SaaS metrics

Question 1

Magic Number

Answer 1

(New New ARR) / Sales & Marketing from Previous Quarter

Question 2

CAC Ratio

Answer 2

Magic Number * Gross margin

Question 3

Payback Period

Answer 3

1 / (CAC Ratio) or 1 / (Magic Number * Gross Margin)

Question 4

Cash Efficiency

Answer 4

ARR / Total Cash Consumed

Question 5

Quick Ratio

Answer 5

(New + Expansion) / (Churn+Downsell)

For ARR growth accounting, investors are generally looking for new and upsell to grow quarter-over-quarter or month-over-month while churn and downsell stay minimal (i.e Net ARR is increasing on an absolute basis quarter over quarter). A flat Net ARR quarter over quarter (QoQ) implies a company is growing linearly; a growing Net ARR QoQ implies a company is growing exponentially.

Mamoon Hamid, the creator of the quick ratio, preaches a quick ratio > 4 (For every $1 of downsell and churn, company is generating an additional >$4 of new and expansion)