Test 07
The Magic Number Decomposition
Your magic number is soft. Is that a spend problem or a capacity problem?
What everyone does instead
Magic number divides net new ARR by prior-period sales and marketing spend. It is a useful efficiency ratio and a useless diagnostic, because the denominator is a lump. A soft number reads as either underspending or poor conversion, and the usual response is to change the spend. Nobody decomposes the denominator into the hours it bought and asks which of those hours produced anything.
What to compute
- Net new ARR per selling hour, and per productive selling hour after removing hours consumed by process.
- Trapped hours in three categories: deals held past the point a model flagged them, slip re-work, and pursuit of deals that closed and did not last.
- The magic number implied by recovering a stated share of those hours, with spend held constant.
The arithmetic
Net new ARR per quarter $2,800,000 Sales and marketing spend per quarter $5,100,000 Magic number as reported $2,800,000 / $5,100,000 0.55 Selling hours per quarter 12,375 Trapped by the forecast process, 12.1% 1,499 Productive hours 10,876 ARR per selling hour $2,800,000 / 12,375 $226 ARR per productive hour $2,800,000 / 10,876 $257 Recover 45% of trapped hours 675 675 x $257 $173,000 Restated net new ARR $2,973,000 $2,973,000 / $5,100,000 0.58
Worked example
A worked example: $2.8M net new ARR on $5.1M quarterly spend is a magic number of 0.55. With 12.1% of selling hours trapped by the forecast process, recovering 45% of them moves the number to 0.58, no additional spend, headcount, or change to pricing or product.
Illustrative figures. The relationship shown is the hypothesis the test exists to check.
What changes if this is true
A soft magic number normally starts a debate about whether to spend more or spend differently. This changes the first question to how much of the current spend is reaching a customer. If a meaningful share of selling hours is consumed by process, the efficiency was already there.
What you need and how long
Forecast snapshots and closed outcomes
- Where it lives
- CRM
- Days
- 1
Sales and marketing spend by period
- Where it lives
- Finance
- Days
- 0.5
Trapped-hour analysis and restatement
- Where it lives
- Analysis
- Days
- 2
Every test runs on the same two extracts, forecast history from the CRM and contract history from billing, pulled by a RevOps analyst in about an hour. Everything is measured against your own outcomes: no benchmark, no composite, no assumed uplift.