Magic Number
Why it matters
Growth alone does not prove spend is working. Revenue can climb because money is being poured in at a rate that will not last. The magic number shows how efficient the spend was. As a rule of thumb used by investors, a figure below about 0.5 suggests the go-to-market engine needs fixing before more money goes in, and a figure near 0.75 or above suggests the engine is worth feeding. Treat the thresholds as a guide, not a verdict.
How to apply it
- Calculate it every quarter and watch the trend, not a single reading.
- Use the prior quarter's spend, because sales and marketing effort takes time to turn into revenue.
- If the number falls, find out which channel or segment stopped paying back before cutting the budget across the board.
- Remember that net revenue change includes cancellations, so a churn problem pulls the number down even when new sales are healthy.
- Read it next to CAC payback period and the LTV to CAC ratio, which look at the same spend from other angles.
What it is
The magic number tells you how much new recurring revenue each pound of sales and marketing spend produced. The common version takes this quarter's revenue, subtracts last quarter's, multiplies the difference by four to turn it into an annual figure, and divides by last quarter's sales and marketing spend. A variant uses net new annual recurring revenue in place of the revenue change. Pick one version and keep it.
A software company grows quarterly revenue from £500,000 to £560,000. The £60,000 increase, times four, is £240,000. If the previous quarter's sales and marketing spend was £300,000, the magic number is 0.8.
Common mistakes
Using it for a business without recurring revenue, where it means little. Reading one lumpy quarter, such as a single large contract, as a trend. Leaving sales salaries out of the spend figure.
