Customer success is key to any growing SaaS business. Deloitte found in 2017 that customer-centric companies are 60% more profitable than companies that don’t focus on customers. With numbers like that, it’s easy to see why customer success metrics are some of the most sought after numbers by investors.
In this post, we’re sharing insights about which customer success metrics investors care about and why. The insights found here are explored in more detail in a guide we created in partnership with Fulcrum Equity Partners.
3 Types of Customer Success Metrics Investors Care About
As a subscription business, establishing positive relationships with your customers is vital. From onboarding and implementation to adoption and support, every touchpoint can impact whether you retain that customer over time. Measuring customer success and setting goals around those metrics is instrumental in growing your SaaS business.
We’ve identified the following types of customer success metrics as important to investors:
Churn and Retention
Read on for further insight into each type of CS metric.
Churn and Retention
Churn can happen for many reasons, but as one of the most important indicators of your business’s health, you need to understand why. As your company expands and the size of your subscription base’s size 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. You can arrive at that number by replacing MRR in the formula above with the number of customers lost in the period.
A high churn rate usually indicates your product isn’t meeting customer needs. With insight into the factors driving churn, however, 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. In most SaaS businesses, revenue is amortized over two- to three-year contracts.
High retention and strong renewal rates are key value drivers, and it’s an area investors focus on heavily during diligence.
Generating 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:
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, help 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 a cohort analysis by deal size can highlight which “group” has the lowest churn rate.
The Investor’s Point of View on the Cohort Analysis:
Analyzing customer behavior across various cohorts provides valuable insights into how different customer segments 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.