The relationships you build with your customers are crucial to the success of your business. But in today’s on-demand, subscription-service world, where customers have all the power, relationships are now easier than ever to get out of.
If customers aren’t finding your product helpful, if they aren’t seeing the value in it, they’ll simply stop paying for it. And they’ll likely switch to a competing product in order to find the value they’re looking for.
And that’s why more and more companies — including Drift — have been making a conscious decision to invest in strengthening customer relationships. We’ve been doing that by investing in customer success.
So I’ll cut right to the chase. Here’s the three categories of customer success metrics we recommend measuring in SaaS (along with the KPIs to measure within each):
- Churn: Customer Churn %
- Churn: MRR Churn %
- Churn: Net MRR Churn %
- Expansion Revenue: Expansion MRR %
- Customer Satisfaction: Net Promotor Score (NPS)
- Customer Satisfaction: Customer Satisfaction Score (CSAT)
We’ll dig into each of these metrics and KPIs in detail throughout this guide. But first…
Why Measure Customer Success? Your Revenue Treasure Trove
As it turns out, helping your customers become successful with your product isn’t just beneficial for customers. It’s also beneficial for your bottomline.
As SaaS entrepreneur and investor Jason Lemkin said in 2015: “Customer success is where 90% of the revenue is.”
And what he means is that it’s easier to drive revenue through upselling or cross-selling existing customers vs. going out and finding new customers.
To clarify, the objective here isn’t to squeeze as much money out of your customers as possible. Instead, you should be aligning your pricing with the value customers are receiving. (This post from our CEO David Cancel explains our views on pricing in more detail.)
The other major benefit of investing in customer success: it drives new business through virality and word-of-mouth.
Customers who see real results and who are continually amazed by the experiences they have with your product (and employees) will inevitably tell other people in their industry about you. It’s the best kind of marketing you could ever ask for.
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Best Practices in Measuring Customer Success
While the benefits of having a customer success team seem pretty obvious, like any team it needs to be able to justify its existence with data. So you need to have customer success metrics in place that help you evaluate your progress.
After scouring the internet for every customer success metric imaginable, and after talking to a bunch of people (both internally and externally) who work in customer success, I came to a realization:
Everybody does things a little bit differently. Which makes sense, considering everybody has a different product — so there are different product-specific events and activities that need to be measured.
That being said, there are plenty of customer success metrics that all SaaS companies can benefit from looking at. Those are the metrics I’m featuring here.
The percentage of customers who quit your product in a given period of time: That’s your churn rate.
Or at least, that’s your customer churn rate.
As VC Anoushka Vaswani explained on David Skok’s For Entrepreneurs blog, there are actually three types of churn you can measure.
In addition to customer churn, which is the type I just described, there’s gross dollar churn and there’s net dollar churn.
Gross dollar churn is the percentage of total revenue lost as a result of customer churn and downselling or downgrading (i.e. when customers move from a more expensive plan to a less expensive plan).
When measured on a monthly basis, gross dollar churn is also known as “monthly recurring revenue churn,” or “MRR churn”.
Like gross dollar churn, net dollar churn looks at the revenue lost from customer churn and downselling … but it also factors in the gains that result from expansion revenue, which is the revenue that comes from upselling/cross-selling existing customers. (Ideally, expansion revenue can help offset some, or all, of the revenue lost from customer churn and downsells.)
When measured on a monthly basis, net dollar churn is is also known as “net MRR churn”.
To help you get a better sense of what measuring these metrics might look like in practice, I took the sample data Anoushka provided in her churn post and graphed the three different types of churn rates. Just keep in mind that the sample data only looked at 30 (made-up) customers, so some of the percentages are a bit on the extreme side.
What the graph above helps to illustrate is that measuring customer churn alone won’t give you the full picture of how churn is affecting your business.
For example, in the month of June, customer churn was 7%, but MRR churn was at a whopping 25%. This tells us that some high-paying customers were among those who churned that month.
And actually, if you look at the sample data, you can see that it was just one high-paying customer who churned. The customer had been paying $2,000 per month, which was equal to 25% of the MRR the company had ended with the month before.
Of course, in addition to looking at churn rates (i.e. the percentage values), you can evaluate churn by looking at the actual dollar amounts.
In the chart below, I’ve taken Anoushka’s sample data and I’ve broken it down by lost MRR due to customer churn, lost MRR due to downselling, and new MRR due to expansion.
As you can see, MRR lost from downsells hasn’t been much of an issue at this hypothetical company, but the MRR lost from churn is pretty concerning. (Note: There’s a benchmarks section at the bottom of this post that explains what a healthy churn rate looks like.)
Meanwhile, the blue bars on the chart give us a glimpse into the company’s expansion revenue.
While related to churn, expansion revenue really deserves its own spot on this list. So that’s the metric we’ll explore next.
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2. Expansion Revenue
What percentage of your new revenue is coming from your existing customers? That’s expansion revenue.
Unlike churn, which is a metric for measuring retention — i.e. it shows you how good (or bad) your are at getting customers to stick around — expansion revenue is a measure of how good you are getting customers to grow with your product.
Examples of where expansion revenue comes from include customers upgrading from lower-tier plans to higher-tier plans, customers paying for additional seats or storage, and from customers paying for add-on features/functionality.
When you look at expansion revenue on a monthly basis, it’s known as expansion MRR.
Calculating expansion MRR is pretty simple: just take all of your new revenue from upsells & cross-sells for a given month and divide it by the revenue you ended with the month before.
So, for example, if your new MRR from upsells and cross-sells totaled $100 in February, and your ending MRR for January was $1,000, your expansion revenue for February would be 10%.
To help you get a better sense of how expansion revenue fits into the bigger picture of a company’s revenue growth, I took the data from my previous examples and plotted expansion MRR on top of MRR that came from new customers.
The yellow in the graph, new customer MRR, belongs to your sales team.
The blue, expansion MRR, belongs to customer success.
In a best case scenario, a company can realize so much expansion MRR that it can achieve a negative net MRR churn rate. When you achieve a negative net MRR churn rate, you can continue grow revenue even if you’re unable to acquire new customers.
3. Customer Satisfaction
While churn and expansion revenue are both metrics concerned with what customers are doing (Are they sticking around? Are they leaving? Are they upgrading. Are they downgrading?), the metrics in this section are more concerned with how customers are feeling.
As a customer success manager, knowing that a customer’s feelings toward your product are changing for the worse gives you the opportunity to take action before that customer decides to do something drastic … like downgrade or churn.
By regularly monitoring customer satisfaction, you can identify those customers who are most at risk of churning and work toward improving their experiences.
Net Promoter Score (NPS)
NPS has become one of the most ubiquitous metrics when it comes to measuring customer satisfaction with SaaS products. We use it here at Drift, and running NPS surveys is a feature of our in-app messaging product (check out our NPS customer feedback post).
One of the reasons for its popularity is its simplicity: With an NPS survey, a customer is asked a single question, “How likely are you to recommend [Product] to a friend or colleague?” The customer then picks their response from a 0-10 scale.
A “0” means a customer is not likely at all to recommend the product, while a “10” means a customer is very likely to recommend the product.
Based on the responses they give, customers are then grouped into three categories:
- 0-6 = “detractors” (you don’t want to have many of these)
- 7 or 8 = “passives” (not necessarily bad … but not good either)
- 9 or 10 = “promoters” (in a perfect world, all of your customers would fall into this category)
To determine your actual NPS score, subtract the percentage of people in the “detractor” category from the percentage of people in the “promoter” category. (Ignore the “passive’ category.)
For example, let’s say 200 customers take an NPS survey. If 100 are promoters (= 50% of respondents ), 80 are passives (ignore them), and 20 are detractors (= 10% of respondents), your NPS would be 40. Because 50% – 10% = 40%.
Compared to more traditional measures of customer satisfaction, like the CSAT (which we’ll cover next), NPS is more closely tied to growth. On average, companies with the highest NPS in their industry tend to outgrow their competitors by at least 2x.
NPS is also a strong predictor of customer loyalty. Customers who fall into the “promoter” category tend to have an average lifetime value (LTV) that is 3x to 8x higher than those in the “detractor” category.
Translation: promoters stick around with your company longer, they spend more, they’re less expensive to serve, and they tell other people about your product.
Customer Satisfaction Score (CSAT)
The Customer Satisfaction Score, or CSAT, can be a useful metric for looking at short-term happiness. But as I mentioned earlier, it isn’t a great measure of growth or customer loyalty.
A CSAT survey asks a question along the lines of, “How would you rate your overall satisfaction with [Product]?”
Customers then give a response on a 1-5 scale. (Or at least that’s a popular format.)
- 1 = “very unsatisfied”
- 2 = “unsatisfied”
- 3 = “neutral”
- 4 = “satisfied”
- 5 = “very satisfied”
Your resulting CSAT can be represented as a percentage between 0-100 based on how many customers were “satisfied” or “very satisfied.”
A score of 100%, for example, would mean that every single customer gave you a 4 or a 5.
Customer Success KPI Benchmarks
- Customer Churn: below 5% is a common goal
- MRR Churn: below 1% for best-in-class companies
- Net MRR Churn: anything in negative territory = awesome
- Expansion MRR: enough to offset churn and (ideally) enough to make net MRR churn negative
- NPS: 50 is good. (But for perspective, Apple’s latest NPS score was an 89.)
- CSAT: 80% seems to be a common goal
Bonus: Customer Success vs. Customer Support
Since both of these terms tend to get used a lot, we thought it was worth digging into the differences.
Unlike customer support, whose primary goal is to solve customer issues as they arise, customer success takes a longer-term view of the customer relationship. From day one, the mission of customer success is to help customers derive as much value from the product as possible.
With customer success, you’re proactively helping customers work toward goals, whereas with customer support, you’re reactively fixing things and answering customer questions.
(Note: this graphic was inspired by a graphic I saw on the OpenView blog.)