Quick Ratio = New MRR + Expansion MRR / Churned MRR
The Quick Ratio is a metric, or key performance indicator ( kpi ), you can use to gain insight into the efficiencies of growth in your SaaS company, because it takes into account both your overall growth and your churn (the number of canceled subscriptions). So, it’s really just a ratio of revenue gain-to-loss, but has a snapshot effect to let you know if you’re doing enough in both your marketing and retention efforts to build your subscription business.
Of course, the goal is to achieve significant growth while retaining all your customers. How successful you are at achieving high Monthly Recurring Revenue (MRR) with low churn will offer insight to you, your investors, and other stakeholders regarding the health of your company as well as future forecasts.
As a SaaS company, the Quick Ratio allows you to track your results and also use those analytics to gain insights that will help you improve your growth and churn factors. To understand your insights, though, you must also understand that results based on longer term customers are more useful (you just don’t have enough to gather much useful data if/when you’re just starting out). Another best practice is to use your analytics as a strategic roadmap. Really dig into the numbers to find out which strategies are delivering the best results as far as customer acquisition is concerned.
You can also segment your analysis to root out the elements that represent competitive advantages. Perhaps your campaign for a particular payment plan or structure has shown an unexpectedly high response rate. Or it could be that a targeted promo to a vertical is amazingly successful. On the flip side, those marketing efforts may have bombed out, with abysmal results. Either way, you need to determine what went right or wrong, and then use that knowledge to continue to improve your results from every campaign.
The benchmark you’re looking for is a ratio, based on your Monthly Recurring Revenue (MRR) and the churn rate, so the Quick Ratio of 4 is considered a healthy indicator or KPI.
The Quick Ratio really will be more of a helpful indicator if your SaaS business is not in its first year. The challenge for new startups is that your customers are kicking the tires for your subscription services, but they are also committed, so it’s difficult to draw firm conclusions from your acquisition and churn. You can and should still gather and analyze the numbers, but they are more limited in scope. Continue to build upon your successes, and look for opportunities to improve. (But be realistic about what your metrics are able to really tell you.)
Despite the challenges, referrals are essential to the evolution of your subscription company whether you’re just starting out or you’re more established. When you are just starting out, you can build upon and deepen your relationships with your new customers by asking them for referrals, which makes them feel important and valued. As you grow your SaaS company, continue to connect with your loyal customers by tapping into your company’s most important asset: referrals.