What are customer success metrics?

Customer success metrics are majorly the key performance indicators that are meant to ensure the overall health of a company and its customer base. These metrics offer insights about customer adoption, retention, engagement, churn, and expansion. By keeping a close track of these metrics, SaaS businesses can identify areas that require attention, improve customer journey, and drive revenues. Some of the common customer success metrics are Net Promoter Score, Customer Effort Score, product adoption rates, and churn rate.

With customer success, businesses can retain customers and increase their overall lifetime value. Customer success KPIs are critical to gauge your business performance. They evaluate how well a company aligns with the demands of customers, along with their growing expectations. Through regular tracking of these KPIs, teams can better make decisions about product refinement, pricing strategies, improved services, and stronger customer relationships.

Customer success metrics are quantitative and qualitative measures to understand the customer behavior and how your brand meets their requirements. It showcases how well a business supports customers by scalable supporting models and success management.

Understanding the CSM in detail

Keeping a close eye on your business operations and closely monitoring what value you are adding to customers’ lives through your product is crucial. Here are the top metrics that are crucial for your business success.

Net Promoter Score

Net promoter score (NPS) will reveal how customers feel about your brand and products or services. NPS is one factor that will assess how happy the customers are when they use a product. Happier or with higher scores of customers are most likely to exhibit repeated purchases.

This one-question survey queries customers: “How likely are you to recommend [Brand/Product/Service] to a friend or family?” To answer, customers rate on a 1-10 likeliness scale to recommend that business or its products.

0-6: These are detractors or dissatisfied customers who are likely to discourage friends and family from using that brand, product, or service.

7-8: These are the passive audience. They are content with their experiences, but not quite enough to merit high praise or promotion.

9-10: These are the promoters. These are the most loyal customers, the most passionate about the products or services, and the most likely to recommend the brand to others.

Customer lifetime value

Customer lifetime value (CLV) is the most basic statistic customer success teams can track. CLV tells us how much money the average customer is likely to spend on a business’ products or services during the lifetime of the relationship between business.

With this data, organizations can gain a better understanding of their ideal customers and their worth to the company. As CLV rises, the company can see if its products and services are helping customers succeed. If CLV falls, the customer success team needs to seek out defects in the overall customer experience.

Formula for Customer Lifetime Value

The basic formula for calculating CLV is

CLV = (Average Order Value x Purchase Frequency) x Customer Lifespan

Where:

1. Average Order Value (AOV) is the average amount spent by a customer in a single transaction.
2. Purchase Frequency (PF) is the number of times a customer makes a purchase within a given timeframe (e.g., monthly, quarterly).
3. Customer Lifespan (CL) is the average duration of a customer’s relationship with the company.

For example, let’s say

• AOV = $100
• PF = 4 times per year
• CL = 3 years

CLV = ($100 x 4) x 3 = $1,200

This means that, on average, a customer is expected to spend $1,200 over their lifetime with the company.

Customer health score

The customer health score indicates whether a customer perceives value in the organization’s product or service and actively utilizes it. This measure, most applicable to SaaS businesses, rates customers on their probability to retain and expand with the brand or churn.

These metrics are different from firm to firm. But customer success teams must catch up on customers’ health on regular basis, review other KPIs, possibly dispatch regular long-form surveys, and schedule focus groups.

Customer success teams usually don’t know which customers to reach out to. They must know what the signs to watch out for are, such as how many months a customer sticks with the product, how many various users interact with it, and how many features they interact with.

Common metrics used to calculate Customer Health Score

Although the specific metrics often vary from firm to firm, common ones include

• Product adoption: The number of features or users interacting with the product.
• Time-to-value: The time it takes for a customer to realize value from the product or service.
• Usage frequency: The regularity of customer interactions with the product or service.
• Customer tenure: The length of time a customer has been with the company.
• Support requests: The number and type of support requests made by the customer.

Formula for Customer Health Score

There is no one formula, as it depends on the specific business and industry. However, a common approach is to assign weighted scores to each metric, then calculate an overall score.

Example:

Customer Health Score = (0.3 x Product Adoption) + (0.2 x Time-to-Value) + (0.2 x Usage Frequency) + (0.15 x Customer Tenure) + (0.15 x Support Requests)

Where:

• Product Adoption: 0-100% (e.g., 80% of features used)
• Time-to-Value: 0-100% (e.g., 60% of customers realized value within 3 months)
• Usage Frequency: 0-100% (e.g., 40% of customers log in weekly)
• Customer Tenure: 0-100% (e.g., 80% of customers have been with the company for 6 months or more)
• Support Requests: 0-100% (e.g., 20% of customers have made a support request in the last 30 days)

The weights assigned to each metric will vary depending on the business and industry. The resulting score can be used to categorize customers into different health score tiers, such as:

Green (80-100%): Healthy customers with a low risk of churn

Yellow (50-79%): At-risk customers with a moderate risk of churn

Red (0-49%): High-risk customers with a high likelihood of churn

Customer retention rate

Customer success teams can utilize customer retention rates to get the percentage of current customers that continue to be customers after some amount of time. This measure assists teams in learning more about what makes customers loyal to the company and may indicate where to enhance customer service.

This measurement is similar to churn rate, but it measures the rate at which a business retains customers instead of the rate at which they lose them.

How to Calculate the Cost of Customer Retention

In order to determine your customer retention cost, you will need to audit all your customer success expenses. Your customer success efforts to audit are the cost incurred on payroll for customer success and customer service teams, engagement and adoption initiatives, professional services and training, and customer marketing.

Include these costs in a total. Divide that figure by your overall number of customers. The answer will provide your business’s cost of customer retention.

Retention Costs / Total Number of Customers = CRC

Average Revenue Per User

Average revenue per user (ARPU) calculates the average revenue collected per customer during a given period. It enables companies to see how much revenue is generated by each customer and assess the profitability of various customer groups.

Customer success teams leverage ARPU to monitor trends in spending by customers, which can guide upsell plans and identify high-value accounts.

Formula for Calculating ARPU

The basic formula for calculating ARPU is

ARPU = Total Revenue / Number of Active Customers

Where:

• Total Revenue: The total revenue generated by all customers during the specified period.
• Number of Active Customers: The number of customers who were active during the specified period.

Example:

• Total Revenue: $100,000 per month
• Number of Active Customers: 1,000

ARPU = $100,000 / 1,000 = $100 per customer per month

Monthly recurring revenue

Most companies regard MRR as a KPI for the customer base, or spending, of how much over time it has increased. With the emergence of SaaS companies, which now pay monthly fees instead of fees charged one-time by license fees, MRR became a financial resource to be used to determine cash flow.

MRR indicates the amount of spending by the customer base on products or services during each month, something that can favor companies that provide subscription-based services. Customer success teams can contrast this over time to observe growth or decline in MRR.

Calculations for Monthly Recurring Revenue

In order to calculate monthly recurring revenue, you can multiply the total number of paying customers by average revenue per user, or ARPU, per month. For instance, if a company has 100 customers paying $100 each month, their MRR will be $10,000.

The formula is

MRR = MRR = (number of customers) x (average monthly revenue per customer)

For example, suppose a business has three subscription plans: Plan A costs $5/month, Plan B costs $10/month, and Plan C costs $20/month. In a given month, the business has 100 customers subscribed to Plan A, 50 customers subscribed to Plan B, and 30 customers subscribed to Plan C. The MRR for the business in that month would be $1600.

Conversion rate

Conversion rate quantifies the number of prospects or customers that take a desired action as a percentage, for example, subscribe to a service, move to a paid tier, or contract renewal.

By knowing conversion rates, customer success teams can understand the impact their work at each touchpoint has on meaningful customer behaviors. Monitoring conversion rates aids optimization of onboarding, upsells, and customer touchpoints.

How to Calculate Conversion Rate

Conversion rate calculation will vary based on what constitutes a conversion for your company. For instance, the conversion rate of websites is determined by counting the number of conversions within a time frame and then dividing it by the number of individuals who visited your landing page or website in that time frame. Lastly, multiply it by 100%.

(Conversions / Total Number of Visitors) * 100% = Conversion Rate

(Conversions / Total Number of Leads) * 100% = Conversion Rate

Customer Churn Rate

Churn rate is a crucial indicator of customer success, as it offers insights about the customers who are no longer interested in a service or product. Factors that affect churn rate include the following:

• Closed accounts
• Canceled subscriptions
• Loss of recurring revenue
• Loss of recurring business or contract

Churn rate has a role to play in gauging each individual’s success on the customer success team. In general, churn rate is noticed when a customer does not renew their subscription to a service or stops purchasing your product.

Formula for Calculating Customer Churn Rate

The basic formula for calculating customer churn rate is

Customer Churn Rate = (Number of Customers Lost / Total Number of Customers) x 100

Where:

• Number of Customers Lost: The number of customers who stopped using the product or service during the specified period.
• Total Number of Customers: The total number of customers at the beginning of the specified period.

Example:

• Number of Customers Lost: 100
• Total Number of Customers: 1,000

Customer Churn Rate = (100 / 1,000) x 100 = 10%

This means that 10% of the customer base was lost during the specified period.

Customer Effort Score

Customer effort score indicates how conveniently a customer received help from the brand or how much effort went into resolving an issue, making a purchase, or finding an answer to a query.

This score is calculated by sending a survey to clients to assess how easy/difficult it was to get the help that was needed.

Net Dollar Retention

It is a metric that calculates revenue alterations generated via the existing customer base. As a crucial metric for customer success, NDR is helpful for describing the changes in recurring revenue over the passage of time based on upgrades, downgrades, and even customer churn. It measures how much money you have gained or lost from your existing customer base. Some of its examples are

• Upgradation of an existing plan
• Churning
• Plan downgrading
• Payments for additional features such as storage

Formula

To measure NDR, you can do the following:

NDR = (starting MRR + expansion – downgrades – churn) / starting MRR * 100

First Contact Resolution Rate

This particular metric helps to see whether your customer support requests can be handled on the first contact with the customer. While this measure is related more towards customer service rather than customer success, it also contributes to customer success in the grand scheme of things, not to mention enhanced customer loyalty. It is also a crucial metric to determine if it is the support staff or the product that prevents the solution from being discovered on the first interaction.

Measuring First Contact Resolution Rate

In order to measure your first contact resolution rate, you first need to know how your customer support team works and tailor the requirements accordingly. The questions to ask at this point are

• What constitutes a first contact resolution?
• Is my support team configured strongly enough to fix issues on first contact?
• If a customer contacted another department or individual from the company, does that constitute first contact?
• Do calls that were terminated because of wait time qualify?

And many other questions, depending on your work environment and company setup.

Why are customer success metrics important?

Customer success metrics are crucial as they offer valuable insights into customer behavior, preferences, and any pain points or challenges. By analyzing these metrics, businesses can easily identify areas for improvement. Moreover, they can:

• Optimize customer onboarding and support efforts.
• Develop targeted marketing campaigns.
• Enhance customer loyalty and satisfaction
• Increase revenue and growth

When you have complete details about your business performance, you can curate well-researched strategies in terms of sales, marketing, price setting, and more. For any business to run smoothly, it is important to closely monitor the performance of key indicators of success, as they showcase your market presence and how well your product or services meet the customer needs. If given attention to customer success metrics, businesses can perform better by meeting the rising expectations and customer demands.

What are the Benefits of Customer Success Metrics?

The real benefits of customer success metrics lie with their actionable impact on the decision power of businesses.

Ease of Decision-Making

Availability of data via customer success metrics such as churn rate or NPS can allow confidence in any strategic move you make. These help in devising crucial strategies that can help in the long run.

Customize Interactions

When you have clarity over business success and have data that tells you what needs to change, it gets easier to customize user experiences. It allows building smooth customer business relationships.

Address pain points.

When you have complete knowledge about the health of your business, it gets easier to gauge strategies that address weak areas of your business. The areas that need the most attention are easily dealt with.

Improved Business Performance

Tracking down the performance of major KPIs allows measurement of the effectiveness of strategies. It helps to find where the business lacks performance; it can help in continuous improvement at the same time.

Enhanced Customer Lifetime Value

By laying emphasis on customer success, businesses can enhance the overall value of each customer, thereby leading to increased profitability.

Proactive Problem Solving

Dissatisfied customers are most likely to churn after a certain period of time. If customer success metrics are kept in consideration, it gets easier to make amendments in products or services to meet the demands of customers.

Upsell/cross-sell revenue

Making use of any upselling or cross-selling opportunity to existing customers can affect your business growth. By looking at the revenues attained through these upsell or cross-sell opportunities, you can gain insights about customer expansion initiatives and whether your actions are converting customers or driving gains.

What are the limitations of customer success metrics?

In most cases customer success metrics depict a range of benefits to understand the progress of your business. However, not all metrics can fully highlight the success of each step or initiative you employ. There are always certain cons of each metric that can impact the results.

Lagging indicators

Certain metrics, such as churn rate or customer satisfaction, are lagging indicators, as they showcase what has already happened rather than offering real-time insights about customer behavior.

Limited Focus

Numerous customer success metrics have a narrow focus on one part of the customer journey, possibly missing other important aspects. For example, a metric may highlight customer satisfaction but not the long-term value of the customer to the business.

Subjectivity and Bias

Metrics such as Net Promoter Score (NPS) are based on customer self-reporting, which can lead to subjectivity and bias. Customers’ expectations and perceptions can differ significantly, impacting the validity of the metric.

Overemphasis on Quantitative Data

Most customer success metrics give heavy weight to numerical data, such as percentages and numbers, as opposed to qualitative information. This could result in the failure to consider contextual feedback or information from customers.

Complexity and Noise

With an ever-growing pool of customer information, metrics will become complex and noisy. It becomes difficult to spot relevant patterns or trends from this complexity and noise, thus leading to misguided conclusions.

Inaccuracy

Customers can mislead metrics, like NPS or CSAT, by giving inculcated feedback or taking advantage of system weaknesses. This will ruin the accuracy of the metric and lead to improper business decisions.

Contextual Dependence

Customer success metrics are context-dependent. What is suitable for one business or industry may not work for another. This calls for careful analysis while choosing and interpreting metrics.

Data Quality Issues

Low data quality, e.g., missing or wrong data, can disproportionately affect customer success metrics reliability. Keeping data in integrity is important for making smart business decisions.

Overreliance on Metrics

Excessive use of metrics could result in too much focus on optimization instead of innovation. This could impede creativity and the exploration of new possibilities.

Evolution of Customer Behavior

Customer behavior and preferences continue to change. Measurements need to keep up with the changes in order to be useful and effective in determining customer success.