The magic number formula
The SaaS magic number is the quarter-over-quarter change in revenue, multiplied by four, divided by the previous quarter's sales and marketing spend. Scale Venture Partners treats above 1x as compelling and below 0.5x as not working. The common mistake is dividing by this quarter's spend instead of last quarter's, which breaks the formula.
new revenue = this quarter − last quarter magic number = (new revenue × 4) / last quarter's S&M spend payback (months) = 12 / magic number
The metric asks one question: when this company puts money into sales and marketing, does recurring revenue come back out? A magic number of 1 means a quarter's spend recreates itself as annualized revenue within a year.
Scale Venture Partners named it in Magic Number Math (2010): the change in subscription revenue between two quarters, annualized, over the earlier quarter's sales and marketing spend, with above 1x compelling and below 0.5x not working. The full definition with the worked example lives at SaaS magic number in the glossary.
Two honest caveats. The formula runs on revenue, so a company at 60 percent gross margin recovers its money materially slower than the ratio implies, which is why the calculator shows payback in gross-profit months as well. And it judges only the go-to-market: a company can post a strong magic number while burning heavily everywhere else, which is what the burn multiple catches, and what the Rule of 40 summarizes for the whole company at once.