SaaS entrepreneurs are at an increased risk of being overly distracted by vanity metrics. Early stage investors want to see top line “hockey stick charts” and a host of metrics that may really only be loosely correlated to sound financial performance. As a result, early stage SaaS entrepreneurs are often forced into distraction in order to keep pace with the vanity metrics of their competitors if they want to continue to achieve follow on funding.
An often overlooked metric by early stage investors is the SaaS Quick Ratio. The Quick Ratio is the measure of the growth efficiency of a company. Another way to think of it is as a health measure of company growth.
The quick ratio is calculated by dividing new MRR by lost MRR.
(New MRR + Expansion MRR) / (Churn MRR + Reduction MRR)
The higher the ratio the better. Early stage companies are generally considered to be fairly healthy with a Quick Ratio of 4 or higher, but there is no hard and fast rule on this.
Why is this ratio so important? Without factoring in the Quick Ratio you are more likely to be obsessed at adding Net New MRR at all cost. Fuelling the growth of a business with a low SaaS Quick Ratio is like filling up a gas tank that has holes in it. A company with a Quick Ratio of 2 is essentially losing half it’s new MRR every month. Considering it can easily take 12+ months to recover new customer acquisition costs this business requires much more cash to grow than a comparable business with a higher Quick Ratio.
How do you fix a low Quick Ratio? If your company has a strong MRR growth rate but a low SaaS Quick Ratio you need to prioritize customer retention. Leverage marketing support throughout the user experience to continue to engage and educate customers and when your company experiences churn address the underlying issues.
If you have a good Quick Ratio – make sure you educate your investors about it. It will come in handy when you are competing for follow on funding.
