Customer success is a crucial consideration for businesses that provide solutions through a SaaS model. When customers use your service and derive measurable value, they remain as customers and present opportunities for additional revenue. Businesses can best measure through customer success metrics.
Several metrics provide insight into the many factors that determine customer success. These metrics help understand and explain how a customer uses your solution, the number of customers you retain, the value of retained customers and those lost to attrition, and more. Many organizations find that they need to use several methods of measuring customer success, and also that metric needs can change during the customer life cycle. We’ve highlighted five essential customer success metrics that provide insight and transparency for most SaaS companies and their customers.
Churn rate — how many customers are you losing?
Churn rate, or attrition rate, is the rate at which customers unsubscribe or otherwise cancel. Think of your SaaS business as a bucket. Your goals are to fill the bucket in an efficient and balanced manner, but in almost all cases, you want the bucket’s contents to grow. Success, then, means you have to build a bigger bucket. Churn is like the holes in a leaky bucket.
Churn is represented as a percentage of existing customers who do not renew. Churn rate can be monthly or annual. It’s essential to know whether or not the figure is over a year or per month, because a five percent yearly churn rate may be acceptable, but can signal a massive problem if the rate occurs monthly.
Churn rate is expressed through the following formula:
Churn rate = number of churned customers / total number of customers
Determining an ideal churn rate can be difficult, and often requires a more in-depth probe into the reasons behind the churn, and whether those renewing are poised to continue renewing. Ultimately, it’s paramount that your customers not only use your service but use it for their benefit.
Churn Rate By the Numbers
There will be a churn rate within any industry. Finding out what the usual churn rate is within your industry will help you assess whether the churn rate within your company is higher or lower than it should be. It can be a measurement of the health of your company culture, as well as other elements.
The following are some customer success metrics regarding the churn rate in a few industries within the United States that have a high churn rate, according to Statistica.
- Cable – 28%
- Retail – 27%
- Financial – 25%
- Online Retail – 22%
- Telecom – 21%
- Travel – 18%
Less than ideal customer service has become the dominant reason why customer churn occurs, in every industry. Currently, nearly three-quarters of all customers who stop conducting business with a company do so because they were getting poor customer service. This should be a wake-up call to you if you are lacking in providing good customer service and see high levels of customer churn. You can have the best product in the industry, but if your customer service is mediocre, you are going to lose customers.
Reducing customer churn can be as easy as responding to your customers on social media. This is something that just takes hiring one social media manager to handle all feedback and inquiries from your customers. It can go a long way in reducing the churn rate your business has. Since your churn rate can shoot up 15% by simply not answering people on social media, it will pay to stay on top of this.
Just like the lack of a response can cause your customers to break off their relationship with your company, engaging with them in a cordial and helpful way will increase brand loyalty among those customers. Three-quarters of all customers have become dedicated to a particular company after it was friendly with its responses to those customers.
One of the most important reasons for reducing the churn rate is the reality that you will find it is more expensive to get new customers than it is to retain the ones you already have. You have up to a 70% chance of selling more products or services to a customer you already have than selling to a new one. Your chances of selling something to a new customer drop down to being as low as 5%. Your current customers are already satisfied with you and trust you. New prospective customers need to be convinced that they should spend their money on what you are selling. This is why you will always have a better chance at selling to a current customer over a prospective one.
Speaking of gaining more sales from current customers, keeping those customers is significantly less expensive than it is to acquire new ones. It could cost as much as five times as much to get a new customer than it does to hold onto a current one. This is why you should maintain an ongoing relationship with your current customers and make them feel like they matter. Consistency is key here.
Existing customers can be a boon for your business. They are five times as likely to make additional purchases from you in the future. They are also four times as likely to promote your business to others. Finally, they are seven times more likely to try out a new product or service you may be offering. You can start taking advantage of the loyalty that your current customers are providing you. It will be much easier than persuading new prospects to become paying customers. What’s more, you can upsell to your current customer’s ten times more easily than it would be to get new customers to buy something in the first place.
You can significantly reduce customer churn if you know that some of your current customers are unhappy with the service they are getting. How do you do that? You ask them. There are many ways to do this. A popular method is sending customer feedback surveys. You can eliminate over 10% of customer churn just by reaching out to your customers, to see if they are satisfied. Only 1 in 26 customers who are unsatisfied will actually complain. Think about the 25 others who did not take the initiative to let you know why they decided to leave. When you reach out to your customers first, you can salvage the relationships you have with them. You can potentially even strengthen them.
The more you reduce your customer churn rate, the greater your profits will be. For every 5% reduction in your churn rate, you stand to gain between 25% and 125% in profits. That is a massive gain for your profit margin, showing you just how important it is to reduce the churn rate.
These churn rate statistics paint a very clear picture of just how important reducing the customer churn rate for your business is. It is clearly more valuable and less expensive to hold onto existing customers. Now that you understand a little bit about the churn rate and its importance in the continued success of your business, you will need to become familiar with another turn: the average revenue per account.
Average revenue per account — what’s the ongoing value of each of your customers?
Recurring revenue businesses find it useful to know the average revenue per account, or ARPA, as it helps them refine the analysis of revenue capabilities at the customer level. This figure can be used to compare with the competing SaaS companies, and to help in the forecasting of future revenues.
ARPA is also helpful because it fuels other metrics, which, in turn, provide deeper insight into your company’s future revenues. Understanding ARPA requires knowing your monthly recurring revenue and your total active customer amount. The monthly ARPA formula is:
ARPA = monthly recurring revenue (MRR) / total number of customers
LTV — what is the lifetime value of your customers?
Some of the most informative metrics use a combination of others, as is the case with Lifetime Value (LTV). LTV is an estimate of the value of a customer over their expected total customer lifecycle. It’s a valuable metric that assesses the health of a SaaS-based business by providing an average revenue figure of a customer before they churn. LTV is forward-looking and can be difficult to pinpoint in some businesses. It’s important to know the LTV as accurately as possible because it gives businesses a water level. Once you know LTV, you know how much you can spend to acquire customers. You can also determine the payback period for acquisition costs.
The LTV rate formula is:
LTV = ARPA / Customer Churn Rate
LTV: Customer Acquisition Cost Ratio — insight into your company’s performance over time
While it’s crucial to know churn rate, the average value of your customers and their lifetime value of your customers, the metric that is most essential for measuring growth is the ratio between your customers’ LTV and the cost to acquire new customers (CAC). It’s crucial because it gives SaaS businesses an idea of a general rate of return.
The LTV/CAC ratio formula is:
LTV : CAC Ratio = LTV / CAC
Too low of a ratio, such as lower than a ratio of 3, means that you are likely spending too much to get new customers. A ratio of 4, for example, means that for every dollar spent, you get four dollars in lifetime value. But, too high of a ratio may not be a sign of higher profit; it could signal too low of an investment in prospecting and a hindrance to future growth.
NPS — customer success as a tool for new business
A final crucial metric is not specifically about churn or value. Instead, it is all about how your customers feel about working with your solution and whether or not they would refer your company to others. Net Promoter Score (NPS) is a metric derived from asking a simple question: “how likely are you to refer others to us?” Customers are requested to answer on a scale from zero to 10, with zero being highly unlikely and ten indicating highly likely. Those that respond with a nine or 10 are your promoters. Don’t take them for granted. Incentivize their role as a promoter and realize one of the best and least expensive lead sources.
The formula for NPS is:
NPS = percentage of promoters / percentage of detractors
Those who answer with a seven or an eight are passives. You might want to spend some time turning them into promoters, but you first should look at the bucket of customers that fall between zero and six. These are your detractors and can keep you from achieving success. Work to find out why they are dissatisfied, not just to win back their favor, but also to fix what’s broken.
There are five customer success metrics that are key to your business being more profitable. While the churn rate is especially important to understand and keep low, you also need to look at the average revenue per account, lifetime value of your customers (as well as its customer acquisition cost ratio), and net promoter score. When you get a good handle on these metrics, you will help your business become well-positioned to be as successful as possible within your industry.
These five metrics are just a few of the several ways that SaaS companies can measure customer success. SmartKarrot works with SaaS companies to ensure that they can measure customer success and turn customers into fans. By scaling and operationalizing customer success, SmartKarrot enables more metrics and greater insights. You no longer have to feel like you are in the dark. You can identify exactly where challenge exists, along with what your company’s strengths are. Open the door to greater profitability for your business by letting SmartKarrot help you. It may be one of the soundest investments you will have ever made into your business.
This blog has been last updated on 25 March 2020 to make it more comprehensive.