Every business works hard to acquire new customers. However, things may not work out as expected. Maintaining steady revenue in the face of customer churn and downgrades can be more challenging. In other words, this situation means you are facing a SaaS Quick Ratio.
How Significant is the SaaS Quick Ratio?
Although initially it may seem unimportant, SaaS Quick Ratio is helpful to measure revenue growth during the early stages of your business. It also gives you valuable insights and assess business aspects, such as:
- Your organizational ability to increase recurring revenue despite customer churn. The ratio compares two aspects- Your new and expanding Monthly Revenue Rate (MRR) with revenue losses caused by churned MRR and contraction MRR. This comparison is used to calculate Net Revenue Growth.
- The efficiency of your growth rate while reducing the risk of an unsustainable churn rate.
Essentially, the SaaS Quick ratio is designed to ensure that high growth rates do not hide any issues with customer retention. When a company records a low quick ratio, it indicates that it is having difficulties maintaining its revenue growth.
Therefore, any additional revenue generated is adequate enough only to make up for the revenue loss incurred due to customer churn and downgrading. It does not help in driving the company forward.
If you are a SaaS business, it is vital to prioritize quick ratio because it signifies:
- The cash flow in and out of your business.
- The incoming revenue for the revenue lost to customer churn.
- Whether your MRR and ARR are increasing or decreasing.
- Where your income is heading.
You can reverse the SaaS quick ratio formula to determine your worst-case churn. If your current churn rate is higher than what you calculate, it's essential to work on reducing churn before focusing on increasing MRR or ARR.
What is the Formula to Calculate the SaaS Quick Ratio?
SaaS Quick Ratio is measured every month. The calculations are based on bookings and customer churn inputs.
Customer churn is a vital aspect of SaaS businesses. Since the primary focus is to maintain a low churn, any metric that provides insight into churn is valuable, and the SaaS Quick Ratio is one of them.
The formula used to calculate this metric is simple:
New MRR (or ARR) + Expansion MRR (ARR) / Downgrade MRR (ARR) + Churn MRR (ARR) = SaaS Quick Ratio
Let’s take a look at what the calculated SaaS Quick Ratio means for your business:
- If the SaaS Quick Ratio is less than 1, it spells trouble for your business. Sustaining a SaaS business with a quick ratio this low will be difficult. Hence, it would help if you fixed your churn as early as possible.
- If 1 < Quick Ratio < 4, it indicates your SaaS company’s growth. However, it is slow and inefficient.
- If Quick Ratio > 4, it indicates a satisfactory growth rate, indicating that your company is adding $4
- You’re growing at a reasonable rate and doing it efficiently. This means a SaaS company needs to generate four times its lost revenue.
How to Generate a High SaaS Quick Ratio?
There is no hard and fast rule to determine the best SaaS quick ratio. However, the higher the number, the better it is for your business. For SaaS companies, the quality of growth is crucial for long-term success. Not all revenue is created equal, so it's important to consider this when evaluating a company's viability.
To ensure a high SaaS quick ratio, you should:
- Strengthen your customer acquisition strategies by prioritizing customer retention and reducing churn.
- Monitor your quick ratio. Look out for increased churn and focus on retention. Prioritize product customer experience and stickiness.
- Understand the components of your formula and choose the best ways to enhance it.
Conclusion
Efficiency is the cornerstone of every SaaS company. By calculating your Quick Ratio, you can build a strong business, reduce customer churn, acquire more customers, and achieve sustainable growth.
