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SaaS Tip: How to measure customer growth?

how to measure customer growth
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If you are running a SaaS business and want a sureshot way to succeed then you must know how to measure customer growth. Now when I say customer growth it can mean two things. First, by customer growth it can mean the progress your customer is making in their business while using your product. Second, it can also mean how much growth in revenue your existing customers have made in your company.

Now, out of these two definitions the first one – your customer’s internal growth – is out of your hands. Well, up to an extent where their growth depends on parameters outside the control of your product’s usage area. Nevertheless, you would still want your customer to succeed in their own business because that would ensure they never run short of budget to pay for your subscription.

The second definition of customer growth which relates to the growth in customer footprint in your company is what we are interested in here. It is a simple “land and expand” strategy that successful SaaS companies apply in order to grow their business.

A typical customer journey grows through the below 5 stages. Let’s have a brief look at them before we jump into how to measure customer growth.

#1 Brand awareness 

It is the stage when marketing teams are doing their job by spreading awareness of the brand or product to the target audience. In this stage customers get to know about the product for the first time and may or may not proceed to the next stage. According to a research, the average rate of visitors who convert to marketing qualified leads is 5%.

#2 Product adoption 

This includes the stage where customers have onboarded, started using your product and have got accustomed to it. It takes months or sometimes years for the customers to reach this stage. For a typical B2B transaction, the initial marketing and sales conversion itself takes months to complete. 

Then the customer success team ensures the customer acquires all the necessary training and skills to use their products. Only after the CSM’s prolonged efforts of value realization and overcoming initial glitches does the customer adopt the product.

#3 Customer retention

After the customer has bought your product and has started using it regularly, it is important that they continue to drive value out of it. For it is only possible to retain them consistently only as long as your product is helping them in business growth. For a monthly subscription model, a recurring renewal for a good six months to one year means customer retention is achieved.

#4 Account expansion

Based on the customer’s satisfaction with your product, you approaching them for further business is called expansion. This could be in the form of upselling higher end products or cross-selling related products sold by your company. The credibility acquired during their initial usage of the product would decide their willingness for doing further business with you.

#5 Brand advocacy

This is the final stage where you begin to reap harvest for your long-term efforts. Based on their overall satisfaction with your brand they can be willing to recommend your products to others. This is how they start adding more customers to the top of your sales funnel. And the same journey starts again with the new customers.

These are the broad 5 stages of customer growth. But just having goals is not enough. You must make use of important metrics to measure your progress. Only by using these metrics would you be able to know how to measure customer growth. Let’s look at a few of them below.

#1 Churn rate

It is the rate at which your customers are stopping to use your service measured across any time period. Churn rate is calculated as:

(number of customers unsubscribed) / (total number of customers at the beginning)x100

You can measure it on a monthly, quarterly or yearly basis. Naturally, as the definition suggests, the churn rate should be as low as possible which denotes your customer growth. 

If the churn rate is high it means your customers are unable to find success through your product. A negative churn rate is what you must aim for in order to gain customer growth.

#2 Net promoter score (NPS)

NPS is what drives brand advocacy to your business as how I described it above. This is the clear indication of success of your product and would help you in knowing how to measure customer growth

In a short survey, you can directly ask your customers how likely they are to recommend your product to others. On a scale from 0 to 10, those who rate 9-10 are the promoters. Those who rate 7-8 are passive and those with the rating from 0-6 are detractors. And the Net promoter score is calculated as:

NPS = % of promoters – %of detractors

According to NPS standard, any score above 0 is considered as good. A score of 50 and above is excellent and above 70 is considered to be world class.

#3 Average revenue per customer

In the SaaS industry there are companies with varying revenues per customer. There can be high paying customers as well as low paying ones. But if the average is high then it means you are on the path of growth. It is very simple to calculate as shown below:

Average revenue per customer = Total revenue from customers / Total number of customers

You can calculate it over monthly, quarterly or annual time-scales. It is especially helpful when you compare it between two time-scales in order to determine the growth or loss rate.

#4 Customer Engagement

This is the metric through which you can measure how engaged your customers are with your product. Despite of installing your app there are chances that a customer might not be using it regularly. This clearly shows a hindrance in your growth. Hence, the user engagement is calculated as the ratio between Daily Active Users (DAU) and Monthly Active Users (MAU).

User engagement = DAU / MAU

A high ratio indicates you have a good number of users who are actively using it on a daily basis. You can also measure customer engagement through active time, number of actions and other product specific metrics.

Wrapping up

Although there are many other metrics that you can use to measure customer success, it is important to remember that customer growth can not always be quantified. It is an ever-evolving function in a modern SaaS organization and requires long-term strategy to take effect. 

These metrics will give you a brief idea on how to measure customer growth. But the real growth of your business comes through the growth in revenues. In order to achieve that a qualitative approach towards customer growth is as important as keeping track of your progress through metrics.

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