Customer success is key to growing your SaaS business. That's why investors care about your customer success metrics (and more).
In the second half of our two-part blog series, we're sharing insights from investors about SaaS customer success metrics. We also share the context around each metric so you understand why they're important for your SaaS or subscription-based business.
This blog is based on an eGuide we created in partnership with Fulcrum Equity Partners that dives into revenue growth performance metrics, momentum and velocity metrics and customer success metrics.
Feel free to download the entire "Insights from Investors" eGuide now or read on to see part two of our blog series.
Insights from Investors: Customer Success Metrics
As a subscription business, establishing positive relationships with your customers is vital. From onboarding and implementation to adoption and support, every touch point can impact whether or not you retain that customer over time. Measuring customer success and setting goals around those metrics is instrumental in growing your SaaS business.
These metrics are indicators for measuring the health of your customer base:
- Churn and Retention
- Expansion Revenue
- Cohort Analysis
Churn and Retention
Churn can happen for a multitude of reasons, but as one of the most important indicators of the health of your business, you need to understand why. As your company expands and the size of your subscription base grows, the revenue lost to churn can also grow, requiring more bookings from new customers to replace what was lost. This can be a significant drag on growth. Here are two formulas commonly used to calculate churn.
Another common metric for analyzing retention is logo churn by replacing MRR in the formula above with number of customers. High churn usually indicates your product isn’t meeting customer needs and expectations. With insight into the factors driving churn, you can take action, such as improving customer engagement and onboarding or making product tweaks that can improve customer retention.
The Investor’s Point of View on Churn and Retention
Investors pay very close attention to churn because customer retention is 95+ percent of your revenue. Everything is amortized over two- to three-year contracts in a SaaS business.
High retention and strong renewal rates are key value drivers and are crucial to increasing CLV, and it’s an area investors spend a lot of time focusing on during diligence.
Generating revenue from existing customers is a good indicator of whether they are receiving value from your product and expanding their use. Expansion revenue includes customers who upgrade to a more robust plan or those who pay for additional users or features.
When expansion revenue outpaces lost revenue from existing customers, you’ll reach net negative churn—also known as the holy grail of SaaS. At that point, your recurring revenue is expanding without adding new customers.
The Investor’s Point of View on Expansion/Upsell Revenue
It takes significantly more time and resources to acquire and onboard a new customer than it does to retain and upsell existing ones.
Investors look closely at expansion and upsell revenue metrics and ascribe high value to businesses that can grow organically by expanding existing customer relationships.
Grouping customers by product, vertical, sales channel, deal size, etc., also known as cohort analysis helps uncover trends in specific customer groups.
For example, if a large number of customers are churning in the first or second month, you may need to address your onboarding process. Emerging SaaS companies typically have customers that vary in size, so cohort analysis by deal size can highlight which “group” has the lowest churn rates.
The Investor’s Point of View on the Cohort Analysis
Analyzing customer behavior across various cohorts provides valuable insights into how different segments of your customers are interacting with your product, sales and marketing teams.
Customers have different needs, and understanding these needs across cohorts can help improve customer relationships, go-to market messaging, predict upsell/expansion opportunities and combat churn.
Did you miss part 1 of our two-part blog series? Head on over to part 1 to read about revenue growth metrics.
Download the eGuide to see the full list of KPIs and insights from investors.