cust.co / Concepts / Rule of 40 vs Magic Number

Rule of 40 vs SaaS Magic Number - when each applies

Both are SaaS health checks. Rule of 40 looks at growth + profitability; Magic Number looks at sales efficiency. Different audiences, different decisions.

Rule of 40

Growth rate + FCF margin should sum to ≥40%.

ARR Growth Rate (%) + FCF Margin (%)

Wall Street's preferred SaaS health filter.

Full definition →

Magic Number

Annualized net new ARR per dollar of S&M spend.

4 × Net New ARR (qtr) / S&M Spend (qtr)

>1.0 → invest more. <0.5 → cut S&M.

Full definition →

When each matters

Rule of 40 is for the board / investors - it asks 'is this whole company healthy?'. Magic Number is for the CRO - it asks 'is the sales engine efficient?'. A company can pass Rule of 40 (growing fast) but have a bad Magic Number (overspending on S&M). The reverse is rare.

Related concepts

Glossary terms that show up in this comparison.

Rule of 40 →Magic Number →Customer Acquisition Cost (CAC) →

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Benchmark your retention

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