Definition
A metric often used as a rule of thumb to evaluate a firm’s sales and marketing performance, with the range from 1 to 1.5 set as a good benchmark.
It is calculated dividing the net increase in ARR in a specific quarter by the sales and marketing spend in that quarter.
It is usually estimated that the ideal benchmark for the Magic Number is between 1 and 1.5.
Values below 1 may indicate that your Go-to-Market is not scalable, because you are spending too much acquiring new customers or you have a churn problem.
Values above 1.5 may indicate that you are leaving money on the table and could spend more in sales and marketing to grow faster. Example:
- Last quarter, you spent €900’000 in sales and marketing
- At the end of last quarter, your ARR increased by €1’000’000 compared to the beginning of last quarter (acquiring new customers, upgrading existing customers, churning with some customers)
- Your magic number is €1’000’000 / €900’000 = 1.11