As the Chief Customer Officer for a software-as-a-service (SaaS) company, much of my day is spent thinking about customer success and retention.
Like any subscription-based business, renewals are our lifeblood and the success of our customers is paramount to our success as a company. A focus on customer success should be embraced by every business, because if your customers are made successful by doing business with you, they’ll keep doing business with you. It’s a ‘win-win’ or ‘lose-lose’ proposition.
Managing customer success means constantly improving the Customer Experience, from first sale, onboarding, and implementation, to support, account management, and renewal. It’s a journey that requires you to evaluate customer needs, proactively engage with them regularly, and identify the most effective ways to meet their goals.
It might seem that, with so many moving parts, customer success management would be difficult to evaluate. But it can be done with the right collection of metrics. While there are many possible metrics that touch on customer success, I rely on a handful that tell me what I most need to know.
I recommend no more than a dozen metrics, or you risk missing the most important data. For deeper understanding of those metrics, I drill down into the details behind the data, as well as talk to customers to identify possible causes.
Top six customer success metrics:
Churn rate
This is the metric most subscription-based businesses use. Churn looks at what is leaking out of your recurring revenue bucket. There are different types of churn and churn metrics, but I concentrate on three: simple churn, gross churn, and logo churn.
• Simple churn is the net change in ARR (annual recurring revenue) from existing customers divided by starting period ARR, annualised. It calculates the change in the level of your bucket and I think this is the best metric for valuing the ARR annuity. Not only does it measure what is leaking out but it also accounts for expansion (up-sell and cross-sell) from existing customers.
• Gross churn looks at everything that leaked out of the bucket without being off-set by upsell or cross-sell. It shines a light on products or offerings that aren’t being renewed and forces you to answer the question, “why?”.
• Logo churn tells us the percent of customers who, given the chance, chose not to renew with us. Since it is independent of customer size or shape, leaks in the bucket are created equally and it’s therefore a good indicator of customer happiness.
Net promoter score (NPS)
NPS is an increasingly popular way to measure customer satisfaction and is based on the answer to the question: “On a scale of 0 to 10, how likely are you to recommend us to a friend or colleague?”
NPS is calculated by subtracting the percentage of customers who are Detractors (who respond with a 6 or less) from the percentage of customers who are Promoters (9 or 10). The nice thing about NPS is that the Passives (7 or 8) are not included in the calculation which in turn amplifies the message from your Promotors and Detractors.
Lifetime value (LTV)
This measures the value of your customer base. LTV is calculated by taking your average yearly profit (ARR minus operating costs) and multiplying it by the average number of years a customer stays with you.
LTV/CAC ratio
This measures the relationship between the lifetime value of a customer and the cost to acquire them as a customer (CAC). The higher the LTV/CAC the better because ideally a customer’s worth should be far greater that what you spent to acquire them.
Cost to renew
This simply looks at what it costs to renew a dollar of ARR. It is calculated by dividing the operating expenses of the Customer Success department by the ARR renewed in a given period. The key to scaling a Customer Success department is lowering your cost to renew over time while at the same time maintaining low churn and high NPS.
ARR/CSM
This measures the recurring revenue each Customer Success Manager has to protect and renew. Simply looking at the number of customers a CSM owns is not enough, it’s critical to look at the book of business they are managing.
Selecting a few key metrics isn’t easy and it’s natural to grow and evolve your metrics over time. The key is regularly to ask yourself “what is this data telling me?” and “what else do I need to know?”. While a good set of metrics can serve as indicators or smoke detectors, don’t stop there.
A key part of measuring customer success is taking the time to speak regularly with your customers and solicit their direct input. Qualitative elements like feedback through conversations also play a critical role in driving customer success and, ultimately, your success.