We're firm believers that Customer Success teams should play a role in driving these metrics.
We’re often asked what metrics to look at to measure customer success. The answers vary widely from company to company depending on your customer success model, structure and responsibilities that have been assigned to the team.
That said, there are some metrics we believe every SaaS company should be looking at. Ideally all customer success efforts would somehow map to or directly feed these metrics.
Here are several metrics we like to begin with:
Gross Retention Rate
Gross Retention is a great metric to help us understand raw retention performance before we offset it with upsells and expansion. Therefore, this metric does not include new sales, upsells, license expansion or price increases.
We calculate it by dividing the ending annuity value of a customer cohort of by the beginning beginning annuity value of the same cohort.
(Note: a “cohort” is simply a group of customers that we can monitor over a period of time)
Gross Retention = [Ending ARR] / [Beginning ARR]
As an example, suppose we we begin a period with a customer cohort worth $10MM ARR. At the end of the period in question, we still have $9.2MM dollars of ARR. Keep in mind, this is the ARR remaining from the same set of accounts that made up the original $10MM.
Additionally, we exclude any upsell or expansion activity that occurred in those accounts. For this reason, Gross Retention can never be greater than 100%.
In this example, Gross Retention is 92% for the period.
Net Retention Rate
Net Retention tells us how much we are growing the existing customer base, net of churned or reduced ARR:
Net Retention = ([Beginning ARR] - [Churned ARR] - [Downsell ARR] + [Upsell ARR] + [Expansion ARR]) / [Beginning ARR]
Again, If we begin a period with $10MM ARR, churned $800k, upsold $1.2MM and added another $10k in price increases, our ending ARR would be $11,410,000. The Net Retention Rate in this case is 114.1%.
Clearly, this is a desirable result for a SaaS company. We grew at 14% before adding a single new logo to the base. This is called negative net churn and is a powerful growth mechanism for a SaaS company.
Renewal rates are a little different. Instead of time-based retention cohorts, here we’re looking only at revenue that’s Available to Renew (ATR) within a given period. We can look at renewal rate on a more realtime basis to determine how our renewal efforts are faring.
Renewal Rates are calculated as follows:
Renewal Rate = [Renewed ARR] / [ARR Available to Renew]
For example, let’s assume that $1MM of our ARR annuity is up for renewal in the first month of the period. We are able to renew $950k, so our renewal rate is 95%.
Renewal Rate is a leading indicator for overall retention rates, and is typically tied to CSM comp plans, especially in companies with a high-velocity sales model (more on that in a moment).
There are nuances that must be dealt with when calculating renewal rates. For example, we may have to adjust the calculations to accommodate early or late renewals? We also want to look at renewals on both a gross and net basis, similar to retention rates.
Logo Retention gives us a sense of overall satisfaction of the install base unbiased by ARR weighting.
Logo Retention = [Ending Customer Count] / [Beginning Customer Count]
This is a simple ratio of the number of customers remaining from a cohort divided by the count of customers in that cohort at the beginning of the period. So if we had 1000 customers at the beginning of a period and 890 of them remained at the end of the period, our Logo Retention is 89%.
Customer Lifetime Value
Customer Lifetime Value, or LTV, helps us understand a customer cohort’s cumulative value to the business. It’s a helpful metric to look at when determine what level of investment we can afford to make into a given group of customers.
As an example, for a cohort of accounts with an LTV of $60k, it may makes sense to assign each account a named CSM. Conversely, if LTV were only $600, we should certainly use customer marketing automation and in-app customer success strategies.
A simple LTV calculation that will typically work to get you started is as follows:
Lifetime Value = [Average Contract Value (ARR)] / (1 - [churn rate])
So, what does it mean when a customers drops a module, but adds user licenses within a single renewal transaction? Or, vice versa, the customer drops user licenses but adds a new module to their subscription.
Well, it means we have both module churn and upsell within a single transaction – a phenomenon that we’d want to track and ultimately understand more deeply. By tracking revenue “puts and takes” at the account level we maintain the ability to identify trends and monitor product health.
Here is the list of metrics to track at the account level:
This seems like a tedious exercise, and indeed it may be depending on your contract structures and unit accounting practices. However, having data at this level provides us with the ability to look at all of the metrics above across any segment of the customer base we want to.
This brings us to segmentation…
Segment for Deeper Insights
Calculating these metrics globally is interesting, and necessary, at the investor and board level, but analyzing them across the customer segmentation will provide infinitely more value.
If we begin by calculating each metric at the account level we can slice and dice the metrics by any customer segment dimension – SMB, Mid-market, Enterprise, industry, sales rep, booking cohort, and so on. This gives us the ability to identify problematic areas and pinpoint improvements to specific problems.
Said another way, segmentation becomes the foundation upon which the business cases for customer success investments are made.
Alignment to Metrics
These metrics are fundamental to every SaaS company, no matter what type of customer it serves. We are firm believers that Customer Success teams should play a role in driving these metrics. The most reliable way to justify the ongoing investment in Customer Success staff, platforms, and training is to ensure we are aligned toward business outcomes.