The magic number annualizes a quarter of new ARR and divides it by the prior quarter's sales and marketing spend. The gross version uses new ARR before any losses. The net version subtracts churn and contraction first. Both use the same denominator, so the spread between them is a direct read on retention.
The two formulas
``` Gross Magic Number = (New ARR in Q x 4) / S&M Spend in Q-1 Net Magic Number = (Net New ARR in Q x 4) / S&M Spend in Q-1 ```
Net new ARR equals new plus expansion, less churned and contracted ARR. The one-quarter lag on spend reflects that money spent this quarter produces bookings later, which matters more as cycle length grows.Worked example
A company books $3.0M of new and expansion ARR in Q3, loses $1.2M to churn and contraction, and spent $6.0M on sales and marketing in Q2.
| Metric | Calculation | Result |
|---|---|---|
| Gross magic number | ($3.0M x 4) / $6.0M | 2.00 |
| Net magic number | ($1.8M x 4) / $6.0M | 1.20 |
When each one answers the question
Use gross to judge the sales and marketing motion in isolation. It isolates whether campaigns, territories, and rep capacity are producing bookings for the money, without retention noise from cohorts sold years ago.
Use net to judge whether the business compounds. Net is the figure that connects to net revenue retention and to valuation. A board that approves headcount on gross efficiency and then asks why ARR is flat has usually been reading the wrong one of the two.
Where the calculation goes wrong
Mixing periods. Lagging spend by a quarter on one version and not the other makes the spread meaningless. Apply the same lag to both. Counting reactivation as new. A returning logo booked as new ARR inflates gross while the earlier churn already suppressed a prior period. Track it in its own line. Annualizing a seasonal quarter. Multiplying by four assumes the quarter repeats. ORM sees seasonality where Q2 and Q4 run stronger than Q1 and Q3, and where the third month of a quarter outperforms the first two. A magic number built on a strong Q4 overstates the annual run rate.Read both numbers as a pair, and read them next to forecast accuracy rather than on their own. Efficiency measured on bookings you were never going to keep is arithmetic, not a signal.
Frequently Asked Questions
Which magic number should you report to investors?
Report the net magic number as the headline and show gross alongside it. Investors underwrite retained revenue, so net is the figure that maps to the growth they are buying. Gross without net can look strong at a company that is acquiring quickly and losing almost as fast.
What does a large gap between gross and net magic number mean?
The gap is churn and contraction expressed as a share of acquisition. A wide gap means the GTM engine works and the retention side does not, so adding sales headcount will raise cost faster than it raises retained ARR. Fix the leak before funding more acquisition.
Should expansion ARR count in the magic number?
Include expansion in the net calculation if expansion is sold by the same quota-carrying team whose cost sits in the denominator. If a separate customer success org owns expansion at a separate cost line, count it separately or you credit the sales team for revenue it did not generate.
Put these metrics to work
ORM builds custom revenue forecast models that turn concepts like gross magic number vs net magic number into prescriptive action for your team.
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