The other day I was looking at our growth dashboards of Blue
I saw an interesting metric listed that I had never seen before, and this was the SaaS Quick Ratio.
It turns out that for SaaS companies, this is a really great measurement of growth efficiency. It answers the question of how reliably a SaaS company can grow its revenue given the current revenue churn rate that it is experiencing.
In a nutshell: How efficient is your growth?
The formula is as follows:
Quick Ratio = (New MRR + Expansion MRR) / (Contraction MRR + Churned MRR)
And let’s also define all these terms:
- MRR — Monthly Recurring Revenue
- New MRR — MRR that is coming from new customers
- Expansion MRR — MRR from existing customers (i.e. upgrades)
- Contraction MRR — MRR that has been lost from existing customers that month (i.e. downgrades)
- Churned MRR — MRR that has been lost because customers have cancelled their accounts.
ProfitWell gives a really good example of how a SaaS Quick Ratio can help differentiate two companies that have the same $ value in growth in a given month:
Let’s say two companies each grow by $25,000 in a given month. Company A can have $50K in New and Upgrades, while losing 25k to Downgrades and Churn. They have a quick ratio of 2.
Company B can have only 30k in New and Upgrades, but lose $5k in Downgrades and Churn. They have a quick ratio of 6.
Company B’s growth rate is much more efficient in the long run.