How often do you measure your company’s monthly recurring revenue (MRR) and growth? Knowing how well your business is doing is essential, but what metrics should you be tracking?
You have worked diligently to improve your monthly recurring revenue and attract more customers. But are you tracking the right metrics to measure the success of your SaaS company?
SaaS Quick Ratio is a metric that helps founders track their company’s growth efficiency. It provides insight into the health of a company by measuring its monthly recurring revenue compared to its monthly expenses. By understanding this key SaaS metric, founders can make data-backed decisions for more efficient and effective growth strategies.
This guide will go through everything you need to know about SaaS Quick Ratio measures —from its definition to its importance and to how you can use it to monitor and grow your company.
An Introduction to SaaS Quick Ratio
The SaaS quick ratio evaluates a company’s capacity to expand its recurring revenue regardless of the churn experienced.
In basic terms, this ratio compares inflows (expansion and new MRR) versus outflows (contraction and churned MRR) in order to measure net income progress. A high score on SaaS quick ratio is seen as an indication that your business is performing well.
For people familiar with finance metrics, SaaS quick ratio and the traditional financial acid test may seem incredibly similar.
However, they are, in fact, two separate measures. Remember that the Quick Ratio evaluates a business’ capability of fulfilling its short-term debts within the realm of finances.
However, while SaaS quick ratio does not directly reflect a company’s liquidity position, it can still give investors an indication of the associated risks. The metric merely focuses on growth and is aimed at providing insight into a company’s ability to scale up quickly.
As such, both types of quick ratios are essential for potential investors to understand before investing in a business.
As SaaS quickly becomes a trend, investors and industry professionals are increasingly recognizing the importance of quick ratios.
To make an accurate assessment of a company’s growth prospects and the sustainability of its success, many investors now require that companies provide their estimates for this metric. Through analyzing these figures, one can gain insight into how lucrative investing in a particular business will be.
With that being said, compared to other measures, such as Monthly Recurring Revenue (MRR), the quick ratio gives investors a more comprehensive view of an organization’s growth potential, taking into account both positive and negative elements.
How to Calculate SaaS Quick Ratio?
SaaS Quick Ratio calculation requires an understanding of the monthly inflows and outflows of a company’s monthly recurring revenue. To calculate the ratio, you will need to collect monthly data for the following four metrics:
Monthly Recurring Revenue (MRR)
MRR is the monthly income a company receives from its subscription-based services. It’s the monthly income generated by customers who have signed up for monthly, annual, or multi-year contracts, and it’s usually considered to be the most important SaaS metric.
New MRR
New MRR refers to any revenue that was not previously included in the monthly recurring revenue figures. This can include any new subscriptions taken out during the month and any existing customer upgrades or expansions.
Expansion MRR
Expansion MRR measures changes in monthly subscription revenue due to an increase in usage or plan upgrades by existing customers. It’s helpful for tracking customer loyalty, as it indicates whether customers are choosing to increase their monthly commitment to the company.
Churned MRR
Churned MRR measures the monthly recurring revenue lost due to customer cancellations or downgrades in plans. It’s important for SaaS companies to track churned MRR in order to understand which of their services or offerings may not be resonating with customers and why.
Contraction MRR
Contraction MRR is the monthly revenue lost due to canceled plans, downgrades in services or usage, or customers switching to a competitor’s service. Measuring contraction MRR allows SaaS companies to track customer attrition and identify areas where they may be losing market share.
Once you have all four monthly metrics calculated, you can easily calculate your SaaS Quick Ratio using the following formula:
SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)
Let’s take an example of a monthly SaaS quick ratio calculation. If a company has a monthly MRR of $10,000, a new MRR of $2,500, an expansion MRR of $4,500, and churned and contraction MRRs of $1,000 each, the company’s SaaS quick ratio would be:
(2,500 + 4,500) / (1,000 + 1,000) = 3.5
To calculate the Net New MRR, use the formula:
(New + Expansion – contraction + Churn)
In our case, it will be: (7,000 – 2000) = 5,000
What is the Ideal Quick Ratio Benchmark?
The ideal SaaS quick ratio is dependent on the company’s size and industry. Generally, a ratio of 4 or higher is considered good. For early-stage companies, having a monthly SaaS quick ratio of 3-4 can indicate strong growth potential.
For more established companies with more complex customer lifecycles, monthly SaaS quick ratios of 4-5 are generally considered acceptable.
In any case, the monthly SaaS quick ratio should be viewed in the context of other important metrics such as monthly recurring revenue, customer lifetime value, and customer churn rate.
Maintaining a quick ratio of 4 translates to $4 in revenue made for every dollar lost.
During the early phases of a company’s growth, we commonly observe exponential expansion. That trend slows as the organization develops further, and with that comes an augmented likelihood of failure.
This isn’t to say that established businesses should avoid assessing their quick ratio. However, achieving four times the revenue for each unit churn is exceptionally difficult – if not downright impossible – for scaling or mature SaaS companies.
For early-stage companies, a quick ratio of 4 can indicate phenomenal growth; conversely, with scaling or mature companies, this same ratio is indicative of incredible retention rates.
According to conventional standards, a healthy quick ratio is 4. Nevertheless, aiming for an even higher one should be your goal. A lower quick ratio isn’t necessarily indicative of danger; it relies heavily on the size and scope of your business.
While the quick ratio can offer insight into a company’s growth efficiency, it should not be used as an isolated measure. To gain a more accurate perspective on the financial status of a business, evidence from other sources, such as the cost of customer acquisition (CAC), must also be taken into consideration.
For example, CAC could differ drastically compared to industry averages for certain businesses.
When analyzing metrics, it’s important to not rely solely on one indicator. For instance, high MRRs might look less impressive if the marketing budget is equally proportionate.
To counteract this issue, some companies prioritize LTV over one-time purchases; in these instances, a low quick ratio doesn’t matter as much because there’s time to scale it up anyways. Furthermore, no metric exists independently – they must be considered holistically and together when assessing business growth effectiveness.
Is the SaaS Quick Ratio Efficient or Directional?
The SaaS quick ratio is both efficient and directional. It can provide accurate information about monthly revenue growth; however, it does not always predict the long-term potential or sustainability of a company.
Efficiency metrics like the monthly SaaS quick ratio help to identify business performance in terms of monthly growth rate compared to monthly churn rate. Directional metrics measure factors like customer lifetime value (LTV) – which show how customers use their product and what they bring in terms of financials over an extended period of time.
By combining these two types of metrics, founders are able to gain valuable insights into the health and viability of their business as a whole. As more data points are considered, founders will be able to make informed decisions efficiently and measure the influence of their monthly SaaS quick ratio.
With regular monitoring and optimization, founders can use the monthly SaaS quick ratio to ensure that their company remains healthy and profitable for years to come.
Ultimately, the monthly SaaS quick ratio is a powerful tool for understanding growth efficiency in early-stage companies; however, it must be used in concert with other metrics to get an accurate picture of overall business performance.
By considering multiple sources of data together, founders can make better-informed decisions about how best to prioritize resources and stay focused on long-term success.
How to Use SaaS Quick Ratio to Grow your Business?
Monitor monthly trends
Regularly monitor monthly revenue and churn data to identify areas of strength and weakness within your company. The SaaS quick ratio will help you gain an understanding of which strategies are working and which need attention.
Measure customer loyalty
Use the monthly SaaS quick ratio to measure customer loyalty over time and make sure that customers are sticking around for the long haul. This metric can be used as a benchmark for success or failure when launching new products, services, or campaigns.
Analyze monthly performance
Compare monthly MRR to monthly churn rate on a regular basis to assess company performance – both short-term and long-term – against industry standards. With this information, you can make decisions on how best to optimize the monthly SaaS quick ratio and reach your desired goals.
Maximize customer value
Track monthly LTV to measure the returns of your customers over time. This will help you evaluate customer lifetime value, as well as identify potential opportunities for further growth or improvement within the company.
Optimize monthly revenue
Make sure that monthly revenue is maximized by optimizing marketing channels to acquire more customers and retain existing ones. The monthly SaaS quick ratio can provide insight into which efforts are succeeding and highlight areas of a potential optimization in order to increase growth efficiency over time.
Scale your business
Use monthly MRR data to scale your company and make sure that key performance indicators are tracking positive growth. With the monthly SaaS quick ratio, you can stay ahead of the curve by measuring monthly revenue and monthly churn rate against industry standards.
How Do I Fix a Low SaaS Quick Ratio?
Analyze customer behavior
Take a close look at customer usage and retention data to identify potential areas of improvement. Understanding why customers are leaving or not buying is key to fixing a low monthly SaaS quick ratio.
Develop customer loyalty initiatives
Utilize loyalty programs, referral campaigns, and other strategies to retain existing customers and increase monthly MRR.
Optimize pricing plans
If the monthly churn rate is high, consider modifying your company’s pricing plans and product strategy in order to make them more appealing to customers.
Increase visibility & awareness
Make sure that your company’s presence is well-known when it comes to advertising and marketing efforts – especially in terms of targeting potential customers.
Improve customer service
Invest in providing better customer service to ensure that customers remain satisfied and will stay with your company for the long term.
Explore new channels
Consider alternative ways of reaching potential customers, such as via email marketing campaigns and social media platforms.
Implement cost-effective initiatives
Cut costs by implementing cost-saving strategies such as automation and outsourcing certain tasks to reduce monthly expenses without sacrificing quality or customer satisfaction levels.
Analyze monthly performance metrics
Track monthly MRR data against monthly churn rate on a regular basis to assess overall company performance – both short-term and long-term – against industry standards so you can make sound decisions about how best to optimize the monthly SaaS quick ratio.
Take calculated risks
Consider taking risks when necessary in order to boost monthly MRR and optimize the monthly churn rate. For example, try introducing new products or services that could potentially draw more customers in the future.
Evaluate customer lifetime value
Understand how long customers are staying with your company and use monthly LTV data to measure monthly revenue potential over time – this can help you identify areas of improvement within the monthly SaaS quick ratio and reach higher levels of success.
Conclusion
SaaS Quick Ratio is an important metric for measuring monthly recurring revenue and monthly churn rate against industry standards. It can be used to identify potential areas of improvement within a company, as well as to evaluate customer lifetime value and optimize monthly revenue. By understanding how the monthly SaaS quick ratio works and implementing cost-effective initiatives, companies can maximize customer value and scale their business for long-term success.