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Breaking into GTM

What is the magic number and should I care about it at my stage?

The magic number is how many dollars of annualised new revenue you generated for each dollar of sales and marketing you spent in the previous period. It was coined at Scale Venture Partners in 2005 when Rory O'Driscoll saw Omniture producing more than two dollars of first year revenue per dollar of go to market spend and said it was magic. The long run median for SaaS sits around 0.7, roughly one is good, and above one is usually a signal to spend more. Should you care yet? Not much below a million dollars ARR, because the numbers are too small and lumpy for the ratio to mean anything. Track it once you have a repeatable motion and a few quarters of comparable spend.

Go deeper

4 resources, 4 link-checked.

📄 Article
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The magic number was invented at Scale, so this is the primary source, including the Omniture story behind the name and how the benchmark has drifted since 2005.

SaaS Metrics: A History of the Magic Number

From Scale Venture Partners by Dale Chang 8 min read

  • The magic number measures first-year revenue generated per dollar of sales and marketing spend.
  • It came from Scale's Rory O'Driscoll around 2005, when Omniture returned more than 2 dollars of first-year revenue per dollar of go-to-market spend.
  • The long-term private SaaS median is about 0.7x, which Scale treats as a healthy baseline rather than a pass mark.
Open scalevp.com →
📄 Article
✓ Link checked Free Intermediate

Separates gross sales efficiency, net sales efficiency and magic number, which most people use interchangeably and should not. Also sets the 0.7 long run median you will be judged against.

SaaS Metrics: A Primer on SaaS Sales Efficiency

From Scale Venture Partners by Dale Chang 10 min read

  • Gross sales efficiency is gross new ARR divided by total sales and marketing expense; net sales efficiency uses net new ARR instead.
  • The magic number version is the change in GAAP revenue between periods times 4, divided by sales and marketing expense.
  • Median sales efficiency in the Scale Studio dataset is around 0.7, and going above 1 is rare.
Open scalevp.com →
📄 Article
✓ Link checked Free Intermediate

The formula reference: CAC, months to recover CAC, magic number, net MRR churn and NRR, each with the calculation spelled out. Bookmark it and stop arguing about arithmetic.

SaaS Metrics 2.0: Detailed Definitions

From For Entrepreneurs by David Skok 20 min read

  • Customer lifetime is 1 divided by churn rate, so 3 percent monthly churn means a 33 month lifetime.
  • LTV is ARPA times gross margin percent, divided by monthly churn rate.
  • Months to recover CAC is CAC divided by (ARPA times gross margin percent), and should sit under 12 months, up to 20 for enterprise.
  • Net MRR churn is (churned MRR minus expansion MRR) divided by beginning MRR, and going negative is the goal.
Open forentrepreneurs.com →

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The same ground, at another level

How forecasting and gtm metrics reads from a different seat.

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Terms in this answer

MRR

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