Magic Number

What is the Magic Number?

As elusive as The Magic Number sounds, it's simply a metric used by investors to assess the efficiency of a company's go-to-market strategy. It does so by comparing the net change in revenue for a given period to marketing and sales spending for that same period.

A Magic Number greater than 1 indicates that the company is generating more revenue from customers than it's spending to acquire them. Like LTV:CAC, it's a proxy for the ROI of marketing and sales efforts that indicates whether a company can scale up acquisition efforts sustainably.

Why use Magic Number rather than LTV:CAC? Public companies typically don't disclose their detailed operating metrics, which are often loaded with assumptions and calculated differently across companies. By contrast, the components of Magic Number are publicly reported, making it easier for investors to compare operating performance across companies without getting into the weeds.

For example, consider a company that generates $5M in ARR but spends $5M to acquire that revenue in a given year. Here, the Magic Number is 1 ($5M/$5M). In this case, the company can confidently scale its marketing efforts as long as it believes that it will be able to retain that $5M in revenue.

On the other hand, if a company generates $2.5M in ARR but spends $5M to acquire it, the Magic Number would be 0.5 ($2.5M/$5M)). In this scenario, the company must consider whether the revenue will likely stick around long enough to justify further sales and marketing investment.

How to calculate the Magic Number

To calculate your Magic Number, you'll need to compare revenue gained over a period to the sales and marketing spend for that period:

$$\text{Magic Number}=\frac{\text{Net New ARR for the period}}{\text{Sales \& Marketing spend for the period}}$$

First, calculate the net change in your company’s Annual Recurring Revenue (ARR) over a specific period—in other words, your Net New ARR. To do this, take the ARR at the end of the period and subtract the ARR at the beginning of the period.

Next, identify the total sales and marketing (S&M) spend (as reported in your P&L statement) during a period that aligns with your buying cycle. The period should reflect how long your marketing efforts take to generate revenue, which can vary across businesses depending on the nature of the product and sales process. At Intercom, for example, we accounted for a ~3-month sales cycle by comparing the net change in revenue for a quarter against the previous quarter's marketing spend.

Now, divide the Net New ARR by the S&M spend for the chosen period to reveal your Magic Number.

Benchmarks

Investors often use these rules of thumb to contextualize the Magic Number:

• Greater than 2: This is considered highly efficient. It suggests that every $1 dollar of S&M spend is converted into $2 of revenue, often interpreted as a signal of strong product-market fit and go-to-market efficiency.
• Around 1: This is the industry standard. It shows that the business is effectively breaking even on its investments in marketing and sales-led acquisition.
• Below 1 or approaching 0.5: This is a cause for concern, as it suggests that the company is expending extra resources to "push" its product into the market. This is a warning sign that the company may need to reassess its go-to-market strategy.

Remember that Magic Number is a high-level investor heuristic and is not necessarily meant to drive operating decisions within a business. For example, the Magic Number doesn't account for nuances such as the quality of acquired customers, engagement, and revenue retention. Always pair it with operating metrics like LTV:CAC and Payback Period when optimizing for go-to-market efficiency.