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December 31, 2021

As the customer success manager, my job is to make sure our customers are happy. But what does that mean? How do I measure and manage our team’s progress? There are 7 key metrics for customer success: customer health score, Net Promoter Score (NPS), churn rate, lifetime value (LTV); 5) engagement rate, upsell/cross-sell rate, and satisfaction score.

A customer health score is one of the key metrics for customer success that measures how likely it is that a customer will achieve their desired outcome using your product or service. It takes into account factors such as usage, support interactions, and feedback surveys. A high health score means the customer is doing well and is unlikely to churn. A low health score indicates that the opposite may be true – the customer may be at risk of churning or not achieving their goals with your product or service.

Key Metrics for Customer Success

Churn rate is the percentage of customers who cancel or do not renew their subscription within a given period.

Customer lifetime value is the total revenue a customer generates for a company throughout their relationship.

A customer satisfaction score is a measure of how likely customers are to recommend a company’s products or services to others.

The net promoter score is a measure of customer loyalty and indicates how likely customers are to continue doing business with a company.

SaaS Customer Success Metrics

Customer success metrics for SaaS companies are more focused on data specific to that industry and can be more granular.

SaaS Product Usage Rate

The more value a customer gets out of a product, the less likely they are to uninstall it. Unless, of course, the product is very similar to an app like Hinge, where the goal is to get rid of that app as soon as possible.

Your customer support team can monitor your product’s usage rates. You want them to progress until your software is being used at the ideal level.

To calculate the percentage, decide the interval that you want to track, such as a daily, a weekly, or a monthly basis.

Average App Login Time

Understanding how long customers use your software is telling how much value your product is adding to their day-to-day activities.

This can help you gauge your customer’s behavior and set benchmarks for how long a customer should spend on your app.

This way you can improve your software as time goes on.

Active Users

This key company growth indicator is crucial for any successful software company.

You can calculate active customers by counting how many of your customers are using your product regularly — daily, weekly, or monthly.

Free Trial Conversion Rate

How can you measure the success (or failure) of your freemium options? A free trial conversion metric should be a must-have for any startup.

This tells you how much your customers are converting from a free version of your software to a paid one.

You can measure the free trial conversion rate by dividing the number of customers using the free trial by the number of customers who converted to a paid subscription — monthly, quarterly, or yearly.

A Successful Business Depends on Customer Success

Customer satisfaction is integral to the success of any business. The revenue, profits, and market share of any company are contingent upon the satisfaction of its customers.

As a company, it’s crucial to understand how your customer base is doing. The best way to measure this is by tracking their successes. Use the information provided here to improve your own strategy and increase your own sales.

7 SaaS Customer Success Metrics You Can’t Do Without

The only way to determine the right direction for your company is to look at your key customer success indicators. These KPIs will tell you whether your business is improving, staying the same, or declining.

Your customer’s success is only determined through the implementation of your key performance indicators.

The best way to get an accurate picture of your company’s current situation is to look at data points. Data never lies, so this is the most reliable method.

So, we must prioritize our next steps based on which actions will have the greatest impact on our overall customer satisfaction.

But with so much data, we can become overwhelmed and confused.

As a pilot, it is important to constantly monitor your plane’s altitude. If the plane is at an appropriate altitude, then you can focus on speed. It is important to maintain optimum speed and take necessary steps if the speed is not optimum. However, if the plane is at a low altitude, then your focus should be on the height of the plane. Monitoring both speed and height are essential for a safe flight.

But if your airplane is flying low, then your focus should be on its height and not its velocity. If you focus on its velocity, it could lead to your plane crashing.

You need to make sure you are measuring the right KPIs that will drive your business forward.

1. Average Revenue Per Account (ARPA)

It is the amount of income generated by an account over a given period.

Revenue per unit analysis is useful for analyzing your company’s revenue and growth at a unit level.

A calculation of ARPA is by dividing the revenue generated from all sales during a set period by the total number of customers who made purchases during that time.

A monthly ARPA is the average MRR divided by the total number of customers.

There is no change in the formula for calculating ARPA. However, if there has been a significant change in pricing, it is advisable to measure ARPA separately for new and existing customers. This will provide a more accurate understanding of the average revenue per account over time.

A wide price range for ARPA, along with other important Customer Success KPIs, must be monitored to ensure you’re providing your customers with the best service possible.

2. Customer Lifetime Value (LTV)

Lifetime value (LTV) is an estimate of how much revenue you can expect from an average client over their entire lifetime.

The lifetime value of a customer is much higher than the one-time cost of acquiring them.

LTV is a reliable way of growth because it can account for the majority of revenue coming from repeat purchases.

LTV can be calculated using the formula:

LTV = ARPA Customer Churn Rate (if ARPA is calculated monthly, so will the churn be)

LTV = ARPA * Gross Margin % Revenue Churn Rate (for varying ARPA across your client base)

Calculating lifetime value (LTV) can get complicated, especially when factoring in things like customer attrition.

3. LTV/CAC Ratio

The most important KPI for sales is to show improvement, how it should be invested in, and how it impacts growth.

LTV/CAC Ratio = LTV divided by CAC

If you want your business to grow, it’s important to maintain a high LTVCAC ratio. A ratio of 3:1 means that for every dollar invested, you’ll see a return of $3. This is a strong indicator that your business is healthy and has growth potential.

A lower LTVCAC ratio suggests that the company is investing too much per customer. A ratio greater than 3 suggests that the company is getting a good return on its investment, meaning each customer acquired brings in more revenue than it costs to acquire them.

So does this mean that the higher your ratio is, the better off you are? Well, just like too much of any one thing is bad, so is the case with this.

A ratio of 7 or 8 suggests a large return on investment, meaning the company is not spending enough to support growth.

4. Churn Rate

One of the most important metrics for SaaS businesses is the ratio of customers who have canceled their subscription to the total number of users you had. It defines or limits the maximum size your business can achieve.

It is crucial to understand the reasons for your churn rate so that you can take proactive steps to prevent it.

For small startups, a 3% churn rate with 300 customers (i.e., 9 customers) is not a huge loss. However, for a company with 30,000 accounts, a 3% churn equals 900 customers and acts as a growth inhibitor for the company.

Common types of churn

There are different types of churn but the most common ones are customer churn and revenue churn.

Customer churn is when a customer cancels their subscription. Revenue churn is the loss of revenue due to churn.

You may be thinking that both are similar and that calculating one would result in the other.

Wrong!

They are very different. Let’s use an example of each.

A company has 100 customers, 50 of which pay $100 a month and the other 50 pay $1000 a month. This results in a total of $55,000 in monthly recurring revenue (MRR).

Now, suppose 10% of your customers leave and 9 out of 10 are small clients.

Number of accounts left = (50-9) + (50-1) = 90

Customer Churn Rate = (10/100) = 10%

Revenue Churn Rate = ((100*9 + 1000*1)/55000) = 3.4

Now, if the remaining small accounts upgrade from $100 to $200 a month, then we see that the customer churn rate stays at 10% but revenue churn rate drops to -4%.

Customer Churn Rate = (10/100) = 10%

New MRR = (41 x 200) + (49 x 1000) = $57,200

Revenue Churn Rate = Revenue Churn / Initial MRR = (2200/55000) = -4%

This shows the difference between these metrics, so both should be monitored.

5. Customer Retention Cost (CRC)

CRC is the amount of money a company spends on technical support to keep and cultivate its existing customers. 

The formula to calculate the average cost of retaining each customer segment is:

CRC = (Total support costs + Total marketing expenses + Total account management costs)

CRC can be a significant expense for SaaS companies, and it’s important to track this metric over time to ensure that your company is efficiently retaining its customers.

CRC provides insights into company performance to guide investment decisions. By understanding where CRC is coming from, SaaS companies can focus on areas of improvement from a product perspective.

6. Expansion MRR

To calculate your expansion MRR, you will need to take your current MRR and subtract any churn that has occurred. From there, you will add on any new recurring revenue that has been generated from upselling, cross-selling, or new customers.

Expansion MRR is the revenue you generate from selling additional products or services to your existing customers. This is important for long-term profits and growth as it costs less than acquiring new customers.

It indicates that customers are getting the most value out of the product and that the product is selling well.

To calculate your Monthly Recurring Revenue Expansion, add up all revenue that your current clients generated in the month.

Expansion MRR can be used as an indicator of negative churn. A high Expansion MRR rate is usually indicative of a negative revenue churn rate, meaning that the revenue collected from existing customers is greater than the revenue lost to those who have churned.

7. Customer Health Score

The customer health score is a metric used to predict a customer’s probability of churning out from a company. It allows companies to be proactive and take required steps based on the customer health score.

The score is determined by taking into account various smaller metrics which give an insight into the current condition of the customer’s account.

There’s no single standard for measuring customer satisfaction. Each business will have to figure out what metrics are most important to its success.

The first few attempts may be messy and require constant adjustments. However, as customer success metrics become increasingly refined over time, the efforts will begin to show results.

The customer health score is a fantastic way to keep track of your customers’ progress. It factors in statistics like how many emails they’ve sent, as well as goals you’ve set for them. It’s also an excellent way to build a relationship with them, ensuring their satisfaction with your service.

What are some key factors that go into a customer’s health score? Usage frequency, product stickiness, ticket volume per user, product adoption, quality of relationship with a customer, response time to the first request, and average logging frequency are all important factors in a customer’s health score.

B2B SaaS companies usually deploy a customer success platform to monitor customer health scores and take proactive actions to reduce churn, drive up-sells, and grow revenue.

The first step to figuring out the best metric for your customer success is to identify what your company needs to measure. This would help both you and your clients understand the current situation and work towards their goals.

Although metrics are important for gauging success, sometimes they can raise more questions than answers. This can happen when a CSM team is working on too many metrics at once, leading to over-analysis.

This often causes companies to over-focus on data, and neglect other important aspects of the business.

The CSM team should focus on tracking a few key success metrics that are most important to the company. This will help avoid analysis paralysis and ensure that everyone is working towards common goals.

Conclusion

Customer success is vital to the long-term health of any business. By tracking and managing the 7 key metrics for customer success, you can ensure that your team is on track to meeting goals and achieving objectives. Doing so will help you maintain a high level of customer satisfaction, reduce churn, and increase lifetime value.

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