The Quick Ratio, devised by investor and co-founder of Social Capital Mamoon Hamid, gives investors, founders, and team members an immediate view of a SaaS company’s growth efficiency. The Quick Ratio shows the ratio of your revenue gains to your revenue losses, so you can see immediately if your company has both significant growth and low churn. Tracking your Quick Ratio will help you understand your own company better by considering both the effectiveness of your customer acquisition and your retention efforts.
Customer Acquisition Cost (CAC) measures the costs of acquiring new customers by adding up sales and marketing costs for a given period and dividing them by the number of new customers for that period. CAC calculations can vary in regard to the inclusion of variable and fixed (or overhead) costs. SaaS expert Lincoln Murphy talks about “fully loaded CAC”, which includes everything it takes to get a customer on board, from “the cost of advertising, marketing, sales, support during the Free Trial, on-boarding costs, etc” (read Lincoln here). CAC metrics can also be determined on an individual account basis, by breaking down costs more granular.
LTV TO CAC
The Customer Lifetime Value to Customer Acquisition (LTV / CAC) ratio measures the relationship between the lifetime value of a customer and the cost of acquiring that customer. The metric is computed by dividing LTV by CAC. It is a signal of customer profitability, and of sales and marketing efficiency.
Magic Number is a common metric showing how efficiently Software-as-a-Service firm is growing its recurring revenue compared with sales and marketing spendings. The Magic Number of 1.0 means that marketing and sales spendings will come back to the company’s bank account in revenue in one year’s time. The result of 1.0 is generally the desired outcome by SaaS businesses.