Metrics for Customer Success

Posted by Sumit Kumar Uzir, Certified CSM

When we speak of metrics in any discipline, this particular quote of Lord Kelvin has always been my personal favourite:

“To measure is to know.” “If you cannot measure it, you cannot improve it.” “When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind.”

The Importance of Metrics:

Personally, metrics always has been a great motivator in pushing towards achieving Customer Success Plans. In addition to that, it also has boosted team morale to take Ownership and somewhat builds credibility as well. Furthermore, it puts leadership in a position to make better business decisions.

Categories:

• Metrics for Customers

• Metrics for Leadership

• Metrics for Team Success

Let’s consider an imaginary company Beluga AI. They offer solutions backed by a patented AI tech on oceanic intel for Petroleum companies.

ARR and MRR:

They stand for Annual Recurring Revenue and Monthly Recurring Revenue. It does not matter if your business model demands MRR, you could simply multiply by twelve to get your ARR.

The sum total gives a holistic view and idea of the recurring revenue for the next contract cycle, minus the churn. It guides the leadership on making better decisions, forecasting, scaling operations, to say the least.

Calculation:

Say, Beluga AI has 10 customers paying $100,000 every month. So, in this scenario:

MRR = 10 * $100,000 = $1,000,000

ARR= MRR * 12 = $1,000,000 * 12 = $ 12,000,000

Retention and Churn:

Retention and Churn metrics are one of the most important aspects of a Subscription Business Model.

It doesn’t matter how much annual sales a business is closing but what matters most is how much are you able to retain. It is said in Customer Success 101 that, the very reason that led to the inception of Customer Success Teams was because of an exceptional Churn Rate during its IPO.

Churn and Retention are exactly opposite to each other. Retention is what a company is able to retain at the end of a contract cycle and Churn is what you lose. And, if you were to consider these two as twins, then I must remind you that Retention is the popular one in the industry. Companies do have an allocated or agreed upon churn rate that is considered safe per historic data, but Retention is what any subscription business thrives on.

Now, Retention could be of various types:

Logo Retention:

In Logo Retention, we only count the number of logos, the contract value doesn’t matter.

Back to the example, Logo Retention of Beluga AI

Suppose they had 10 customers at the beginning of 2019 and at 8 by the end of the year.

So Logo Retention for 2020

= no. of customers in the end / no. of customers in the beginning

= 8 / 10 * 100 = 80%

Gross Revenue Retention(GRR)

It stands for the total revenue that is accumulated from the clientele without the expansion revenues coming from cross-selling, upselling, price increase or any organic growth in an assigned timespan.

So, back to the example of Beluga AI

Now, we know the ARR = $ 12,000,000 and say they churned 2 customers.

Suppose, Total Churn value = $ 4,000,000

Therefore GRR

= (ARR - Churn Value) / ARR * 100

= (12,000,000 - 4,000,000) / 12,000,000 * 100

= 66.67%

Net Revenue Retention:

NRR or Net Revenue Retention is one of the most fundamental aspects of the overall success of any company. NRR is calculated by adding all the net revenue accumulated in that specific time period preferably annually from existing and new customers while subtracting the churned values and downgrades.

So, back to the example

Year Starting revenue 2020 = $ 12,000,000

Churn Value = $ 4,000,000 (-)

And let’s assume,

# of 3 Customers downgraded worth = $ 3,500,000 (-)

Added 7 new customers worth = $ 7,000,000 (+)

1 Customer Account Expanded worth = $ 500,000 (+)

So, ARR year ending 2020 = $ 12,000,000

Therefore, NRR

= Year Ending revenue for 2020 / Year Starting revenue 2020 * 100

=12,000,000 / 12,000,000 * 100

= 100%

Please note, the NRR can be higher than 100% and that would be an ideal position to be but if the NRR is below 65%-70%, it would be a good practice to do a Root Cause Analysis.

Expansion Revenue:

Expansion Revenue is the additional revenue generated from existing customers. This is a surplus revenue that is to be added to the initial ARR or MRR from a particular client or clients. This is one of the best indicators of customer health, adoption and usage.

Up-sell Revenue

It is the additional revenue generated from an existing customer for an upgrade in their subscription plan due to a surge in usage.

Back to the Beluga AI’s example

Let’s consider another imaginary company called Green-Flow Petro. They are a customer of Beluga AI. Currently, they have 100 licenses of Beluga AI’s product and would like to add 50 more.

Initial Contract Value

= Number of Licenses * Per License Cost

= 100 * $ 1000

= $ 100,000

Up-sell revenue due to purchase of additional licenses

= Number of Licenses * Per License Cost

= 50 * $1000

= $ 50,000

Therefore, the New Contract Value

= Initial Contract Value + Up-sell Value

= $ 100,000 + $ 50,000

= $150,000

Cross-sell Revenue:

It is the additional revenue generated from an existing customer for an upgrade in a product or service.

Now, Green-Flow seems to be satisfied with Beluga AI’s capabilities but they wanted to purchase another product to complement their AI’s Unsupervised Learning.

Let’s consider the Initial Contract Value as $150,000

Now, Green-Flow Petro was charged another $ 35,000 for the additional project charges.

Therefore, the New Contract Value

= Initial Contract Value + Cross-Sell Contract Value

= $ 150,000 + $ 35,000 = $ 185,000

Annual Contract Value (ACV):

Annual Contract Value or ACV is the is the annual revenue from customers but it excludes any one-time fees.

So, back to Beluga AI.

Let’s consider another imaginary client of Beluga AI named RH Petro is added to their clientele. They were charged as below:

License fees = $1,000,000

One-time Configuration fees = $ 50,000

Training Costs = $ 10,000

And, therefore the ACV of RH Petro is $1,000,000 as per the subscription agreement.

Total Contract Value (TCV)

Total Contract Value or TCV is an accumulation of all the values of the contract, including the ACV, training or any one-time charges.

So, back to Beluga AI.

Let’s consider another imaginary client, AT Petro. And, just for the sake of this example, let’s say a record deal was signed between both parties for a subscription fee of $ 4,000,000 for 2 years. They were charged as below:

Subscription fee = $4,000,000 for 2 years

Training fee = $ 5,000

Set up fee = $ 50,000

Therefore, TCV

= Subscription fee + Training fee + Set up fee

= $4,000,000 + $ 5,000 + $ 50,000

= $ 4,055,000

ARPU

ARPU or Average Revenue Per Unit (B2B) and Average Revenue Per User (B2C) is the average recurring revenue from all the existing customers in a given time period.

So, back to Beluga AI one last time;

As considered earlier ARR = $ 12,000,000

Total Customers = 10

Therefore, ARPU

= ARR / Total Customers

= $ 12,000,000 / 10

= $ 1,200,000

CAC

CAC or Customer Acquisition Cost is the aggregation of all the cost that goes into the acquisition of a customer. This is generally the addition of marketing and sales costs. CAC is also one of the most important aspects of SaaS unit economics that indicates long term sustainability.

CAC = total cost of sales and marketing / number of customers acquired

The CAC could be expressed in months, a year or monetary value. In addition, depending on the company’s requirements and the complexities of the product portfolios, we have calculated CAC based on product segments and the company at large.

CLTV

CLTV or Customer Lifetime Value (CLV/ LTV) is the revenue that can be achieved from a customer in a lifetime relationship with a customer.

CLV = ARPU * Gross Margin * Average duration of customer contracts

Or

CLV = ARPU / Percentage of Churn

Where;

Gross Margin (%) = (Revenue – COGS) / Revenue {COGS - Cost of Goods Sold}

CLTV to CAC ratio :

Another powerful measurement of a company’s health indicator has to be the CLTV: CAC. It helps companies to understand their profitability and take necessary steps to enhance if it is not up to their benchmark.

Ideally, if CLTV:CAC ratio is between 2-6, it is considered to be a financially sustainable company with good retention.

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Customer Success Metrics

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