Edited excerpt from Diligence at Social Capital Part 1: Accounting for User Growth by Jonathan Hsu:
Quick Ratio = (new users + resurrected users)/churned users
(This should not be confused with the normal finance quick ratio that measures the ability of cash and near cash assets to pay off liabilities.)
This ratio needs to be greater than one if the app is to be growing, otherwise churn is overwhelming growth.
Most consumer applications don’t have a very strong mechanism to bring users back month after month and so the quick ratio tends to be just above 1. The dynamic for each month in a consumer app is typically to add a bunch of users and to simultaneously lose a bunch of users with a small additive piece on top from resurrection yielding overall small positive growth.
All else being equal, a company with the same growth but a higher quick ratio is more attractive company to us because it is starting from a better base. With high retention, it would be worth trying to push harder on the top of funnel with new users to drive growth (more aggressive sharing/referral mechanisms, paid acquisition, etc.). If a company has higher churn, it’s harder to justify pushing on new users as you would end up losing many of them. It’s easier to fill the top of funnel than it is to fix some underlying churn problem.
This accounting can be done on time-frames other than calendar months. Indeed, several of our portfolio companies implement it on a rolling 28 day basis (to remove day-of-week effects).
(1) Thank you Guy Cohen for the article tip.
(2) Cf. Why retention is the key to growth and Sustainable growth vs. growth hacking.
(3) Practical advice on how to reduce churn: (i) How to reduce churn — a process, (ii) How to reduce churn by winning back cancelled customers, (iii) How to think about churn.