SaaS metrics guide
The SaaS Magic Number
It answers one question: if we put another dollar into sales and marketing, do we get it back quickly? The answer is only as good as the lag you apply — and almost everyone applies the wrong one.
Last updated 2026-10-20
The formula
Magic Number =
(ARR this quarter − ARR last quarter)
÷ (sales & marketing spend last quarter)Three details decide whether the number is meaningful:
- Net new ARR includes churn. Expansion minus contraction minus churn minus new logos. Using gross new business instead makes any retention problem disappear.
- Full S&M cost. Salaries, commissions, advertising, content, tools, agencies — everything. Excluding salaries is the single most common way to inflate it, often by a factor of two.
- The lag. The spend that produced this quarter’s revenue was booked earlier. One quarter is standard; if your sales cycle is nine months, one quarter understates efficiency badly.
Reading the number
| Magic number | Reading |
|---|---|
| Above 1.0 | Every dollar of S&M returns more than a dollar of ARR in a year. Spend more, fast. |
| 0.75–1.0 | Efficient. Investing more is usually justified. |
| 0.5–0.75 | Workable. Fix conversion or pricing before scaling spend. |
| Below 0.5 | Acquisition is not paying back fast enough. More spend makes the problem bigger. |
The thresholds assume a roughly twelve-month payback. That assumption is doing a lot of work — see below.
What it hides
Contract length. A magic number of 0.8 looks identical whether you sell monthly or on three-year prepaid contracts. In the first case the cash comes back gradually; in the second it arrives immediately. Same score, completely different cash position.
Gross margin. The magic number compares ARR to spend, not gross profit to spend. A business at 50% gross margin needs twice the magic number of one at 80% to break even on the same cohort. Any SaaS with heavy hosting or services costs is flattered by this.
Segment mix. Enterprise deals with 0.6 magic number and 8-month payback can be better business than SMB at 0.9 with 22-month payback, because the enterprise revenue lasts longer. The ratio ignores lifetime entirely.
One-off expansion. A price rise or a large renewal can push net new ARR up for a quarter without any change in acquisition efficiency. Smoothing over four quarters is the minimum discipline.
Magic number vs CAC payback
They are two views of the same investment, and they disagree in useful ways.
| Magic number | CAC payback | |
|---|---|---|
| Measures | ARR returned per dollar of S&M, per year | Months until gross profit repays CAC |
| Uses | Deciding whether to increase budget | Deciding whether a unit is viable |
| Ignores | Lifetime, gross margin, cash timing | Blended efficiency across channels |
Use the magic number as the budget dial and CAC payback as the viability floor. If the two disagree — a good magic number with a 30-month payback — the payback is usually right and the magic number is measuring the wrong thing.
Run the numbers yourself
CAC Payback Period Calculator — free, no signup, results computed in your browser.
Open the CAC Payback calculator →Frequently asked questions
What is a good SaaS magic number?
Above 0.75 is generally considered efficient enough to increase sales and marketing spend, and above 1.0 is excellent. Below 0.5 suggests acquisition is not paying back fast enough to justify more investment. Values in between mean fix conversion or pricing before scaling.
Should the magic number use gross or net new ARR?
Net new ARR — new business plus expansion minus contraction minus churn. Using gross new business hides retention problems and makes any business look efficient, which is exactly the failure mode the metric exists to catch.
What lag should I apply to the magic number?
One quarter is the common convention. If your sales cycle is longer than about six months, one quarter credits revenue to the wrong spend and understates efficiency — use a lag closer to your average cycle and keep it consistent.
Is the magic number the same as CAC ratio?
They are close relatives and often confused. The CAC ratio normally compares gross profit from new customers to acquisition cost, while the magic number compares ARR to total S&M spend. Because the magic number uses revenue rather than gross profit, it overstates efficiency for lower-margin businesses.
Related guides
- CAC Payback Period: Formula and BenchmarksCAC payback is CAC divided by monthly gross profit per customer. See the formula, a worked example, benchmarks by segment and the mistakes that shorten it.
- What Is a Good LTV:CAC Ratio?A good LTV:CAC ratio is about 3x for most B2B SaaS. See benchmarks by segment, why the ratio must use gross profit, and the mistakes that inflate it.
- SaaS Metrics Cheat SheetSix core SaaS metrics with their formulas, healthy benchmarks and links to free calculators: MRR, churn, LTV:CAC, CAC payback, quick ratio and runway.
Maintained by The SaaS Metrics Calculators Editorial Team
Maintained by the site’s editors, with every formula unit-tested and every benchmark traced to a published source
Formulas and benchmarks last reviewed October 2026.
This page is educational. Every figure is computed in your browser from the inputs you supply, and nothing is checked against your own accounts — treat results as a planning aid, not as financial advice.