SaaS Quick Ratio Explained.

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.

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