Customer Success is one of the most important metrics a software company can track. Strong revenue growth can sometimes hide greater challenges within a business due to churn. Companies that can retain and even upsell clients are that much more valuable to investors because growth can come from new and existing clients which more than offset any customers that don’t renew. It costs five times more to acquire a new customer than to keep an existing one, and a good customer success team finds 90% of revenue from existing clients (Forbes & SaaSx).
Subscription businesses thrive when they can build strong relationships with their customers. The sales cycle extends past the close date, with the onboarding, implementation, adoption, and support stages taking on an equal significance. It is crucial to set goals and track pre-identified KPI’s when growing a customer base. It is crucial that a company commits to building strong customer success process, systems, and teams to track and drive improvement in pre-identified KPI’s when growing a customer base.
This post, in partnership with SaaSOptics, will walk readers through the customer success metrics that investors care about, including:
- Churn and Retention
- Expansion Revenue
- Cohort Analysis
For more metrics that matter, including revenue, performance, and velocity metrics, make sure to download our comprehensive guide.
Churn & Retention
Understanding your churn can be the key to unlocking the health of your business. As revenue rate and new business grows, revenue lost to churn also has the potential to increase, making your sales staff work twice as hard to make up for the lost business. Take a look at the below formulas often used for calculating churn:
Net Churn = (Sum of MRR churn and contraction – Sum of expansion MRR)/MRR at start of period
Gross Churn = (Sum of MRR churn and contraction)/MRR at start of period
Another measurement of churn is logo churn. Replace MRR in the above formula with the number of customers lost in the set period.
So, what exactly does churn indicate? Not meeting customer needs, for one. Listening to why your clients decide to stop using your product or service or not even starting to use it will give you insight into potential tweaks in your product, onboarding, or marketing.
The Investors Point of View on Churn & Retention:
Investors pay close attention to churn as it helps them understand product-market fit and whether a product is nice to have or need to have. It ensures the company has a clear ICP (Ideal Customer Profile), which is important for marketing to understand so that the business can target more effectively to organizations, create leads, and ultimately scale and grow quickly. Investors look for commitment to investing in teams, processes, and systems to continuously drive customer success ultimately improving churn and retention.
Expansion & Upsell Revenue
Generating additional revenue from existing customers is a good indicator of whether they receive value from your product and expand their usage. Expansion revenue includes customers who upgrade to a more robust plan or those who pay for additional seats or features.
When expansion revenue outpaces lost revenue from existing customers, you’ll reach a net negative churn rate. At that point, your recurring revenue is expanding without adding new customers.
The Investor’s Point of View on Expansion & Upsell Revenue:
Investors look for growth momentum in businesses. With net negative churn, it’s much easier for growth to compound and investors to believe in accelerated future growth by investing more into sales, marketing, and customer success. Companies that have net negative churn are much more attractive to investors as a result.
Uncover trends in specific customer demographics such as product, vertical, sales channel, deal size, and more using cohort analysis.
An example of this is if analytics show that small businesses churn within the first three months. By identifying when and who is most likely to churn, companies can pinpoint where and how tweaks can be made to improve retention.
The Investor’s Point of View on the Cohort Analysis:
In the early days, many startups are excited to win any customer, only to realize later that many of them were not the right fit. Continually reviewing customer trends is critical to understand a company’s ideal customer profile (ICP) and the value proposition that resonates. There may be many ICPs and many differing value propositions. As equity funds look to invest in the company, understanding penetration within the current ICP and expansion customer profiles will help tell a story of current focus but also future expansion into bigger markets.
Did you enjoy this post? Check out our Revenue Metrics that Matter post, also in partnership with SaaSOptics.
Download the guide to see the full list of KPIs and insights from investors.