SaaS Magic Number Calculator

How it is calculated

The tool compares one quarter's revenue growth with what was spent to produce it. net new ARR = (rev_current − rev_prior) × 4, because quarterly revenue is multiplied by 4 to give a yearly run rate. magic number = net new ARR ÷ sm_prior, where sm_prior is the sales and marketing spend of the prior quarter, since spend takes time to show up as revenue. A second figure is the payback in months, 12 ÷ magic number. If the magic number is zero or negative, the payback is shown as a dash. The revenue fields are recurring revenue for a full quarter, not monthly figures. The payback uses revenue, not gross margin, so it is shorter than a margin-based payback. Spend must be above zero.

Common mistakes

• Using this quarter's spend instead of last quarter's. The formula pairs the revenue gain with the earlier spend; using current spend for a fast-growing company lowers the number.
• Entering monthly revenue in the quarterly fields. Both revenue fields should be a quarter's recurring revenue, or the ×4 annualization gives the wrong scale.
• Including one-time revenue such as setup fees or services. Only recurring revenue should be in the two revenue fields, or the growth looks inflated.
• Swapping the two quarters. If the earlier quarter is entered as current, growth becomes negative and the tool shows a negative magic number and a dash for payback.
• Leaving out part of the sales and marketing cost. Salaries, commissions and tools count, not just advertising, so a figure built from ad spend alone looks better than it should.