I’m excited to continue on with our blog series on customer success metrics. In our last post on this topic, we covered the top four categories of customer success metrics. The topic I will cover in this blog is on the top five customer success financial metrics. I will also throw in a few runner-ups.
Customer Success Financial Metrics
When most executives think about customer success metrics, they typically refer to the core SaaS financial metrics. If current customers are the lifeblood of a SaaS business, then these metrics are the heartbeat metrics for any SaaS company. These financial metrics provide a top-level view of the overall financial health of an organization and can serve as a strong indicator when it comes to the long term growth and scalability.
Top 5 Customer Success Financial Metrics
1. Revenue Retention Rate (Gross & Net)
The amount of recurring revenue (ARR/MRR) a company is able to retain for any given period. Gross Revenue Retention only considers the starting revenue minus any revenue lost through downsell or churn. Net Revenue Retention considers the o setting revenue from expansion (upsell and/or cross-sell). Some refer to this metric as Dollar Revenue Retention (DRR).
Be sure to review both Gross Revenue Retention and Net Revenue Retention Companies that only focus on net numbers will likely misjudge the true health of their business because the net results may mask the symptoms of churn Revenue Retention Rate is also a very different metric than Renewal Rate (see definition below), so be careful to distinguish between the two metrics and be sure to measure both.
2. Revenue Churn Rate (Gross & Net)
Revenue Churn is simply the opposite of revenue retention – the percentage of recurring revenue (ARR/MRR) lost through downsell and/or churn in any given period. Gross Revenue Churn only considers lost revenue whereas Net Revenue Churn includes any off setting expansion revenue. When expansion revenue is greater than churn, that is often referred to as “negative churn.”
Understand your revenue (or dollar) churn rate and focus intently on driving it down World-class SaaS companies have negative churn (or net growth).
3. Customer Retention Rate/Customer Churn Rate
Customer Retention Rate (CRR): The percentage of customers retained over a given period of time. This is also referred to as “Logo Retention”.
Customer Churn Rate: The percentage of customers that are lost (i.e. cancel their subscription) over a given period time. This is also referred to as “Logo Churn.”
While both revenue retention and customer retention are important, many SaaS companies place a higher value on revenue retention because revenue is king in any SaaS business For example, you may lose 10 customers with subscriptions of $10,000 each for a total of $100,000 in lost revenue, or one larger customer with a subscription of $150,000 In this case, it may be better to lose the 10 customers equaling $100k in ARR, rather than the one customer and $150k in ARR Just keep in mind that the 10 lost smaller customers carry additional hidden costs as they may become negative advocates in the market.
4. Renewal Rate (Gross & Net)
Gross Renewal Rate: The percentage of *renewable* revenue that actually renewed in a given period. Gross renewal rate only considers downsell and churn and does not include any o set from expansion revenue that happened at the time of the renewal. Gross renewal rate can never be greater than 100%.
Net Renewal Rate: The total revenue renewed and gained from the *renewable* book of business for a given time period. Net renewal rate includes any expansion revenue (upsell and/or cross-sell) added as part of the renewal transaction; therefore, it’s feasible that the new renewal rate could be greater than 100%.
Renewal rates specifically correlate to renewal transactions where- as revenue retention considers any increase or decrease of recur- ring revenue during a time period, including expansion, downsell and/or churn that may happen outside of a renewal (i e , mid-term expansion, etc ) Renewal rates should always be calculated against the *renewable* book of business (RBOB) for the specific time period.
5. Quick Ratio
Created by Mamoon Hamid, the Quick Ratio measures growth efficiency for a SaaS company, comparing revenue growth (new and expansion) against revenue churn (downsell MRR and churn MRR).
The following Quick Ratio guidelines help identify the strength of your company’s growth:
- Quick Ratio < 2 – bad growth
- Quick Ratio 2-4 – ok growth
- Quick Ratio > 4 – good growth
Top 5 Runner-Up Customer Success Financial Metrics
1. MRR (Monthly Recurring Revenue)
The amount of Monthly Recurring Revenue for all paying customers at the end of any given month.
Revenue from consulting/professional services (or “one-time” revenue) should not be included in MRR calculations Only recurring revenue
2. ARR (Annual Recurring Revenue)
While MRR measures the sum of recurring revenue each month, Annual Recurring Revenue (ARR) measures the recurring revenue a company will generate over the course of a year. ARR is used to predict annual recurring revenue for the coming 12 months, assuming no changes to the customer base.
Similar to MRR, revenue from consulting/professional services (or “one-time” revenue) should not be included in MRR calculations Only recurring revenue ARR is different from ACV (annual contract value) as ACV includes any revenue, including one-time revenue Don’t mistake the two.
3. Month-over-Month Growth Rate
The total amount of recurring revenue growth (or decline) this month compared to the previous month.
MoM growth rate of 10% is considered strong growth, 20% or higher is considered world-class.
4. Expansion Growth Rate (Upsell + Cross-sell)
New revenue from current customers as a result of selling more of the same product (upsell) and/or new products (cross-sell).
Expansion growth rate can be one of the best indicators of the health of your business as typically customers who are purchasing more are getting high value and have a very high propensity to re- new year over year.
5. Down-sell Rate
The total amount of MRR lost by customers who reduce their subscription revenue in a given time period. Churned customers do not count as downsell as they have terminated their subscription all together. Down-sell results from someone who continues their subscription but reduces the spend on the subscription (i.e. reduces # seats, stops using product for a team or division, etc.).
Downsell could happen as part of a renewal or mid-term (separate from the renewal).
There you have it. The top customer success financial metrics. These metrics were provided by leaders who attended the CS100 Summit for Customer Success Leaders.
Download our eBook “The Ultimate Guide to Customer Success Metrics” to get the corresponding formulas for each of the above metrics.
We will be covering to top customer success health metrics in our next customer success metrics blog next week.
Learn more about how ClientSuccess can help your company develop a strong Customer Success methodology and strategy with easy-to-use customer success software by requesting a 30-minute demo.