Guessing has no place in a changing customer success industry. Now more than ever, customer success leaders must use relevant and actionable customer success metrics to make guided decisions and strategies to deliver success.
Even Data is reliable, accurate, and complete, it can still become overwhelming. Out of the myriads of customer data that can be measured, in this blog, I will emphasize the most important customer success metrics you need to focus on based on best practices. Together, we will examine metrics that quantify the overall financial health of a subscription-based business.
Remember, most customer success metrics fall into one of these four main categories:
- Customer Financial Metrics
- Customer Heath Metrics
- Customer Success Team Performance Metrics
- Customer Usage Metrics
While this blog focuses on customer financial metrics, it is part of a blog series, where we examine each customer success metric category in separate blogs. Don’t forget to follow the links above for each metric category.
Customer Financial Metrics You Should Monitor
These core metrics provide an assessment of the financial health of a company and can be used to forecast growth and stability.
1. Average Revenue Per Account (ARPA)
The Average Revenue Per Account is a profitability metric that assesses your company’s revenue per customer account, usually calculated on a yearly, quarterly, or monthly basis. Investors use ARPA to evaluate and compare company performance and identify which SaaS solutions generate low or high income.
Average Revenue Per Customer = Total Revenue / Number of Accounts
ARPA can be segmented for new and existing customers to understand the revenue generation dynamics for each segment. In this case,
Average Revenue Per New Customer = Total Revenue from New Customers / Number of New Customer Accounts
Average Revenue Per Existing Customer = Total Revenue from Existing Customers / Number of Existing Customer Accounts
2. Annual Recurring Revenue (ARR)
The subscription-based model of most companies hinges on generating and maintaining recurring revenue. Annual Recurring Revenue (ARR) is the amount of recurring revenue normalized into an annual amount. ARR is an essential customer financial metric that businesses with an annual recurring subscription offering can measure to demonstrate growth, sustainability, and value.
Understanding your ARR enables you to forecast your growth and sales projections better, budget for sales and marketing, identify trends quickly, and motivate your team. Revenue gained from set-up fees, consultancy services, credit adjustments, or non-recurring add-ons should be excluded when calculating ARR. ARR can be calculated in three ways:
i. Summing the annual fee of each customer.
ARR = Sum of all paying customer’s annual subscription fees.
ii. Multiplying the number of paying customers by the Average Revenue Per Account (ARPA)
ARR = Total Number of customers * Average Revenue Per Account
3. Revenue Retention Rate (Gross and Net)
Revenue retention rate is a “macro” metric that measures the total change in recurring revenue over a specified period. Gross Revenue Retention (GRR) is the amount of revenue retained minus the revenue lost due to churn and downsell without considering the impact of cross-sells, upsells, or an increase in prices. GRR is an indicator of your business’s long-term health and how well you handle churn.
Gross Revenue Retention = (Starting ARR – Downsell – Churn) / Starting ARR
Net revenue retention (NRR) is the amount of revenue left over from your existing customers after churn and other revenue expansions like cross-sells, upsells, upgrades and price increases have been taken into account. GRR is always less than 100% and cannot be greater than the NRR.
Net Revenue Retention = (Starting ARR + Expansion – Downsell – Churn) / Starting ARR
4. Revenue Churn Rate (Gross and Net)
The revenue churn rate is the opposite of revenue retention rates. It is the percentage of recurring revenue lost as a result of churned customers and account downgrades. Unlike Gross Revenue Churn (GRC), Net Revenue Churn (NRC) takes into account all offsetting revenue gained from account expansion or new customers. A small decrease in Net Revenue Churn rate can lead to considerably higher revenue at the end of the quarter.
Gross Revenue Churn = (Downsell + Churn) / Starting ARR
Net Revenue Churn = (Downsell + Churn – Expansion) / Starting ARR
5. Customer Lifetime Value
Customer Lifetime Value (CLV) is the monetary value of a business attributed to a particular customer. CLV measures the profit your business gains from the customer over the customer’s entire relationship with your business. Tracking your Customer Lifetime Value helps you determine who your best customers are, how much you should spend to retain them, and how much you can afford to spend on acquiring new customers based on your average CLV.
To calculate the Customer Lifetime Value of a customer, deduct the cost of acquiring and serving the customer from the revenue generated from that customer.
Customer Lifetime Value = Customer Revenue – Cost of Acquiring the Customer – Cost of Serving the Customer.
To calculate the average Customer Lifetime Value of your installed customer base based on existing data, multiply the average order value by the average number of repeat sales, and then by the average retention time in years.
Average Customer Lifetime Value = Average Order Value * Average Number of Repeat Sales * Average Retention Time in Years
6. Customer Retention Rate/Customer Churn Rate
Customer Retention Rate (CRR) is the percentage of customers a company has retained over a certain period. This metric does not include new customers. A high CRR indicates customer loyalty and reduces the pressure to find new customers.
Customer Retention Rate = 1 – Customers Churned in Period / Customers at The Start of The Period
As the opposite of CRR, Customer Churn Rate (CCR) is the percentage of customers a company has lost relative to the start of the period. Companies that lose too many customers are at risk of creating negative advocates, which can have negative impacts on potential customers.
Customer Churn Rate = Customers Churned in Period / Customers at The Start of The Period
7. Renewal Rate (Gross and Net)
Renewal rate designates the percentage of renewable revenue that was renewed in a given period. A high renewal rate indicates effective customer retention playbooks and long-term value. Gross Renewal Rate (GRR) takes churn and downsell into account but does not include revenue from expansion. It cannot be greater than 100%.
Gross Renewal Rate = (Renewable ARR – Downsell – Churn) / Renewable ARR
Net Renewal Rate considers expansion revenue when it measures the amount of revenue that was renewed in a certain period. Thus, it may be higher than 100%.
Net Renewal Rate = (Renewable ARR – Downsell – Churn + Expansion) / Renewable ARR
8. Quick Ratio
Quick ratio measures the growth efficiency and liquidity of a company. It is a litmus test that measures a company’s ability to grow recurring revenue regardless of its current churn rate. Quick ratio reveals the strength of a company’s growth by comparing its revenue growth against its revenue churn.
Quick Ratio = (New ARR + Expansion ARR) / (Downsell ARR + Churn ARR)
Quick Ratio < 2 – Bad Growth
Quick Ratio 2-4 – OK Growth
Quick Ratio > 4 – Good Growth
Monitoring the trends around revenue generation and loss helps subscription-based businesses, particularly SaaS, to identify pitfalls early on, create better strategies, predict and prove growth, and test scalability. Customer success teams in top SaaS companies use these financial metrics to evaluate the past and present and to predict the future. Follow the links below to learn more about other customer success metrics by category:
July 17, 2020
[…] Set Renewal Targets Based on Net Retention Revenue Renewal is a key process for any organization, mainly due to the fact that most upsells and cross-sells are obtained during the renewal negotiation process. When setting goals for your Renewal Management team (whether it’s reporting to Sales or Customer Success), it is therefore important to set their renewal targets and key performance indicators on Net Retention Rates (not GRR). […]
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