Brenda Linhares - Partner & CMO @Insight Sales
The customer success sector is essential for any growing business. Research by Deloitte has shown that companies that work customer-centrically are 60% more profitable than companies that don't focus on their long-term partners. With numbers like that, it's easy to understand why customer success metrics are such hot numbers for investors today.
Follow this article to understand how to implement these KPIs in your business.
What is a Customer Success sector and what do they do?
The SaaS business environment is currently dominated by recurring revenue (MRR) subscription-based plans. This has essentially redefined how companies approach customer retention and customer lifetime value. For this purpose, we now have professionals like Customer Success Managers.
After closing a deal, the goals immediately shift to ensuring these new customers find value in your product or service as soon as possible, and see results on an ongoing basis. That said, smart companies don't leave customer success to chance. Instead, they invest in a successful strategy to:
- Better understand customers' business and objectives
- Deeper relationship with customers
- Work with customers to ensure they use your product successfully
- Data-driven insights about when and how customers are using your solution.
The cost of acquiring a new customer can be 5 to 25 times more expensive than the cost of retaining. So the risk of losing customers in a highly competitive market is too big to leave customers on their own.
Therefore, the Customer Success sector has a methodology whose mission is to help customers adopt the company's products and services, and use them to ensure that they achieve their goals. Rather than closing a sale and letting the customer adopt your solution unattended, the CS is the direct contact that will respond ASAP any questions the customer may have during the partnership, and proactively finds new ways for the customer to evolve with their revenue and routine.
That said, the Customer Success professional becomes the customer advocate and voice within your company. On the other hand, he will also represent the company when dealing with the customer.
How the SaaS business model highlighted the Customer Success position
High churn rates have always been a concern for companies, even before they were named like this. But something intensified when SaaS products began to dominate the B2B sales market.
The main business model of SaaS companies is based on subscription plans, which means that customers can now leave with a month of service without fines or aggravations for the most part. Is not interesting anymore to hold a client in a one-year contract (depending on your industry) after a sale. The model has now turned into recurring revenue (MRR), based on good products and services that will ensure the customer stays in your house. This reinforces the importance of reducing churn and, as a result, the Customer Success industry was born.
5 Customer Success Metrics Investors Need to See
Without a doubt, establishing positive relationships with your customers is vital. From onboarding and implementation to adoption and support, every touchpoint can impact that customer's retention over time. Measuring customer success and setting goals around these KPIs is critical to growing your business.
That said, we've identified below the types of Customer Success metrics that are important to investors:
1. Churn rate and retention
Churn can happen for many reasons, but as one of the most important metrics of your business's health, you need to understand why. As your business expands and the size of your customer base evolves, revenue lost can also grow, requiring new customers to come in to replace lost ones, and this can be a significant drag on your business stability. Below is a commonly used formula for calculating churn:
Number of customers who canceled at the end of the period ÷ Total customers at the beginning of the period = Churn
A high churn rate usually indicates that your product is not meeting the customer's needs. With insights into the factors that drive churn, however, you can take action like improving customer engagement and onboarding or making product adjustments that can improve customer retention.
Investors pay close attention to churn because customer retention typically accounts for more than 95% of your revenue.
High retention and renewal rates are key drivers of value, and these are metrics that investors focus heavily on during the due diligence period.
2. Cross sell and Upsell
Generating more revenue from existing customers is a good indicator of whether these customers see the value of your business and want to expand the partnership. Expansion revenue includes customers who upgrade to a more robust plan or those who pay for additional features or services.
When expansion revenue exceeds lost revenue from existing customers, you will reach a negative net churn rate. At this point, your recurring revenue is expanding without adding new customers, which will be quite positive.
That's because it takes much more time and resources to acquire and onboard a new customer than it does to retain and sell to existing ones.
Investors look closely at expansion revenue metrics (upsell and cross sell), and place high value on businesses that can grow organically by expanding their existing customer relationships.
3. Cohort analysis
Cohort analysis is a methodology that allows you to organize the list of customers and understand all the pros and cons of their behavior. It allows you to make precise business decisions about each type of customer, rather than lumping all your customers under one assumption. Because customers are critical to your business, you'll probably want to be aware of every possible opportunity to increase retention, increase Lifetime Value (LTV) and reduce churn.
For example, if a large number of customers are leaving in the first month or two, you may need to address your onboarding process and improve that point with the tech team.
Analyzing customer behavior across multiple cohorts provides valuable insight into how different customer segments are interacting with your product, sales, and marketing teams.
Customers have different needs, and understanding those needs across all groups can help improve customer relationships, anticipate upsell/expansion opportunities, and combat churn.
4. Monthly Recurring Revenue (MRR)
MRR is the total amount of predictable revenue your business can expect to receive on a monthly basis. For SaaS companies, is the volume of MRR that will come from monthly subscriptions.
However, you can get more technical with this metric by checking MRR in five basic ways:
- New MRR: MRR of new sales
- Expansion: MRR of existing customers who choose to upgrade their service (new plan, additional licenses, add-on features, etc.)
- Reactivation: MRR from previous customers who returned
- Downgrade: Loss of MRR for customers who opted for a cheaper plan
- Churn: Loss of MRR from customers leaving your company.
Measuring the five points above will help you understand the customer lifecycle.
5. Customer Lifetime Value (LTV)
LTV estimates how much money you can expect on average from a single customer. That is, it is the monetary value of your customer relationship.
If you're looking for a metric that can accurately measure how much a single customer is worth, this is the one. And, as already mentioned, it is much more cost-effective to retain customers than to acquire new ones, so increasing this metric is critical to long-term success.
The calculation is quite simple:
Average Ticket x Average Customer Lifetime = LTV
Combined with other metrics on this list, LTV can also act as a great indicator of when customers may be nearing the end of the contract, allowing you to create retention strategies to further extend your customer partnership.
Do you need a Customer Success strategy?
Whenever there is a risk of frequent customer churn, and the problem is not with your product or service, a CS strategy will help you tremendously.
That said, each company should have its own approach. Some may have a separate department dedicated to Customer Success, while others combine the sector with another function such as sales and support. This will depend on how your solution and sales cycle works.
Although the concept of Customer Success is not new, strategies and the use of technological tools are. That's why any company can make some changes and improve a Customer Success methodology to make customer relationships better through the use of data and technology (and no investor will miss this opportunity).
