Loading summary
Transcript48 lines
- [00:00]
Ray Reich
Foreign.
- [00:12]
Dave Kellogg
Entity, New York It's SAS Talk with the Metrix Brothers Growth and cac.
- [00:16]
Ray Reich
And I'm Groth, better known as Ray Reich, founder and CEO of BenchMarket.
- [00:21]
Dave Kellogg
And I'm Kac, better known as Dave Kellogg, EIR to Balderton Capital, independent consultant and the author of Kelblock.
- [00:28]
Ray Reich
And together we are the metrics brothers.
- [00:31]
Dave Kellogg
And we go together like ebbs and flows.
- [00:34]
Ray Reich
I love that combination. But wait, when talking about ARR and ARR growth, which are ebbs and which.
- [00:40]
Dave Kellogg
Are flows, ebbs are when it's going out and flows are when it's coming in.
- [00:44]
Ray Reich
But on average, then they must offset, right? So the net revenue retention of the ocean is 100%.
- [00:51]
Dave Kellogg
Well, I suppose you can think about it that way. The NRR of The ocean is 100%. But you know, you may have heard about this thing where sea level is going up.
- [00:58]
Ray Reich
But wait, wait. We're not Andreessen Hurwitz. We don't do politics on SAS talk, Dave.
- [01:05]
Dave Kellogg
Well, some might call it science, Ray.
- [01:07]
Ray Reich
But the main point is, just like ebbs and flows, we can look at the net changes in the SAS leaky bucket of ARR in different ways. Which takes us to today's topic. The sasquic Ratio, a SAS metric that measures new ARR growth to versus existing AR contraction.
- [01:27]
Dave Kellogg
Getting a little seasick here, Ray. But before we dive in, can we hear a word from our sponsor?
- [01:33]
Ray Reich
Benchmark? It conducts original benchmarking research programs in partnership with leading B2B SaaS companies including Gainsight, SalesLoft, Lean Data Pavilion, Hendo, Cloud Zero and Xactly. Our original benchmarking programs result in a compelling content marketing asset in the form of both a report and interactive benchmarking portal that engages executive buyers to see how their internal performance metrics and processes measure up to their like company cohort. Our partners report that our original benchmarking research programs are a top producing content marketing asset as measured by downloads, target buyer engagement and executive buyer awareness. If you would like to learn more about how you can partner with Benchmarket to conduct an original benchmarking research program that increases awareness and engagement with your economic buyers, send an email to raynchmarket AI. That's raynchmarketwithanit AI. Okay Dave, let's jump into it. So what is the SAS Quick Ratio? It's a SAS metric that measures new ARR growth versus existing arrangements contraction. In fact, based upon the research I was doing for this episode, it shows that the sasquic ratio was first mentioned or used at a saster event in 2015 by Mamoon Hamid, the co founder of Social Capital with Chamath and now an investor at Kleiner Perkins. And he then revisited the same concept at Saster 2017.
- [03:09]
Dave Kellogg
Cool.
- [03:10]
Ray Reich
But I thought you don't often do.
- [03:11]
Dave Kellogg
The history of a SAS metric here, right? This is good.
- [03:14]
Ray Reich
I don't. I had to do some research and I was drawing. I was really intrigued by what I found, so. But before we talk about this SAS quick ratio for those MBAs and finance members of the audience, they probably thinking about what's the. How's it different than a quick ratio? And the quick ratio, which is the namesake for the sasquic ratio, is a measure that measures a company's capacity to pay its current liabilities. It's calculated by dividing a company's most liquid assets. So that's on the numerator like cash, cash equivalents, marketable securities and accounts receivable. And then you divide that by total current liabilities and that gives you the financial quick ratio.
- [03:59]
Dave Kellogg
Yeah, also known as just the quick ratio. If you talk to a finance person, that's what they're going to think. They're going to think it's primarily a liquidity measure. Like you might see a loan covenant on the quick ratio. And a quick ratio is basically what's your ability to pay your current liabilities given your current assets. And given that. I've never actually liked the name personally because to me it's kind of a different concept. You're taking two balance sheet metrics and comparing them here. I think it's a bit of a stretch to what they're doing, but let's go with it. Some people use this metric, so let's go in and see how they adapted the name of the quick ratio more than the concept to SaaS.
- [04:39]
Ray Reich
Okay. Now, and I know we come at this from a little bit different, but I think we'll get to the same point. So the Sasquik ratio, you take on the numerator, new logo, ARR + expansion ARR. And you divide that by the denominator, which is the combination of churned ARR and downsell ARR. So should I do an example, Dave?
- [05:03]
Dave Kellogg
Yeah. Let me just say, I mean, look, this is one of the things I know Most of the SaaS world uses terminology like the ones you just used. So I think I'm a minority. They're not terribly consistent about what they call each element. To be honest, some people would say expansion plus upsell because they make those separate. Right. There's different ways people talk about these Concepts, which is why I try to start at the top. And in my world, this is just new ARR divided by churn ARR. Because I think new ARR comes in two flavors from new customers and from existing customers. And I think churn ARR comes in two flavors from. From lost accounts and from shaken accounts. So for me, this is just new ARR divided by churn ARR. But I would happily concede, Ray, that most of the world talks about it the language you use. In fact, the thing I find super confusing is they won't even say new logo like you did. They'll just say new ARR plus expansion ARR. And to me, new ARR includes expansion ARR. So I hate when the capstone term is the same as one of its elements.
- [06:02]
Ray Reich
It's always one of the great debates when I talk about new ARR with anyone, do I say new customer ARR, Do I say new logo ARR? I sure wish it was a standards body. You could define that for me, Dave.
- [06:14]
Dave Kellogg
Yeah, there should be somebody should make one of those, Ray. For what it's worth, I call it new biz. So just to add one to the mix. But. But in any case, right, let me go through your example because what we're saying is this is going to be the ratio of basically stuff you added to the bucket divided by stuff that leaked out of the bucket, referring of course to the leaky bucket of ARR. That is a SaaS company. But let's do your example.
- [06:34]
Ray Reich
Yeah, so, and you know me, I like to use weird numbers. So in my example, we have 700,000 of new logo ARR, we have 300,000 of expansion ARR, we have 200,000 of existing customer churn, and we have 50,000 of existing customer downsell. So if you take that new ARR new logo plus expansion, 1 million in the numerator divided by the 250k of lost customer ARR. That gives you a 4.0 SaaS quick ratio, which.
- [07:07]
Dave Kellogg
So you just did it, right? You just created a capstone term for churn plus downsoll. You called it lost ARR. But the world really needs a standard for that. But keep going. So you get your quick ratio. Have you done the quick ratio yet? I can't remember. No, you're 750 and net new. Okay, quick ratio of four.
- [07:21]
Ray Reich
So it's four. But Dave, it's a little bit like, so what? It's four. What in the heck does that tell me?
- [07:27]
Dave Kellogg
Well, a couple of things, Ray, but before we dive into the kind of Rule of thumb there, let me just say the way you can think of this is how many steps forward per step back ratio, which is the best way to think of it. In this case, you take four steps forward to take one step back. So you add four units of 250k and step back by one unit of 250k to get 750k in net new ARR. So this is kind of just a different way of looking at net new ARR. It's dividing it rather than summing it. And if you want it to be intuitive, I like this notion of how many steps forward to take a step back because that's what it feels like to run a SaaS company. Wow. We worked really hard to take a million dollars forward. Oh, you know, it's just four units of 250 and oh, darn, we took one unit of 250 back. So we ended up at 750 net.
- [08:11]
Ray Reich
It's a good, good way to look at that. And I was going to even throw in another term, but I don't want to confuse myself, but what is a good SaaS quick ratio? So I did probably a couple hours of research trying to find out, you know, what are the benchmarks, who's the thought leader? So I had to start.
- [08:27]
Dave Kellogg
What's the answer, Ray? What's the answer? Four. The answer is, I think there's one answer, four.
- [08:35]
Ray Reich
So. And that's what the original creator of the sasquik ratio, Mahmoud Hamid, said at Sasser. But then I went into our friend's article, he wrote it in 2017, by the way, and that's Ben Murray, the SAS CFO. And it was really the first time I saw it segmented. But I've seen like seven other people segment it very similarly. Less than one. It was a. You can't sustain a SaaS company long term with a less than one quick ratio because your churn is just too large that you can't make it up. Just with a great customer acquisition motion.
- [09:07]
Dave Kellogg
One is you're taking more than one step back for every step forward. So that that is ending ARR is shrinking. So that dog definitely doesn't hunt. So less than 1's bad. Keep going.
- [09:17]
Ray Reich
Now 1 to 4. Now some people say 2 to 4, but Ben said 1 to 4. It says, hey, you're growing, you're growing, but not as efficiently as you should. So you should really look at that leaky bucket and try to find out how you can get that from a 2 to a 4 or 3 to a 4. And then 4x and above. Everyone says 4x and above for a Sasquik ratio is good. To Moss Tungas, he, he wrote an article that said, well, it kind of depends on whether you're a high value product or a low value product has lower value products that has higher churn. You might want to get that up to 5x or bigger. But most said 4x or higher, Dave.
- [09:57]
Dave Kellogg
So the answer is 4. I think it's a reasonable rule of thumb. I think. Look, I have a little quibble with. Some people call this an efficiency ratio and in some sense it is, and in some sense it isn't. So let's just talk about that for a second. It is in the sense of steps forward to step back, right? It's clearly more efficient to take four steps forward for every one step back than two steps forward for everyone to step back, right? So in that sense you could talk about efficiency. The thing that it misses is how much those four steps forward cost. Because if your CAC ratio is a half, then those four steps forward cost you two. If your CAC ratio is two, those four steps forward cost you eight. So to me, to really be a GTM efficiency ratio, I want to look at the cac. But you know, Grossomoto of okay, your company, for every one step backward you take you four steps forward. I mean you can think of that as efficiency, I suppose.
- [10:56]
Ray Reich
No, I agree. And later in the episode I wanted to talk about, I think there's much better efficiency metrics to use versus sasquik ratio. But that's jumping ahead of myself, which I often do. You know what I did, Dave, and I learned this from you and it's actually a great best practice. I kind of modeled out the SAS quick ratio for a company that started with 10 million. And then I had different new ARRs and expansion ARRs, churn and downsell because I wanted to see how growth rates were impacted for a company with a 2.0 SaaS quick ratio versus 3.0 versus 4.0 versus 4.5. And in the model I did, Dave, at 2.0, this 10 million company had a 12% growth rate with a SAS quick ratio of 2. And at a SAS quick ratio of 4 they had a 33% growth rate. Now this isn't just a pure linear impact on growth rate, but it really jumped out at me of why it does have some. I call it, it's correlated to growth rate. What do you think?
- [12:00]
Dave Kellogg
Yeah, I mean I'm not sure I'd call it correlated because correlation immune implies independent observations and are they linked? And these are not independent observations by any stretch. It's just different ways of doing the math. So I don't think it's surprising that a company that takes four steps forward per step backward is going to be growing faster than a company that takes two steps backward for every four steps forward. Right. It's basically the second company's bucket is leakier, so it's harder to make the level go up. So I thought it was an interesting exercise. I don't know if we do episode notes online, but I think the table's useful. But the fact of the matter is. Yeah, the more units of addition per unit of subtraction, the better off you're going to be.
- [12:44]
Ray Reich
But I think there's an important question here, so I'm going to throw it out at you and let me know if you want to answer it first from me too. But. So we've talked about what a quick ratio is, what a good versus a bad quick ratio is, but at the end of the day, why calculate the SAS quick ratio? Dave?
- [12:59]
Dave Kellogg
Yeah, look, I think the short answer for me at least is don't. I know race is different, so you'll hear from Ray in a second. But this is not a new metric. I think the first talk goes back to 2015, maybe the first reference to 2013. I think I may have the number slightly wrong. This thing's a decade old and the fact that it's an old, unpopular metric is not good in my mind. It means it never really hit the mainstream. So I don't hear a lot ever. I mean, literally, I've never had a VC say to me, quick ratio. So maybe you have. But I think we could agree, regardless if you've ever heard it, it's not tier one SaaS metric. So the fact. Nor is it an up and coming SaaS metric. Right. Because it's not like something that just got invented that, ooh, it's going to be the big thing. So I think it's kind of an old unpopular metric and I think there's a reason for that, which is there's better ways to measure what it's aiming at. I think the most clever thing I saw on it, Ray, was actually in the blog post done by, I can't remember his name, the guy who gave the talk at saster. And in his blog post he shows why you need this metric. And it was really interesting to me. And it's needed because everything he presented was a chart and because I present tables, I don't need this as much because I can do the division of my head to look at it. But when you're looking at these charts, unless you make another chart that does the ratio of the ads to the subtracts, you can't see it happening. I think it's a very strong argument against using charts, to be honest with you, because people think they can see it. And in this case, trying to get the ratio of one thing that's below the line with the ratio of a thing that's above the line in two color blocks away, it's just too hard. So I thought his presentation was really interesting. And by the way, if you present all your SaaS metrics as chart, maybe you do need to add another chart that has this one. If you present them as tables the way I do, people can kind of look at it and just see the numbers and go, wow, wow. For every million dollars in adding, we're losing 300,000. You know, wow. So. So. But. So. So that's my take, Ray. What's yours?
- [14:54]
Ray Reich
Well, I must admit, I'm influenced by some of the people I work with a lot. And one of those is Ben Murray. And Ben always says, hey, Ray, let's talk about the quick ratio. I really like the quick ratio. So I'm like, I don't use it. I don't understand it. So when I started doing the research for this episode, quite frankly, I'm like, okay. It's a very simple way to say on a relative basis, how much better am I at getting new ARR versus losing existing ARR? And then when I see Momon Hamid, I'm like, well, if Kleiner Perkins is using it, that's something I at least should know about. But honestly, Dave, I would much rather use a bucket of three to four other SaaS metrics. As an operator, that gives me a lot more insight into why am I growing new ARR efficiently and why am I losing existing ar?
- [15:47]
Dave Kellogg
Yeah, so I think we're coming to the same conclusion here. I got a lot of respect for Bed too, and I liked his blog post on the metric. I read it. And I like the other blog post with the charts. I read that and I still believe the most compelling reason to use this is if you present in charts, make another one that shows this ratio because your eye can't pick it up. And it is an important ratio. But I would say, look, one, in general, fewer metrics are better, so we don't need another SaaS metric out there in the world. In my opinion, for people to track two this is just net new ARR and other clothing, right? In net new ARR, you add the additions to the subtractions, you sum them and you get a net number. This is just, you take the additions on top and divide them by the subtractions on the bottom. But, but you know, that's it. It's kind of net new ARR and different clothing. So I just use net new ARR to understand what's happening in my bucket of ARR. I'd use net customer expansion to understand the base. Maybe we should do an episode on that metric. That's a metric you don't hear much about that I do like. And then I use new logo ARR as a percent of new ARR to stand the health of the new ARR mix. And with those three metrics, I get what I want. And if, you know, if I'm paying attention, I don't need this metric to highlight that. Wow, Net new ARR is not going up very quickly. And churn is pretty high relative to new ARR. Houston, we've got a problem.
- [17:06]
Ray Reich
And I have to admit, I really don't think like an investor. I think like the operator that I was for 30 plus years. So when I look at how efficiently am I growing? When I look at new arrival, I want to know the CAC ratio for my new logo ARR and my expansion ARR. And I know that expansion ARR efficiency is hard to measure sometimes. And then on my churn ARR, I want to know what my gross revenue retention rate is. I want to know that by segment and by product because that gives me a good idea. Oh, the SMB gross revenue retention is really underperforming the benchmark. So I need to really think about how do I either change or maybe I even walk away from that icp. So those are some of the things I'd rather use as an operator. Dave.
- [17:55]
Dave Kellogg
Yeah, so I think we both don't use this metric that much. I mean, look, most SaaS metrics are useful segmented, right? Because if you see that we've got a churn problem. Well, gosh, where is it? Oh, it's in the SMB segment. Or we have a shrinkage problem. Where's that happening? Oh, an enterprise. Right, so it's useful or by vertical. So there's one vertical where people aren't renewing because we don't have a good product fit. So I agree with you. I think you can basically, I think you could live your whole life without ever dividing these two numbers and manage your business just Fine. If for some reason you're dying to divide them by each other and get the ratio, you could do that. But the net problem here is that you've got too much churn, right? The reason this ratio is off is relative to your new ARR, you've got too much churn ARR and therefore you're taking too many steps back per step forward. And therefore the symptom ultimately will just be ARR growth, right? The ultimate top level metric would be ARR growth is too low. So. And the real thing that matters here as an operator, Ray, is just why, right? Why is churn high? Are we overselling? Is the product not working? Is there a new competitor who's cheaper? Are we seen as a risky supplier because we've got it up number four in the market? Or sometimes I see companies, Ray, where they get crushed by this, where they have an old big customer who churns and that wipes out a year, right? Some massive amount of churn on the year. And it's actually not a run rate thing, it's a one time thing. But, but boy, their quick ratio would suffer if you lose a million dollar old customer. You know, like any compound metric to me, it's a smoke detector. It tells you there's a fire. You got to go figure it out where, where it is. Like you said, by segmenting, for example. By segmenting.
- [19:34]
Ray Reich
I was actually in a company once, Dave, and the quick ratio was not being used. But if I'd calculated I would have known that my issue wasn't churn, it was just we weren't selling enough. So that new ARR was low because there's two ways to make the quick ratio small, right? You either have too big of a denominator or too small of a numerator.
- [19:54]
Dave Kellogg
Yeah. And GRR will tell you if you're churning too much, right? I mean there's other metrics that do the job. If your problem is churn, we'll see it in grr. If your problem is in new sales, you'll see it in new new ARR. By the way, this is a reason pro tip. Don't run your board meetings and don't run your QBRs on net new ARR. And that new ARR is a financial metric. Run along. New ARR or new ARR, sorry to use the more common vernacular, new logo ARR plus expansion ARR. Run it on that because that's a measure of sales. Net new ARR is a financial measure because it's blending too many things, right? But you'll see it if you're looking at what I call new ARR, which is from both sources, existing and new, and you're looking at grr, Boom. If you've got a problem that this thing will find, I can find it with those two metrics. Yeah.
- [20:39]
Ray Reich
So you know what this 20 minutes did for me, Dave? It helped me understand why most of my customers don't use the sasquik ratio, why it's not a metric that I've used throughout my career. And most importantly, it highlighted to me that we agree that it's really not a efficiency metric.
- [20:59]
Dave Kellogg
Yeah, I mean, look, I'm going to go both sides of the efficiency thing. I agree with you. This thing is, what, 12 years old, 10 years old? There's a reason this is not a popular metric, and the answer is because there's other ways of looking at it and most companies don't need it. It's good to have the toolbox. It's good not to have a blank. You know, if you're an FPA person and an investor asks you about it because they're one of the handful that care, it's good not to have a blank look on your face when they say it. So I think it was worth this trip down, you know, down this corner of SAS trivia to understand this metric. And is it efficiency? I don't know. When I first saw it, I was like, there's no way CAC ratio is the right GTM efficiency metric. But I can kind of get why Tungas and others call it an efficiency metric because of the steps forward to step back ratio. And certainly it's more efficient to take one step back per four steps forward than it is to take two steps back for four steps forward. So that in that gross sense, I would say you could call it an efficiency measure.
- [21:52]
Ray Reich
Well, Dave, I think this dance is over and I think we took many steps. Thank you so much.
- [21:57]
Dave Kellogg
Do the two step. Take care. See you, Ray. SAS Talk is a production of the Metrix Brothers Growth in CAC and a member of the Benchmarket Podcast Network. By accessing this podcast, you acknowledge that the Metrix Brothers make no warranty, guarantee or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray. Information, opinions and recommendations presented are, according to our spouses, probably wrong, and provided for information purposes only. This podcast should not be considered professional or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, undirect, misdirect, incidental, special, ordinary, consequential, inconsequential, sequential, or other damages arising out of any use or reliance upon the information presented here. Ray Grothreich is based in New York City and available on X at Ray Reich Dave Kellogg is based in Silicon Valley and available on LinkedIn at in Kellogg. Dave Schenectady, which is French for unspellable, is not our actual production location. You can reach us@sastalkpodcastmail.com and thanks for listening.