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The crucial nuance behind seven top Customer Success metrics for SaaS companies
Some Customer Success metrics are considered standard but there’s often more than meets the eye. SaaS professionals who geek out on metrics can find themselves in deep philosophical debates about the best numbers to track.
That’s according to a landmark webinar we hosted last fall titled, “A Crash Course in Customer Success and SaaS Metrics” with Dave Kellogg and You Mon Tsang.
Dave has a long and tenured history serving in roles including CMO, and later, CEO. Today he is the principal of Dave Kellogg Consulting and an entrepreneur in residence (EIR) at Balderton Capital. You Mon is an seasoned entrepreneur and the founder and CEO of ChurnZero.
That webinar was – and continues to be – wildly popular because it explores the nuance behind Customer Success metrics. That nuance is derived from three underlying factors:
- Construct. There is often more than one way to calculate a given Customer Success metric;
- Gaming. Investors rely on metrics for determining valuations and deal-making, so these can sometimes become subject to gaming; and
- Conclusions. It’s common for two smart people to see the same metric and yet draw different conclusions. In a sense, that’s what business is all about.
Understanding the nuance behind Customer Success metrics will help you build consensus around which numbers are the best numbers to track for your SaaS company. It will also ensure everyone is on the same page as to what the metrics are telling you about the health of your business.
Customer Success metric 1: recurring revenue
Recurring revenue is the total value of a subscription at the end of a given period. It demonstrates how fast a company is growing.
There are two broadly accepted ways to calculate this number:
- Annual recurring revenue (ARR) is the sum total of contracts that renew on a yearly basis; and
- Monthly recurring revenue (MRR) is the sum total of contracts that renew on a monthly basis.
Nuance: You should use the time period that best matches your business cadence. For example, large enterprise software deals are often structured on an annual contract cadence (or even a multi-year cadence), so ARR is usually best. If most of your contracts are renewable monthly subscriptions, MRR probably works best.
Customer Success metric 2: customer retention rate
Customer retention rates measure a company’s ability to retain customers. That seems obvious, but here again, there is more than one way to calculate the customer retention rate including:
- Logo retention rate. This is calculated by dividing the number of customers remaining at the end of a contract period by the number of customers at the beginning of the contract period. If your company has 100 customers at the beginning of the year, and 98 at the end of the year, the logo retention rate is 98% (98 ÷ 100 = 98%).
- Available to renew (ATR). This method only looks at customers that are up for renewal in a given contract period. It’s calculated by dividing those customers up for renewal that renewed – by the number of customers up for renewal. For example, if your company has 100 customers but only 40 of them are up for renewal this year – and the other 60 are up next year – you only consider those 40 up for renewal in the ATR equation. Let’s say 38 of the 40 renewed – the math looks like this: 38 ÷ 40 = 95%.
Nuance: These are both valid measures, but they serve different purposes. The logo retention rate is preferred by investors who are trying to determine the total value of your customer base. By contrast, ATR may better meet the needs of entrepreneurs who are trying to figure out how to best run their businesses.
Customer Success metric 3: churn rate
The customer churn rate is the inverse of the logo retention rate described above. In that example, the customer logo retention rate is 98% – so the logo churn rate is 2%. This is determined by dividing the number of logos lost by the number of customer logos at the beginning of the year (2 ÷100 = 2%).
As with the previous examples, there is more than one way to calculate a churn rate. It can also be calculated as churn by revenue. For example, let’s imagine 100 customers are collectively worth $10,000 in revenue. Let’s also say while the average contract is worth $100, two of these customers pay more because they subscribe to a premium tier worth $200 each.
If they don’t renew, those two customers together represent $400 in lost revenue. We then calculate the revenue churn rate by dividing the lost revenue by the total revenue. This produces a churn rate by revenue of 4% ($400 ÷ $10,000 = 4%).
Nuance: Calculating the churn rate based on the customer logos may miss the financial impact in a business that has tiered subscription offerings. In this example, the 4% revenue churn rate is double the 2% customer logo churn rate, but more accurately illustrates the effects on revenue.
Customer Success metric 4: net revenue retention
Net revenue retention (NRR) measures a company’s ability to retain and expand customers. It helps articulate the health of a SaaS business.
We defined NRR as the total sum of retained, contracted, and expanded revenue over a set period, typically one month (i.e. MRR) or one year (i.e. ARR). Net revenue retention calculates total revenue, including expansion revenue, minus churn, which includes contract expirations, cancellations, or downgrades.
To put it another way, on an annual basis, it’s looking at the value of customers a year ago compared to what their value is today. It’s important to note that NRR can exceed 100%. As we note in an example on Churnopedia:
“Your business enters January with an MRR of $27,000 and exits January with an MRR of $35,000 (due to upsells) from the same customers at the start of the month. And your business exits January with $5,000 in revenue churn due to contract expirations. Your net revenue retention for January is 111% ($30,000 ÷ $27,000).”
Nuance: Startup founders are reporting NRR is increasingly important. It’s coming up earlier in discussions with potential investors and influencing their willingness to invest.
Customer Success metric 5: gross revenue retention
Gross revenue retention (GRR) reflects a company’s ability to retain customers. It is calculated by taking total revenue – excluding expansion revenue – and subtracting revenue churn, which includes contract expirations, non-renewals and contractions.
A contraction is anything that makes ARR fall such as reducing the number of licenses (seats) or downgrading to a lower-tier product.
Nuance: GRR addresses one of the key challenges with NRR because it excludes expansion revenue. Expansion revenue can mask churn – where a 20% churn rate can hide behind a 40% expansion rate. Unlike NRR, GRR cannot exceed 100%.
Customer Success metric 6: customer lifetime value
The customer lifetime value (CLV) or lifetime value (LTV) is the average recurring revenue per customer multiplied by the customer lifetime. So, if a customer subscribes to your software for $1,000 per month and typically stays for five years, the CLV is $60,000 ($1,000 x 12 x 5 = $60,000).
Nuance: CLV is often compared with customer acquisition costs (CAC) to determine the time it takes to reach profitability. However, a growing number of analysts believe CLV isn’t useful for several reasons:
- CLV doesn’t account well for churn;
- CLV doesn’t consider the impact of new competitors entering a space; and
- CLV overlooks the effects of force majeure events like COVID, global supply chain shortages and war.
However, as You Mon pointed out, it’s still a Customer Success metric that’s used often, and so Customer Success managers should be knowledgeable about it.
Customer Success metric 7: net promoter score
A Net Promoter Score® (NPS) measures customer satisfaction. It’s based on a one-question survey that asks customers, on a scale of 1-10, where 10 is best, “How likely are you to recommend us to a friend or colleague?”
Answers are grouped into three categories:
- Promoters: customers who scored 9 or 10;
- Passives: customers who scored 7 or 8; and
- Detractors: customers who scored 0 to 6.
The NPS is then calculated by subtracting the percentage of Detractors from the percentage of Promoters. Scores can range from -100 to +100. Any positive score is good because it means you have more promoters than detractors.
Nuance: NPS can be misleading. For example, if you have 10 users under one customer logo, and most of them are unhappy, but the one person you survey is a Promoter, it gives you a false sense of that customer’s overall satisfaction.
A related issue is when a customer gives you a high NPS – 9 or 10 – but doesn’t renew. A company being acquired is a good illustration of when this can happen.
To address this, Dave suggests adding a second question to the NPS survey using the same scale: “Do you intend to renew when your contract is up for renewal?”
If a customer gives you a high NPS, but says they don’t plan to review, you now have time to act. You can call them up and perhaps get a meeting with the acquiring company.
The full webinar contains much more nuance – and thousands of CSMs have watched it. The recording is freely available on our YouTube channel and is embedded nearby.
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