A north star for our Marketing & Sales teams at ShopKeep was our sales efficiency ratio, or the magic number. The SaaS magic number is a common sales finance metric that simplifies the growth efforts into a simple-to-follow marketing and sales health metric. It keeps growth aligned with the health of the business. While not the only metric we monitored to understand marketing and sales impact, it was our canary in the coal mine, easy to follow regardless of department, and guided our growth investment strategy.
Breaking Down the Sales Efficiency Ratio
The formula for this efficiency metric is fairly straightforward.
Sales Efficiency Ratio (Magic Number) = (ARR current quarter - ARR prior quarter) x 4 / Sales & Marketing Spend prior quarter
Using an example, we can visualize how this works in practice.
Let's say the Q2 just wrapped with $1,500,000.00 in ARR. In Q1, you had $1,000,000 in ARR. Fantastic, you have grown your revenue quarter over quarter! Your Net New ARR in Q2 was $500,000.
Net New ARR = Q2Revenue - Q1Revenue
$500,000 = $1,500,000 - $1,000,000
Now let's annualize that Q2 growth of $500,000 by multiplying it by four quarters. This brings you to $2,000,000 Net New ARR (Annualized).
Net New ARR (Annualized) = Net New ARR * Time Periods in a Year
$2,000,000 = $500,000 x 4
Dividing the Net New ARR, $2,000,000, by the Q1 Sales & Marketing Spend (let’s say, $2,250,000), leaves you with a sales efficiency ratio (magic number) of ~0.89.
Sales Efficiency Ratio (Magic Number) = New New ARR (Annualized) / Q1 Marketing & Sales Spend
0.89% = $2,000,000 / $2,250,000
Before I go into how to interpret this number, let me first explain why we use Q1 Sales & Marketing spend instead of Q2. This is because there is an anticipated lag between what you spend and when it converts into revenue. Industry standard is to use a one-quarter lag.
However, this lag should match your actual sales cycle and marketing adstock. If your deals take six months or more to close, you may need to look back two to three quarters.
Alternatively, you may choose a more conservative number that doesn’t account for the lag effect by using the same-quarter method or using the same quarter for spend and revenue.
What is a Good Magic Number?
Now that we have a magic number, you likely want to know: where does it fall on the scale of good to bad? I will answer this in two ways.
First, the generally accepted industry benchmarks:
The standard scale:
| Magic Number | Rating | Interpretation |
|---|---|---|
| ≥ 1.5 | Excellent | For every $1 spent on sales and marketing, you generate >=$1.50 in annualized recurring revenue |
| 1.0 - 1.5 | Great | For every $1 spent on sales and marketing, you generate $1.00 - $1.50 in annualized recurring revenue |
| 0.80 - 1.0 | Fair | For every $1 spent on sales and marketing, you generate $0.80 - $1.00 in annualized recurring revenue |
| < 0.80 | Poor | For every $1 spent on sales and marketing, you generate <$0.80 in annualized recurring revenue, spending more than you're creating in annual revenue |
Second, the context matters:
While you may find yourself feeling tense when you first calculate your ratio and evaluate it against the industry benchmarks, the magic number alone doesn’t tell the whole story. To truly understand what your magic number means, you need to consider additional metrics:
- CAC (Customer Acquisition Cost)
- CAC Payback period
- LTV (Customer Lifetime Value)
- LTV:CAC Ratio
- Churn Rate
- Net MRR and ARR growth
- Burn rate
- Sales cycle length
- Channel-based efficiency
Consider this example:
A magic number of 0.6 looks poor and concerning at first glance, but can be deceptive if paired with a 6:1 LTV:CAC with minimal churn and less than a year payback period. This scenario can be interpreted as a business investing heavily upfront to acquire high-value customers who have lifetime values that far exceed the initial acquisition cost. However, the payback materializes over a longer timeframe than the quarterly magic snapshot interprets it.
Think of the magic number as a starting point for investigation. These supporting metrics complete the picture of your sales and marketing health. By analyzing them together, you can identify specific areas for improvement and make adjustments to your growth strategy, as well as refine how you calculate the magic number to better fit your business model.
Your North Star for Sales & Marketing Growth
While commonly adopted by mature organizations, the magic number is simple enough to be used regardless of where you fall within the business cycle. It provides the clearest high-level health indicator of your growth efforts, serving as the north star that sparks conversations leading to healthy, sustainable growth. Used alongside supporting metrics like CAC payback and LTV:CAC, it gives you both the insights to optimize your strategy and confidence to make bold decisions. Dig into what it reveals about your business today, and let it guide you to more efficient growth.