SaaS Quick Ratio
The Quick Ratio of a SaaS company is the measurement of its growth efficiency. The higher the ratio, the healthier the growth is at your company.
Quick Ratio = (New MRR + Expansion MRR) / (Contraction MRR + Churned MRR)
The idea is that MRR growth, or the growth rate of a company, is not enough to gauge the health of the company. The makeup of that growth is equally important.
- New MRR — MRR from new customers
- Expansion MRR — MRR from existing customers (upgrades)
- Contraction MRR — Lost MRR from existing customers (downgrades)
- Churned MRR — Lost MRR from canceled customers
Say a company has $10,000 in MRR growth. That growth could be made up of any combination of those types of MRR and the Quick Ratio shows you the difference in “growth efficiency” between them.
We can see it in practice when looking at a few different scenarios.
$24K (New + Expansion) / $4K (Contraction + Churn) = Quick Ratio of 6
$30K (New + Expansion) / $10,000 (Contraction + Churn) = Quick Ratio of 3
$40K (New + Expansion) / $20K (Contraction + Churn) = Quick Ratio of 2
All four scenarios result in $20K of Net New MRR, but Example 1 is vastly more efficient at growth as the company is adding the same amount of Net New MRR with much less effort.