Magic Number Formula: Exact SaaS Calculation Rules

Magic number measures how efficiently prior-period sales and marketing spend translates into annualized recurring revenue creation in the next quarter.

• NetNewARR: strict annualized recurring revenue created in the current quarter after subtracting churn and contraction.
• S&MExpense(previous quarter): sales and marketing expense from the immediately preceding quarter under a stable accounting policy.

The strict ARR numerator should be based on net new recurring revenue, not gross new bookings:

If churn and contraction are omitted, magic number overstates GTM efficiency.

• Exclude one-time revenue and services from ARR creation.
• Use prior-quarter S&M expense, not current-quarter expense, in the standard formula.
• Do not mix cash collections with GAAP/management expense policy unless labeled explicitly.

• Below 0.5: weak GTM efficiency.
• 0.5 to 0.75: improving but not strong.
• 0.75 to 1.0: healthy for many SaaS businesses.
• Above 1.0: strong efficiency, assuming the numerator is strict.

• Near-zero prior S&M: tiny denominators make the ratio unstable.
• Large enterprise deal timing: one quarter can overstate sustainable efficiency.
• Heavy churn quarter: net new ARR can collapse even when gross new ARR looks good.

Suppose prior-quarter S&M expense is 400,000 and the current quarter produces NetNewMRR = 30,000.

A magic number of 0.9 indicates healthy GTM efficiency under many SaaS operating norms.

Magic number is a GTM-efficiency ratio built on prior-quarter S&M spend and strict net new ARR. If gross ARR is substituted for net ARR, the result is not strict magic number.

Core metric pages:

• MRR
• MRR vs ARR
• ARR
• Net New MRR