The cloud industry has grown at a stupendous rate in the past decade. And as a direct result of it, the Software as a Service (SaaS) industry has seen a boom as well.
In the past 12 years, the number of SaaS Initial Public Offerings (IPOs) has become double and the global SaaS market revenue is projected to hit the $133 billion mark by 2021.
The above figures clearly tell us that there has been a spike in the demand and as a result there has been a spike in the supply. Across the globe, the SaaS industry is aiding a wide array of industries, from healthcare, to media, to even IT itself, whose part it actually is. And if you look at all that SaaS has to offer, it’s fame doesn’t feel unearned. A subscription-based software is centrally hosted by the vendor and a buyer can purchase a subscription on a monthly or annual basis. By paying him this money, for his enterprise or his personal use, what he is earning is mobility, scalability, and agility. SaaS gives you the power to use this software service anywhere he wants to, as long as he has a stable internet connection. This makes a user mobile and he can get a lot of work done on the go. At the same time, if a user has an enterprise subscription, then he can have as many of his employees’ accounts as he wants on it; there is usually no limit attached to an enterprise SaaS plan.
With the massive demand in the market, SaaS services are fighting tooth and nail to keep their customers. The abundance of providers has put those very providers in a tough spot. Customers have so many options these days that as soon as they face even the slightest bit of inconvenience from a software, they make a switch. It doesn’t even have to be IT-related, poor customer services, annoying pop-ups, there are countless other reasons why a customer might desert a service.
Now, you cannot stop all the customers from leaving; no matter how great your services are, you are going to lose some of your customers every once in a while. But if this happens on a consistent basis, then that is a red flag. And the only way to combat this is by keeping a keen eye on some metrics that decide if your SaaS is doing well or not.
So today, we will talk about 10 key customer success metrics for SaaS enterprise software and you can calculate them.
Key Customer Success Metrics for SaaS Enterprise Software and how to calculate them
- Customer Health Score
- Customer Churn Rate
- Customer Retention Cost
- Revenue Churn
- Customer Lifetime Value
- Customer Acquisition Cost
- Months to Recover CAC
- CAC-to-LTV
- Lead to Customer Rate
- Renewal Rate
1. Customer Health Score
You must have read it on the internet a million times that your success is tied to your customer’s success. Whether you’re selling a service or a product, if it is unable to give the intended results to its customers and if he is losing business or facing other problems, then chances are you might be in trouble too. It is only natural that if a service is not standing on its promise, then the customer will unsubscribe it. So it is essential nowadays to keep a watch of your customer’s health.
The front-line reps are required to do regular check ins and see if the customer’s business is doing well. If not, then offer them their assistance and help them in planning proactively for the future.
Your reps need to find out if your customer is seeing any value from your service. How often are they using your service? Has it helped them in turning their pain-points to strengths? Has your services helped their business in gaining more customers and earning more revenues?
Customer service is not about getting a customer to subscribe and getting him started, your reps need to do better than that and keep a track of how well your customers are doing now that they have your service.
It is important because if you wait till a customer is asking you to unsubscribe,it is already too late. You need to be proactive here and find out which customers might unsubscribe in the future and help them steer away from that situation.
How to calculate Customer Health Score?
There is no direct formula that you can use to find out your customer’s health score. You need to gather different intel like your customer’s revenue and his number of customers and use them to determine his health score. Keep an eye on these figures, see what they were before the customer bought your services and how they changed after they did. If there is a spike in these numbers, then you are in the clear. But if the metrics are
2. Customer Churn Rate
Customer churn rate is one of the most crucial metrics for SaaS enterprise software. Getting new customers is important, but for a subscription-based service, keeping them is equally if not more important. Customer churn rates helps you in keeping a track of how much business you have lost in a certain period of time. In the case of the SaaS industry, it would be how many subscriptions were canceled or how many weren’t renewed. Lower customer churn rate means your business is in good shape while a higher churn rate means you’re bleeding customers at a perilous rate.
How to calculate Customer Churn Rate?
To calculate customer churn rate, you need the first thing you need is a time frame. If it can be anything- 1 week, 1 month, a year. Now you need to find out how many customers you had at the starting of this time period and how many left of churned by the end of this time period. A simple way to find it out is subtracting the number of customers you have at the end of the month from the number of customers you had at the starting of the time period. And now, you divide this number by the total number of existing customers.
Example: Say at the start of the month of January, we had 1k customers but by the end of January, 50 of them churned. So the customer churn rate for the month of January would be 5% (50/1000).
3. Customer Retention Cost
As we discussed earlier as well, customer retention is particularly important for subscription-based businesses. So most SaaS enterprise software vendors launch multiple customer satisfaction and customer success programs whose sole job is to provide top-notch customer services and make sure that your services provide some value to your customer.
But customer success programs take money. A business has to invest, heavily, in an effort to retain its customers. It is called customer retention cost (CRC) and it helps in telling a business how cost-effective it is being. Providing good services to your customers is essential for your business’ survival and investing in trying to retain them is vital as well, but a business needs to make sure that the amount of money that they are investing in trying to retain their customers can justify the revenue that they are making from these customers.
How to calculate Customer Retention Cost?
To calculate customer retention costs of your SaaS enterprise software business, you need to add all the expenses that you made for your customer success program. This will include the money that you paid to your employees in your customer success program, promotions, training, installations, etc. Now take that summed number and divide it by your total number of customers.
4. Revenue Churn Rate
Just like customer churn, revenue churn is an important metric SaaS businesses need to keep an eye on. This tells how much money a company has churned within a period of time.
What you need to keep in mind is that this metric doesn’t co-relate customer churn exactly. If you are offering different subscriptions, then it might happen that a customer who usually goes for a more expensive plan, decides to go for a more economical one. In this case, even though you did not churn out that customer, you churned out revenue. So make sure that these numbers don’t catch you by surprise towards the end of a financial year when you are ready to roll them out.
How to calculate Revenue Churn Rate?
To calculate revenue churn rate, you need to take the monthly recurring revenue (MRR) at the beginning of the month and then subtract the MRR at the end of that month. Now subtract the new sales that you gained that month and then divide that figure by the MRR at the beginning of the month.
(MRR at the beginning of the month – MRR at the end of the month) – New upgrades in MRR/ MRR at the beginning of the month
5. Customer Lifetime Value (CLV)
CLV is the average amount of money a customer pays while he is in business with your company. This metric is important for businesses because it tells them the exactly how much an average customer is worth.
How to calculate CLV?
You can calculate CLV in three steps.
Step 1: Calculate customer lifetime value. Divide number 1 by your customer churn rate.
Example: Let’s take the example in the second point and divide 1 by 0.05. Our customer lifetime value will be 20 (1/0.05).
Step 2: Calculate Average Revenue per Account (ARPA). Divide your total revenue by your total number of customers. The answer will be your ARPA.
Example: Let’s say our company has $5,00,000 revenue and has 100 customers. So ARPA will be $5000 (5,00,000/100).
Step 3: Find your CLV. Multiply your customer lifetime with ARPA.
Example: To find CLV for your example, we will multiply 5000 with 20 and we will get 100000 as our CLV (5000*20).
6. Customer Acquisition Cost
CAC is the amount of money you have to spend to acquire new customers. This metric helps businesses in making sure that their business model is viable. Customer acquisition should be a new business’ top priority while a business that has been around for a while shouldn’t forget about it either, while recurring revenue makes your business stable, the growth of your business is only possible if you keep bringing in new customers.
How to calculate CAC?
To calculate CAC, you need to sum the cost of the money that you spent on acquiring customers in a given period of time, this will include every single dollar that was spent. Then you need to divide this sum by the total number of customers that you were able to add at the end of the time period.
Example: If you spent $100,000 in customer acquisition in the last month and were able to bring in 50 new customers, then your CAC would be $2000.
7. Months to Recover CAC
This metric helps businesses in finding out how long after they have acquired a new customer it is going to take them to earn the money that they invested in acquiring them. So in simple terms, this metric tells them how long before you start seeing ROI on a customer and as your business grows, you want that time to be smaller and smaller.
How to calculate months to recover CAC?
To calculate the months it would take you to recover your CAC, you need to divide CAC by the product of MRRand Gross Margin.
Months to recover CAC= CAC/MRR*GM
Gross margin is calculated by subtracting cost of sales from gross revenue. So in the end, we get the following formula:
CAC= CA/MRR * (gross revenue – cost of sales)
8. CAC-to-CLV
CAC-to-CLV ratio is a way to tell the health of your marketing program with a single metric. This tells the ratio between the lifetime of a customer with your company and the amount of money that you spend in acquiring them. Based on this metric, you can adjust your marketing spending and fine tune your marketing programs to generate optimal results.
How to calculate CAC-to-CLV?
To calculate CAC-to-CLV, you just need to look at the numbers side by side and see the difference between them. For a healthy business and marketing program, CLV should be three times greater than CAC. Any lower and you might be spending too much on your marketing program and if CLV is too big, say five-six times greater than CAC, then you are spending too little and you are missing out on prospective customers.
9. Lead to Customer Rate
Leads are prospective customers that need to be nurtured and convinced to take the final step and sing on the dotted line. A customer is someone who was once a lead and has now been driven in successfully by your sales and lead generation team by using lead nurturing tactics is now paying you money for your SaaS services.
This metric helps you in realizing how effective your sales team is and how many leads can they close.
How to calculate Lead to Customer Rate?
To calculate the lead to customer rate of your company, you just have to take the total number of new customers acquired in a month and divide it by the total number of leads in that month.
Example: If you had 1000 leads in the month of April and you were able to convert only 30 of them, then your lead to conversion rate would be 3%.
10. Renewal Rate
For an SaaS company, renew rate is one of the most important metrics simply because they are a subscription-based business and they judge how successful they are on the basis of how many people are renewing their subscriptions.
It paints clear pictures. If customers are renewing their subscription, then your service is working for them and is giving them the desired result. And if they are not, then that means that your services are not working for them and you need to take a good look at things.
How to calculate Renewal Rate?
To calculate the renewal rate, you need to divide the number of subscribers that renewed their subscriptions by the number of subscribers that should have renewed their subscriptions.
Conclusion
The Software as a Services industry is getting increasingly competitive every year and the above metrics play a crucial role in determining where they stand in the market. Keeping a keen eye on them can help you in averting the loss of subscribers and customers and face losses.
The best way to approach this industry is to take proactive actions and keep a track of your customers and how their businesses are doing and help them if they are in a pickle because if they succeed with the help of your services, then they will keep coming back to you and you see those dollar bills fly in through the window.
