2 minute read / Nov 3, 2015 /
What is the Optimal Quick Ratio for Your SaaS Startup?
What is the optimal quick ratio for your SaaS startup? Is it 4?
Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)
The quick ratio measures a SaaS company’s growth efficiency. The formula for quick ratio is above. It’s the new monthly recurring revenue (MRR) in a month plus the expansion MRR divided by the sum of the churned MRR and the contraction MRR. Churned MRR are customers who have not renewed contracts and contractions are those customers who have decreased their payments.
Larger quick ratios are better. A startup without churn will achieve an infinite quick ratio. But using startup benchmark data, what should be the right quick ratio?
We can re-form the quick ratio to be stated this way:
Quick Ratio = (Monthly Growth Rate + Churn Rate) / Churn Rate
And if we aim to have a quick ratio of 4, this implies that a SaaS startup growing at 15% can sustain a monthly customer contraction & churn rate of 5.0% per month, or 46% annually. At 20% monthly growth rate, a company can record 6.7% monthly churn and still attain a quick ratio of 4.
| Monthly Growth Rate | 10% | 15% | 20% |
|---|---|---|---|
| Monthly Churn Possible | 3.3% | 5.0% | 6.7% |
| Annual Revenue Loss | 33% | 46% | 56% |
This churn number is unsustainably high, and we know from previous churn analyses that high churn implies lower growth rates and dramatically less efficient growth.
According to Clement Vouillon’s great compendium of SaaS churn rate studies, the Totango survey shows 73% of SaaS companies have an annualized churn of 0-15%. So looking at the Quick Ratios using this 7% and 15% annually, we see the quick ratios are much larger.
| Monthly Growth Rate /Monthly Churn | 10% | 15% | 20% |
|---|---|---|---|
| 0.6% | 17.7 | 26.0 | 34.3 |
| 1.2% | 8.7 | 12.5 | 16.4 |
In fact, they range from 8.7 to 34.3. As Clement notes in his analysis, these churn rates are probably more indicative of mid-market price points ($15k+ ACVs) and SaaS startups serving smaller customers will observe higher churn rates.
Greater Quick Ratios are always better. It’s important to be mindful of the underlying churn rates in a business when evaluating your company based on its Quick Ratio. High growth rates can mask high dollar churn rates.
Thanks to Mamoon Hamid, the creator of the Quick Ratio, for helping me with this analysis.