At the SaaStr Conference last week, venture capitalist Mamoon Hamid revealed an emerging metric that he uses to judge the revenue growth of Software as a Service businesses. SaaS metrics being one of the fastest ways to catch my attention, I was hooked on his Slideshare deck immediately as he walked the audience through a few ways he has used this new metric to judge different companies.
The SaaS Quick Ratio is a measurement of the company’s ability to reliably grow recurring revenue in the face of churn. As a reflection of both the Go To Market group (Marketing & Sales) and the effectiveness of retention efforts and customer success programs, the Quick Ratio allows investors to quickly assess the organization’s potential.
How Is Quick Ratio Used?
In his presentation, Mamoon told four short stories of companies he had both passed on or invested in, based in part on this metric. Below is the slide where he introduced the concept. It shows two companies that were able to rapidly scale revenues while keeping churn very low, against two companies that had established solid customer bases but were no longer growing revenues quickly. The low Quick Ratio of the second set of companies revealed that churn and downgrades were getting the better of them, no matter how much new revenue they could stuff in the top.
When using this formula, it’s critical to examine the result over different time periods. Quick Ratio in the first year of business is irrelevant – Even your discretionary churn should be nearly zero, especially if most customers are signing an annual contract. Comparing your growth year over year will help you see if you’ve really licked that churn problem, or are gaining expansion MRR as quickly as you think you are. This is especially true for young companies, where churn might be much lower early in a company’s growth, when early adopters are in love with the early product and your vision, versus 3-4 years in when quality and quickly delivering success become more important to bigger accounts.
Also consider how to use Quick Ratio at different points in a company’s lifecycle. Early in a company’s lifecycle, it’s easier for them to have low churn and lots of new MRR coming in. This is because most customers should be signing contracts for long periods of time, and it’s much easier for software with built-in third axis pricing to excel on the expansion MRR mark. Setting a higher mark for those companies will encourage them to stay aggressive on growth and customer success.
See Your Quick Ratio in InsightSquared
In fact, we love the Quick Ratio so much that we’ve built it into our business analytics product. The image above is InsightSquared’s real Quick Ratio for 2014 with the MRR numbers redacted – We’re averaged a 4.2 for the year. Share your Quick Ratio with us in this Google form and we’ll publish comparative stats next week.
Other Ways To Use Quick Ratio
Being in the InsightSquared product means you can filter this report live for any time period or against your available CRM fields instead of needing to build out each slice individually in a spreadsheet tool like Excel or Tableau. Try slicing your Quick Ratio report by product line, account size, or other fields to examine each element of your business and pinpoint your strengths and weaknesses in revenue growth.
Quick Ratio is a very effective measurement tool, providing immediate insight into a company’s financial success and trend over time. Organizations that can muster a 4.0 or better ratio are adding revenue at four times the rate it’s leaving at, creating a very compelling growth story and showing clear mastery of its sales process. Learn more by getting our free one-pager on calculating and measuring MRR growth with Quick Ratio.