Unit economics

Magic number

Net new ARR in a quarter divided by the previous quarter sales and marketing spend. A sales-efficiency measure.

The magic number measures sales efficiency with a one-quarter lag:

Magic number = (net new ARR this quarter) ÷ (sales and marketing spend last quarter)

The lag exists because spend does not convert instantly. Above 0.75 is usually read as a signal to invest more; below 0.5 says the current motion is not converting spend into revenue efficiently.

Because it uses net new ARR, churn is already netted out, which makes it stricter than CAC: a business can have attractive CAC and a poor magic number if it is losing revenue as fast as the new team can add it.

CAC (Customer Acquisition Cost) Total sales and marketing spend in a period divided by the customers acquired in it.
CAC payback period How many months of gross profit from a new customer it takes to earn back what you spent acquiring them.
ARR (Annual Recurring Revenue) The annualised value of your recurring subscriptions, normally MRR multiplied by twelve, used as the headline size of a subscription business.

Magic number

Related terms