Why the prior-quarter lag matters
The classic formulation uses prior-quarter S&M, not current. The reason: deals don't close in the quarter the spend happens. A campaign run in Q1 typically produces pipeline that closes in Q2. Using same-quarter S&M understates the lag and produces artificially high numbers for fast-spending companies.
How to read the result
- Under 0.5×: the GTM engine is underperforming. Either acquisition is broken or churn is dragging net new ARR down.
- 0.5× – 0.75×: below the investable bar. Find the constraint (top-of-funnel? close rate? retention?) and fix it.
- 0.75× – 1.0×: below-bar but improving — typical for an earlier-stage company finding its motion.
- 1.0× – 1.5×: investable. Sales & marketing dollars are producing more than 1:1 in annualized ARR.
- Above 1.5×: best-in-class. Usually means a category-leader pulling in inbound demand at low marginal cost.
Magic number vs burn multiple — when to use which
Magic number isolates GTM efficiency. Burn multiple captures total business efficiency (R&D, G&A, plus GTM). Use magic number when the question is "is sales and marketing working?" Use burn multiple when the question is "is the whole business working?"
Common mistakes
Same-quarter S&M. Inflates the result for companies in growth mode. Stick to prior-quarter as the denominator.
Counting marketing-influenced revenue. The numerator should be net new ARR booked — actual revenue — not pipeline created or marketing-attributed.
Excluding sales tooling and ops. Include CRM, SDR tooling, sales ops headcount, and BDR support. They're part of producing the ARR.