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SaaS Quick Ratio: How to Measure Your Startup’s Revenue Health

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Fast growth isn’t always the same as healthy growth: but how can you tell if your SaaS startup has overstretched? And how can you tell if you’re growing in a smart, sustainable way?

Today, I’m taking a look at the SaaS Quick Ratio: a quick and effective way to measure the health of your revenue growth.

What is the SaaS Quick Ratio?

In its original incarnation, the Quick Ratio is an accounting concept, designed to measure how quickly a company can liquidate its available assets to cover its current liabilities.

Sounds fun, right? Thankfully, we’re looking at a different variant. Devised by serial investor and Social Capital co-founder Mamoon Hamid, the Quick Ratio we’re interested in is designed to offer an at-a-glance look at the health of your SaaS startup’s revenue growth.

The SaaS Quick Ratio Formula

SaaS Quick Ratio = (New MRRt + Expansion MRRt) / (Churned MRRt + Contraction MRRt)

The formula for calculating your SaaS Quick Ratio relies on four crucial SaaS metrics:

  • New MRR (Monthly Recurring Revenue) is revenue gained from new subscriptions.
  • Expansion MRR is revenue gained as a result of successful upselling and cross-selling.
  • Churned MRR is revenue lost as a result of customers cancelling their subscription.
  • Contraction MRR is revenue lost as a result of customers downgrading their subscription.

In simple terms, the SaaS Quick Ratio compares your revenue growth over a certain time period (as shown by New MRR and Expansion MRR) with your revenue shrinkage over the same timeframe (churned MRR and contraction MRR): creating a simple ratio of growth to churn.

Why the SaaS Quick Ratio Matters

Say your revenue is growing by £1,000 per month. We might assume that growth would break down as follows:

+ £1,000 MRR, – £0 churn

But there are all-manner of other ways that growth could be happening:

+ £2,000 MRR, – £1,000 churn

+ £5,000 MRR, – £4,000 churn

Though the overall growth rate is the same, the underlying health of these businesses is very, very different. The last company is having to generate £4,000 of new revenue, each and every month, just to keep its head above water.

Simple measures of growth wouldn’t always pick up on this disparity, but the SaaS Quick Ratio would: allowing you to see how sustainable your growth is, and how efficient (or inefficient) your current strategy is.

SaaS Quick Ratio Benchmarks

So what does a “good” SaaS Quick Ratio look like?

A hypothetically-perfect SaaS startup with 0% churn would have an infinitely large Quick Ratio (try and plug 0% churn and contraction into that formula and you’ll see why). From that, we can imply that the greater your SaaS Quick Ratio, the larger your revenue growth and/or the lower your churn.

“Bigger is better” isn’t a particularly actionable piece of advice, but thankfully, there are a couple of Quick Ratio benchmarks we can use to gauge the health of our own growth rate.

Quick Ratio < 1

A ratio of less than 1 means you’re losing revenue from churn faster than you can replace it with new MRR. If you sustained this ratio for more than a month or two, your company would be in serious trouble.

Quick Ratio 1 – 4

A ratio between 1 and 4 means your revenue is growing faster than your churn rate, but crucially, you’re growing in an inefficient way: high churn is eating away at your growth potential (like the examples above).

Quick Ratio > 4

The “optimum” SaaS Quick Ratio you’ll hear banded around is 4, put forward by founders and VCs (including Mamoon Hamid) alike. They recommend a target benchmark of 4 for two reasons:

  • To hit a Quick Ratio of 4, a SaaS company needs to be adding $4 in revenue for every $1 lost through churn or contraction. That creates a steep growth curve, and minimises the volatility associated with high churn: perfect for investment.
  • The benchmark also holds-up in the real-world. When InsightSquared analysed some of the fastest growing SaaS companies, they found an average Quick Ratio of 3.9. Chances are, if you can get your SaaS Quick Ratio to 4, and hold it there, you’re on a path to scale.

Sustaining Your SaaS Quick Ratio

So what’s the best way to sustain a Quick Ratio of 4?

To hit that target, you’d either need exceptionally low churn, or exceptionally high growth.

Data from Tomasz Tunguz suggest that the median SaaS business has a yearly churn rate of about 10%, which equates to a monthly churn rate of 0.83%.

Plugging that into a rearranged Quick Ratio formula [SaaS Quick Ratio = (Monthly Growth Rate + Churn Rate)/Churn Rate], we generate a necessary monthly growth rate of about 2.5%:

Quick Ratio = 4 = (2.49% + 0.83%) / 0.83%

Taking it a step further, Lincoln Murphy suggest that best-in-class SaaS businesses lose even less revenue to churn: about 7% churn a year, or 0.58% per month, equating to a required monthly growth of just 1.74%.

4 = (1.74% + 0.58%) / 0.58%

Doable, right? Now compare that to companies with higher monthly churn: say 5% and 10%.

In order to maintain that same ratio of grow to churn, these companies need to be growing at a much, much faster rate: 15% and 30%, respectively. Month on month. Not quite so doable.

4 = (15% + 5%) / 5%

4 = (30% + 10%) / 10%

Three Takeaways

So what can we take away from this? Three things:

1) The SaaS Quick Ratio Reveals Your Revenue Health

There’s a difference between growth and healthy growth, and the SaaS Quick Ratio can show you the difference.

2) 4 is a Good Benchmark to Aim For

A Quick Ratio greater than 1 is an important hallmark of health, but if you want to raise your sights a little higher, a ratio of 4 is a good place to aim. It’s a sign that your business is growing in a healthy, sustainable way, and if you can maintain the ratio as you begin to scale, you’ll likely be a great fit for investment.

3) FOCUS ON CHURN FIRST, GROWTH SECOND

In the early days, it’s possible to have a super high Quick Ratio, fueled by low churn and high growth. After all, it’s easy to grow by 100% per month if your starting point is $100 MRR; and if you have three customers, 0% churn is pretty likely.

But as your company grows, it gets harder and harder to sustain those high growth rates (there’s a reason unicorns are so rare).

As your business matures, your focus needs to switch. In order to keep your revenue growth healthy, sustainable and predictable, churn needs to become your primary focus.

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.cobloom.com/blog/saas-quick-ratio-how-to-measure-your-startups-revenue-health

Fintech

State Street sees CRD tech acquisition pay off with 22% YOY revenue growth

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State Street saw 22% year-over-year growth in revenue from deployments of Charles River Development (CRD), a front-office software firm it acquired in 2018. The revenue growth was primarily related to professional services and its software-as-a-service (SaaS) offering, which together grew 18% YoY, Chief Financial Officer Eric Aboaf said during today’s third-quarter earnings call. The technology […]

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://bankautomationnews.com/allposts/business-banking/state-street-sees-crd-tech-acquisition-pay-off-with-22-yoy-revenue-growth/

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SaaS

6 Product Led Growth Sessions From SaaStr Annual 2021

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As OpenView and many others have documented, Product Led Growth (“PLG”) is one of the dominant themes of the SaaS marketplace today.

Unsurprisingly, Product Led Growth was one of the most popular discussion topics at SaaStr Annual 2021.

If you missed out on attending SaaStr Annual 2021 – where our outdoor format earned an analogy to the “Coachella of SaaS” – or just want to understand PLG better, here are 6 sessions to study:

PLG SaaStr Session #1: “Mastermind Masterclass: Beyond Product-led Growth: 7 Lessons Learned in Product-Led Scaling with Dropbox’s GM”

Presented By: Rachel Wolan – GM & VP – Dropbox – @rachelwolan

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #2: “From the Desk of ClickUp’s VP of Operations: Hold Onto Your SaaS: How ClickUp Rocketed from $4M to $70M ARR in Two Years with Product-Led Growth”

Presented By: Aaron Cort – VP of Operations – ClickUp

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #3: “Building a $5.6B Company with a Product-led Flywheel with Postman’s CEO”

Presented By: Abhinav Asthana – Founder and CEO – Postman – @a85

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #4: “Mastermind Masterclass: How Community-Led Growth Drives Product-Led Growth with Notion’s CRO”

Presented By: Olivia Nottebohm – Chief Revenue Officer – Notion – @ONottebohm

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #5: “Mastermind Masterclass: How Community-Led Growth Drives Product-Led Growth with Notion’s CRO”

Presented By: 
Mark Jung – VP Marketing- Dooly
Rebecca Kline – SVP Marketing – Loom 
Garrett  Scott – Head of Marketing, Growth,  Demand Gen – Calendly

Video: HERE

Intriguing Session Slide – this gives you a sense of the creative + interactive format:

Last but not least:

PLG SaaStr Session #6: “How to Build a Product-led Sales Engine Through Hypergrowth with Dooly’s VP of Revenue”

Presented By: Michelle Pietsch – VP of Revenue – Dooly

Video With Slides: HERE

In the comments below, let us know what Product Led Growth experts you want to speak at SaaStr? 

Published on October 8, 2021

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.saastr.com/6-product-led-growth-sessions-from-saastr-annual-2021/

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SaaS

How To Keep Your Customers For a Decade. Or Longer.

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Salesforce likes to talk about “Customers for Life”, and while that’s sort of catchy, it’s a little hard to grok what it really means.

It finally sunk in for me a bit the other day.  At Adobe Sign, there’s a large group of well-known customers that I closed, Back in The Day … that now have been customers for 15 years.  A decade and a half!

We launched on January 1, 2006 on TechCrunch, and while we closed some good names that first year (Dell, BT, Qualcomm, GE, Comcast, etc.), it wasn’t until later on in 2007 that we had enough revenue to create a large enough group of customers to go on a 10 Year Journey with. And the law of Power Laws and Large Numbers means that, obviously, Adobe has closed far more customers under its watch than I ever did.  The business has grown 15x since then.

Still, I’ve learned a lot seeing case studies go up over the years of customers I closed … that 15 years on … are still customers.

Some take-aways:

  • If You Truly Have Net Negative Churn and High NPS — Then Almost Any Reasonable CAC Makes Sense.  If It Lets You Acquire 15+ Year Customers.  I know some VCs will take shots at this statement, and I mean it more as a construct than a reality.  But if your customers last 10 years, and buy more from you each year … I.e. if a $100k ACV deal you close today, over 10 years, ends up being $2m in total revenue … what can you spend to acquire that customer?  A lot.  Really, quite a lot.  A  lot more than say 20% of first year ACV.  But you have to have insane NPS/CSAT + truly high net negative churn (120%-140%) for this math to really work.  If your customers don’t love you and buy more, your CAC has to be very low.  Be cautious if your customers don’t yet truly love you.  But if you’ve got this winning formula with bigger customers especially — be confident.  Run the tables here.
  • Rip-and-Replace Deals Are Worth It.  As you scale, your competitors will try to do Rip-and-Replace deals.  As frustrating as it can be to deal with those, and maybe even unsavory to do them yourself … it’s worth it.  If the customer lasts 10 years.  You can even give away the first 18 months of a Rip-and-Replace if the customer will last 10 years.  These deals make no sense if you aren’t going long.  But if you are … they are worth it.
  • You Can Get Them Back.  Not Always.  But Often Enough to Go Long and Invest There.  Nothing is more painful than losing a big customer.  Most you may not get back, and even if you do, it may take years.  But if you are thinking in terms of Decade Long Relationships … put sales and even customer success back on lost customers.  They may boomerang back.  It happened to me.  Just not often enough in the first 5 years for me to fully understand it.
  • Put Lots of Coverage on Lost Deals, Too.  Similar to the prior point, but different.  Lost a deal to a competitor?  Well, over the next 10 years, your competitor may stumble.  You may have a chance again.  Don’t view them as Gone Forever.  View them as a Special Prospect in Salesforce, instead.  Never stop trying to win them back.  Invite them to your customer conference.  Don’t send them spammy SDR emails.  But keep them close.  Keep them part of the extended family.
  • Get on a Jet (Now That We Can Again).  I never lost a customer I visited.  More on that here.  I know you’re tired.  I know you have no time.  But if you are going long, there’s no better use of your time than visiting customers.  Not prospects.  But customers.  I ask almost every public and unicorn CEO at the SaaStr Annual how much time they spend with customers.  It’s almost always more than you’d expect.  It’s often more than 50% of their time.
  • Slow Down and Get It Right.  Get your VPs of Sales, Customer Success, Product and Engineering right.  They’re key to this 10 Year Journey.   Even if it takes an extra month or two to get a great one.
  • Overdeliver.  Your customers will basically all stay if you overdeliver.  It doesn’t even matter that much if your competitor has caught up, or even in many cases, passed you in some areas.  Customers invest in not just products, but relationships.  They know they are on a 5-10 year journey too.  Overdeliver vs. their expectations.  Focus on that more than the competitive noise per se.   Force your team to launch at least one “Surprise and Delight” feature each quarter than every customer can at least appreciate, even if they don’t use it immediately.
  • Enterprise deals are nothing like SMB deals, most especially over the long term.  We all know this, but over time the difference becomes even more stark.  Small companies churn at a much higher rate, and it’s much harder to get true net negative churn.  If you compare them over 10 year lifetimes, you’ll see you should probably invest much more in the bigger customers.  And make sure your VP DNA matches your core long-term customers.
  • Truly happy customers are magical.  Challenge yourself.  Measure NPS.  Do a customer conference.  Get the feedback.  Whatever you do — don’t assume your customers are happy because they don’t churn.  That’s rookie error #1.
  • Invest — at least in your bigger customers — as if they are worth 10x what they are worth today.  And make sure you measure your customers by potential value over the next ten years.  If you have Google for $99/month, that’s not a real enterprise deal.  But if you have Google for $250k a year — how much can they be worth over 10 years?  Maybe $5,000,000.  Invest like that.
  • Going Long is Incredibly Empowering.  I’d like to say I was always committed for 10+ years, but that’s not exactly the case.  If it had been, I would have approached all our customer relationships differently.  I loved our customers.  I just didn’t really think of them as ten year relationships.  My mistake.
  • Forever Customers build Forever Companies. You know this. But it takes time to see it and feel it. This is the one thing you can really bank on in SaaS and with recurring revenue.
  • Get it Right, Really Right — And You’ll be Unstoppable.  At least for Decades.  SAP, Oracle, Concur, Cvent, Successfactors … you can take some shots at these oldie products, but these brands endure for decades.  Even post-acquisition.  Salesforce is in  its third decade, and still growing 20%+ at $20 billion+ in ARR.  I’ve been a Decade+ Customer of Salesforce myself now.  Invest in your team, your product, your customers for life.  For decades.  It will be hard to do until you come up on $5m-$10m ARR or so, unless you are pretty well funded.  There won’t be enough people, team or resources.  But after that, at least.  Invest for decades to come.  It won’t seem so crazy then.

10+ Year Customers.  It was always an abstract concept to me.  It shouldn’t have been.

SaaS: Maybe Plan for 30+ Years as a Founder

(note:  an update of a classic SaaStr post)

Published on October 7, 2021

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.saastr.com/the-10-year-customer/

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SaaS

Why a Great Rep Can Close 9x More Than a Poor Rep, and Even 2.5x More Than a Good Rep

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We’ve talked a lot on SaaStr about great sales professionals, on driving up Revenue Per Lead, on not capping sales comp systems, and on why you need to manage out your worst reps (because leads are precious).

What we haven’t done yet is put it all together in a simple, quantitative spreadsheet.  Let’s do that — it is eye-opening:

This is what happens in the real world.  A great rep often literally closes 9x more than a poor rep.  And even 2.5x+ that of a decent, mid-pack rep.  With the exact same number — and same quality — of leads.

But how?  How does this happen?  It’s several factors compounding:

  • First, the best reps close more seats / more revenue per deal.  They are better at mapping out business processes, at discovering how many seats, units, whatever there is to sell … and they just sell more.  Like clockwork. The great reps truly and quickly and effectively learn how much each prospect really can buy — and they get that much.  Without fear, and without ripping the customer off.
  • Second, the best reps generally discount less.  Not always, but usually.  The best reps get very confident in the value proposition.  And poor reps and even mediocre reps fall back on the only arrow in their quiver — A Discount!!  But discounting a product a prospect doesn’t really want doesn’t really work.  In fact, it can harm close rates.
  • Finally, the best reps close faster and close more They don’t mess around, or play games.  They know time is the enemy of deals.  They get very good at key objections.  The know the product and the pitch and the value prop cold.  They build strong relationships with prospects, and add enough value they can ask for a favor back — the sale.  They close better and faster.

These 3 factors together have a compounding effect, which is key.  You can still be a good rep and just be good at some of these 3 factors.   If you are great at all 3, then magic happens.

The top reps close larger deals than a mid-pack rep, discount just a bit less, and close faster … and the three factors together pull them far, far ahead of the pack.  For the same amount of effort (and often, even less total time).

This is also why you have to fire the poor reps fast.  You need to see if they can deliver.  But if they can’t, they don’t just miss quota.  They leave all the money in the spreadsheet above on the table.

Put differently, in the above scenario, the above Poor Rep left $160,000 on the table ($189,000-$20,790). In just one quarterRevenue that was there for the taking.  The leads were there.  Waiting to be sold to.

Route those leads to someone better, and magic will happen.  Fast.

(note: an updated SaaStr Classic post)

Published on October 5, 2021

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.saastr.com/why-a-great-rep-can-close-9x-of-a-poor-rep-and-even-2-5x-more-than-a-good-rep/

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