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. But how can businesses best measure customer success?
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.
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.
These 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.