Is the Magic Number a bad party trick?

Before we make the numbers dance, make sure to check out this week’s Run the Number’s Podcast with Sinohe Terrero, the CFO of Envoy.

We talk about why CFOs should actually say “yes” more, building world class BI teams within finance orgs, and EQ vs IQ as a finance leader.

You listen on: Spotify, Apple and YouTube

Also, Sinohe once met Fat Joe, who does the intro to our podcast. So there’s that.

The magic number is a colonoscopy of sorts on the health of your company’s ARR (annual recurring revenue) growth. It’s a SaaS performance metric that assesses overall ARR efficiency - meaning not just new ARR growth (which CAC Payback Period and Blended CAC Ratio take care of).

The “Art” of the Magic Number is that it bundles up everything that goes into Total ARR - New, Expansion, Churn, Shrink - for better or worse.

Take your Current Quarter’s ending ARR at the close of the period and subtract the Previous Quarter’s ending total. What you now have is your Net Change in ARR. This will have the effect (affect?) of baking in new customer sales, existing customer expansion, existing customer renewal, existing customer churn, and existing customer shrink.

Then divide your Net Change in ARR by whatever you spent on Sales and Marketing costs in the Previous Quarter. We lag the cost by one quarter to assume new deals take one quarter to materialize after putting money out into the universe.

Your Magic Number will be penalized if:

Bigger is better when it comes to the magic number. You want it to go up over time, demonstrating leverage on each S&M dollar you put into the world, and proving that your market share is going up.