SaaS Quick Ratio at a Glance: What It is and How to Calculate It

Building, promoting, selling, and growing a SaaS company is a never-ending project with innumerable tasks, facts, and figures to keep track of. At the heart of these is the company’s revenue growth, and SaaS quick ratio is an easy way to keep tabs on growth for a busy executive.

In addition, if you’re reaching out to venture capitalists for funding, showing a strong quick ratio will go a long way. The SaaS quick ratio pairs nicely alongside other success metrics that matter to investors, assuring them of the current financial health of the company and provide confidence in the company’s future growth.

You can calculate SaaS quick ratio using four essential pieces of data:

• The new revenue from new customers (new MRR)
• The revenue earned from upgrades in subscriptions, services, etc. (expansion MRR)
• The revenue lost from downgrades in subscriptions (contraction MRR)
• The lost MRR from subscription cancellations (churn MRR)

Once you’ve collected those details, you can use the following formula to identify SaaS quick ratio:

New MRR + Expansion MRR / Churn MRR + Contraction MRR = SaaS quick ratio

Let’s look at an example of how to calculate a SaaS quick ratio.

“Great Company Ltd.” has:

• $25,000 in new MRR.
• $9,000 in expansion MRR.
• It lost $6,000 in subscription cancellations.
• It lost $3,000 in current customer downgrades.

Figuring Great Company Ltd.’s SaaS quick ratio would look like this:

$25000 + $9000/ $6000 + $3000 = 3.78

But without context, a number is simply a number. So how do you know if your own SaaS quick ratio is good or bad?

Simply being able to calculate your SaaS quick ratio doesn’t give you any truly useful information. You need to know how to interpret it, too.

So what’s the SaaS magic number? Well, the widely accepted SaaS quick ratio industry benchmark is 4.0.

If your own quick ratio is at or above this number, you’re doing great. Don’t stop now!

But if your company’s quick ratio hasn’t quite reached this benchmark—like Great Company Ltd., as we discussed above—you’ll need to find out what’s causing so many of your subscribers to downgrade and/or churn. This can be a challenge for SaaS startups, but an important one to overcome to achieve sustainable growth.

Clearly, there’s a direct connection between the quick ratio and the financial health of a SaaS company. A high quick ratio indicates greater efficiency in MRR growth. Here are four ways to help raise your quick ratio:

1. Enhance customer retention

If a company has spent the time and dollars to acquire a customer, it’s in the best interest to keep them onboard. In the SaaS business model, initiatives like improving customer service, offering customer loyalty programs, and focusing on customer satisfaction are powerful ways to boost customer retention and achieve a low churn rate.

2. Increase customer acquisition

With so much competition in the industry, SaaS companies need an aggressive customer acquisition strategy. Targeted marketing campaigns, promotional offers, and building a strong online presence are proven ways to attract new customers. In addition, these actions can shorten the sales cycle. Marketing should closely monitor campaign metrics like conversion rate optimization (CRO) to ensure their initiatives are helping increase customer acquisition.

3. Reduce churn rate

Closely and frequently monitoring your churn rate is crucial for SaaS company health. A high churn rate can be a key factor in a low SaaS quick ratio and may negatively affect the overall business in the short term. Losing customers prematurely also decreases the customer lifetime value (LTV). A strategy like conducting exit surveys can help you understand the reasons for churn, enabling you to take measures that will prevent your existing and future customers from deciding to leave, too.

4. Boost upselling and cross-selling

There are plenty of ways to increase a customer’s worth that can add dollars to your bottom line. Implementing a range of upselling and cross-selling techniques can help improve the SaaS quick ratio by raising your expansion MRR. Target the right customers, offer relevant products and services, and time the upsell/cross-sell opportunity right. These strategies can net significant increases in MRR and strengthen your relationship with customers to boot.