What is the SaaS Quick Ratio?
The SaaS Quick Ratio ensures a company’s recurring revenue growth is balanced with enough customer retention. The metric is intended to measure the efficiency at which a SaaS company is growing while reducing the risk that high growth rates are masking unsustainable churn rates.
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How to Calculate the SaaS Quick Ratio
SaaS companies are unique in that they are not only striving for revenue growth – but also attempting to secure long-term recurring revenue sources.
Industry-specific KPIs such as the SaaS magic number can confirm if a company’s sales and marketing strategy is operating efficiently, whereas the rule of 40 can make sure the trade-off between growth and profitability is kept at reasonable levels.
The SaaS quick ratio, however, is used to demonstrate whether a company’s revenue growth is supported by sufficient customer retention, i.e. the positive revenue growth is balanced with minimal customer churn and downgrades.
SaaS Quick Ratio Formula
Calculating the SaaS quick ratio is a relatively straightforward process. The first step is to add new monthly recurring revenue (MRR) to expansion MRR – these represent MRR growth (“inflows”).
The resulting figure is then divided by the sum of the churned MRR and contraction MRR, which are indicative of lost MRR (“outflows”).
SaaS Quick Ratio Formula
- SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)
The list below clarifies the meaning of each item in the formula:
- New MRR → The MRR from acquiring new customers
- Expansion MRR → The MRR derived from existing customers (e.g. upgrades to higher priced tier)
- Churned MRR → The lost MRR from customers that canceled and left
- Contraction MRR → The lost MRR from existing customers (e.g. downgrade to lower priced tier)
How to Interpret the SaaS Quick Ratio
Efficiency KPI Measure – Industry Benchmark
As a general rule, the higher the SaaS quick ratio, the more efficient the growth of the company is.
The quality of growth can dictate the long-term viability of a SaaS company, i.e. not all revenue is created equal.
A SaaS quick ratio of 4.0 is the most frequently cited target benchmark that companies aim to reach (or surpass).
If a SaaS company’s quick ratio is 4.0, that implies that for every $4.00 in revenue generated, only $1.00 is lost from churn or contraction.
Specifically, companies exhibiting strong revenue growth and are acquiring new customers at a rapid pace can easily become susceptible to neglecting churn and looking past internal issues.
In order for a company’s growth to someday reach a sustainable state, its customer churn must be managed and weaknesses in its business model must be addressed.
SaaS Quick Ratio Calculator – Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
SaaS Quick Ratio Example Calculation
Suppose a SaaS company generated $400k in new MRR in Q-1, along with $200k in expansion MRR from successful upselling and cross-selling efforts.
- New MRR = $400,000
- Expansion MRR = $200,000
For the quarter, the company brought in $600k in MRR growth (“inflows”).
- MRR Growth = $400,000 + $200,000 = $600,000
In contrast, the company incurred $100k in churned MRR from lost customers and $50k in contraction MRR.
- Churned MRR = $100,000
- Contraction MRR = $50,000
The total lost MRR (“outflow”) is $150k at the end of the quarter.
- Lost MRR = $100,000 + $50,000 = $150,000
With those two inputs prepared, we’re now ready to calculate the SaaS quick ratio of our company, which comes out to 4.
- SaaS Quick Ratio = $600,000 / $150,000 = 4.0