in the previous quarter was $200,000. The magic number is $240,000 ÷ $200,000 = 1.2.
The metric comes from Scale Venture Partners, whoseoriginal explanation uses GAAP subscription revenue. Many companies use the change in ARR instead; it gives a similar number without the × 4.
Reading the result
| Magic number | What it suggests |
|---|---|
| Above 1 | Spend is turning into revenue efficiently; a case for spending more |
| 0.5 to 1 | Workable, but growth is costing a lot of capital |
| Below 0.5 | The go-to-market model is not working yet; fix it before spending more |
These bands follow Scale’s original article. Their latercalculator note uses 0.7 as a single line: below it, look at the go-to-market model; above it, consider accelerating.
Where the magic number misleads
- Early stage: with a handful of customers, one deal can swing a quarter. CAC payback per customer is steadier.
- Churn hides inside it: revenue change is net of cancellations, so a low number can be a retention problem, not an acquisition one.
- Long sales cycles: if deals take two quarters to close, last quarter’s spend is the wrong match.
- Seasonality: compare like quarters, or average several.
For the per-customer view, see Unit economics for startups.
Common questions
What is a good SaaS magic number?
Scale Venture Partners, who popularised the metric, describe above 1 as a compelling case to invest more, 0.5 to 1 as workable but capital-inefficient, and below 0.5 as a sign the business model is not yet working. Their later guidance uses 0.7 as the line between fixing the go-to-market model and accelerating.
How do you calculate the SaaS magic number?
Take the increase in subscription revenue between two consecutive quarters, multiply it by 4 to annualise it, and divide by the sales and marketing spend of the earlier quarter.
Why does the magic number use the previous quarter’s spend?
Because sales and marketing spend takes time to turn into revenue. Spend in one quarter mostly shows up as new revenue in the next, so the formula pairs this quarter’s revenue growth with last quarter’s spend.
What is the difference between the magic number and CAC payback?
Both measure how efficiently spend turns into revenue. The magic number works at company level from quarterly revenue and spend; CAC payback works per customer and includes gross margin. Early-stage startups usually get more from CAC payback, because a few deals can swing quarterly revenue.
Where Gufy fits
A low magic number usually has one of three causes: acquisition that brings the wrong customers, sign-ups that never activate, or customers who leave. Gufy works out which, with tracking that follows a customer from the first ad to renewal, then fixes that step. See the SaaS growth work.