TL;DR
Net magic number is the ratio of net new ARR to sales and marketing spend in the same period — a measure of growth efficiency. Formula: (Net new ARR × 4) ÷ S&M spend. A net magic number ≥ 1.0 is healthy; ≥ 1.5 is best-in-class. Coined by Lars Dalgaard (SuccessFactors) circa 2008.
What is net magic number?
Net magic number is a SaaS growth-efficiency metric that measures how many dollars of net new ARR a company generates for every dollar of sales and marketing spend, annualized. Formula: (Net new ARR in quarter × 4) ÷ Sales & Marketing spend in the same quarter. A net magic number of 1.0 means $1 of net new ARR for every $1 of S&M spend; 1.5 means $1.50 for every $1 spent.
The metric is a variant of the original magic number that uses gross new ARR. Net magic number is more conservative because it subtracts churn and contraction from new ARR before computing the ratio — capturing the full revenue dynamic, not just new acquisition.
Why net magic number matters
Net magic number compresses the full growth story into one number: are we efficiently growing net of churn? A company with strong magic number (gross) but weak net magic number is acquiring efficiently but losing the revenue to churn — investors discount this heavily.
For SaaS at scale, net magic number is one of the headline efficiency metrics in board reporting and fundraising. Bessemer Cloud Index 2025 shows public SaaS companies with net magic number ≥ 1.0 trade at 1.5-2× the multiple of those below 0.5. The mechanism: net magic number captures both acquisition efficiency and retention strength in one metric.
Net magic number formula
Net Magic Number = (Net New ARR in Quarter × 4) / S&M Spend in Quarter Where: - Net New ARR = New ARR + Expansion ARR − Churn ARR − Contraction ARR - S&M Spend = sales + marketing in the same quarter Example: - Net new ARR (Q1): $2.0M - S&M spend (Q1): $1.4M Net Magic Number = (2.0 × 4) / 1.4 = 5.7 Interpretation: every $1 of S&M produces $5.70 of annualized net new ARR. That's exceptional — typical is 0.7-1.5.
Benchmarks
| Net magic number | Interpretation |
|---|---|
| ≥ 1.5 | Best-in-class — strong growth efficiency |
| 1.0 to 1.5 | Healthy — invest more in growth |
| 0.5 to 1.0 | Below par — efficiency issues to fix |
| < 0.5 | Inefficient — fundamental issues with retention or acquisition |
Benchmarks compiled from Bessemer Cloud Index 2025 and SaaS Capital 2025 Diligence Report.
Common mistakes
- Using gross new ARR instead of net. That's the original magic number, not net magic number. Net subtracts churn and contraction.
- Mixing quarter periods. Use Q-over-Q net new ARR and the S&M from the same quarter, not trailing-12-month averages mixed with single-quarter values.
- Including non-S&M growth costs. R&D, G&A, and CS belong in their own efficiency calculations. Net magic number is specifically about S&M efficiency.
Related metrics
Net magic number sits in the SaaS efficiency stack with magic number, SaaS quick ratio, Rule of 40, burn multiple, CAC payback period, CAC, NRR, and ARR growth.
At a glance
- Category
- Sales Forecasting
- Related
- 5 terms
Frequently asked questions
What is net magic number?
Net magic number is the ratio of annualized net new ARR to sales and marketing spend in the same quarter. Formula: (Net new ARR × 4) / S&M spend. A net magic number of 1.5 means $1.50 of annualized net new ARR for every $1 of S&M.
What's the difference between magic number and net magic number?
Magic number uses gross new ARR; net magic number subtracts churn and contraction first. Net is more conservative and captures the full growth dynamic — a company with high magic number but losing revenue to churn will have weak net magic number.
What is a good net magic number?
Best-in-class: ≥ 1.5. Healthy: 1.0-1.5. Below 0.5: inefficient. The benchmark is invariant to scale — same target across stages.
Who invented the magic number?
Lars Dalgaard, founder/CEO of SuccessFactors (now SAP), coined the magic number formula around 2008. Net magic number is a later variant introduced by SaaS investors and operators who wanted to capture churn in the efficiency calculation.
Sources
- Bessemer Venture Partners. Cloud Index 2025, 2025. bvp.com
- SaaS Capital. 2025 Diligence Report, 2025. saas-capital.com
- David Skok. SaaS Metrics 2.0, ForEntrepreneurs. forentrepreneurs.com
Fairview computes net magic number alongside SaaS quick ratio and burn multiple in one efficiency view — see the operating intelligence overview for the broader category.
Definitions and benchmarks reviewed by Siddharth Gangal, Founder, Fairview.
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