The Math of Customer Success - Part 1

By Jeremy Gillespie

“If you can’t measure it, you can’t manage it”

This quote is generally attributed to Peter Drucker (although apparently he didn't actually say it) and has become a part of corporate lore.  Regardless of its origin, it does apply to Customer Success.  Many customer success leaders are comfortable with the people side of their role, but are unsure of how to measure key metrics.  If that's true for you or even if you just need to brush up on commonly used ratios, this series of practical posts on customer success metrics is for you.

I’ll start with some basics and build to more advanced metrics in future posts. These posts will cover how to measure the performance of customer success, retention and engagement, as well as red flags.  This post is focused on the top line metrics that every customer success team should consider.

Churn & Revenue Retention

Lets start by taking a look at the overall health of the business. You can go into much more depth (and we’ll get into that in a later post), but here are two top-line metrics to measure churn and retention.

CHURN RATE = [# of customers who cancelled in a period] / [total # of customers at the start of period]

The opposite of the renewal rate, the churn rate measures how many customers are leaving in a given time period. For most SaaS companies, this is the metric that is reported to the board and investors.

REVENUE RETENTION RATE = [[Start of period MRR + MRR from up-sell + MRR from price increases] - [MRR from churn + MRR from price decreases]] / [Start of period MRR]

Want to see how you measure up to all-star SaaS companies? Measure the net monetary impact Customer Success is having on revenue growth using the revenue retention rate. If you’re at 100% or above, give yourself a pat on the back.

Customer Success Performance

Once you have the high-level metrics down, you need to measure the role Customer Success is playing in driving retention and growth.

RENEWAL RATE = [# of customers renewed in period] / [# of customers up for renewal in period]

Pretty straightforward, this formula measures the percentage of customers are renewing their subscription. Most companies track this ratio on a monthly basis, and this is a common ratio to build team or individual goals around.

HEADWIND = [Churn + Downgraded MRR in period] / [MRR at start of period]

Just like the wind slowing your plane down, the headwind metric uncovers the impact downgrades and churn are having on your growth. Rule of thumb: 20-30% headwind is detrimental to growth.

TAILWIND = [MRR of pricing increases + upgrades] / [MRR at start of period]

The opposite of headwind, this metric measures how pricing and upgrades are accelerating your growth. Both headwind and tailwind are useful to report on a monthly basis to see changes over time, especially if you're making changes to your team or pricing.

CUSTOMER RETENTION COST RATIO = [Annual Cost of Customer Success Team + Customer Success Tools + Customer Success Programs + Customer Marketing] / [ARR]

This ratio is similar to customer acquisition cost ratios seen in marketing and sales, and is an indication of how much it costs to serve customers relative to how much revenue they produce.  Another way to measure cost relative to revenue is the Magic Number, which is also used to determine whether a success team is ready to scale.

These metrics should give you a good sense of the state of customer success in your company. Be sure to track these on an ongoing basis to see historical changes and trends. In my next post I'll discuss how to measure customer engagement as well as some red flags to watch out for. 

Need more math?  Here are some additional resources for customer success metrics:

Need to know how to improve your metrics?  The Success League is a consulting firm that works with executives who want to unlock the retention and revenue a top performing customer success team will bring to their business.  We transform support into success by building metrics, goals and processes that enable customer success teams to perform at their peak.

Jeremy Gillespie - Jeremy is a growth-oriented marketing geek, technology enthusiast and customer evangelist. He loves using complex data to build creative retention solutions. By leveraging technology, Jeremy excels at creating scalable retention marketing programs.  He works for LinkedIn, holds a BA in Communication from the University of Pittsburgh and MBA from Point Park University.  He is a proud former Pittsburgher, but currently lives in San Francisco, CA.