Key metrics for CS execs, making every employee a part of CS, the importance of your CLV:CAC ratio
As customer success pros, we live and breath the idea that “Success is the new sales.” But for this to be really true, executives can no longer can measure just two or three top line metrics to understand the health of the business or to predict what the business will look like in a year or more. In order to understand the future of the business, executives need to focus on understanding their current customers. They should learn how satisfied customers are, the reasons they bought the product or service in the first place, what they would change about the process, and so on. Learning from current customers – old and new, big and small, and across all industries – and applying the findings back into the sales process is one of the most important things an executive can do to benefit the overall health of the business.
But what are the metrics that a customer success executive should monitor? The most critical ones can be boiled down into three core areas:
- Maintain Current Customers: The most important focus area of customer success is whether or not your company is maintaining current customers. Do you have customers leaving for a competitor or not renewing for another reason after just a few quarters or even after several years? If so, then there are several metrics that can be monitored to help you discover where the problem(s) may be across your processes, product, or people:
- Logo Churn Rate: The logo churn rate is the number of customers or logos who have stopped doing business with your company during a given time period. In short, these customers have “churned.”
- Dollar Churn Rate: Similar to the logo churn rate, the dollar churn rate is the amount of dollars lost when customers have stopped doing business with your company during a given time period.
- Downsell: Opposite of an upsell, a downsell occurs when a customer reduces their spend with your company by downgrading their product, features, or services.
- Recurring Book of Business (RBOB): RBOB for short, a recurring book of business is essentially the annual recurring revenue number that a SaaS business measures. This is defined as the number of predictable dollars that should be renewed each quarter or each year.
- Increase Revenue of Current Customers: Not only is renewing your customer base important to SaaS business models, but an equally important focus area is whether your customers see enough value in the product or service you provide to grow their accounts. SaaS customer success executives understand that a massive business focus should be placed on nurturing existing customers to ensure they are seeing the full value of the product or service. But just as important is understanding the core areas that lead to growing customer accounts so they fully realize the potential your company can offer:
- Expansion Opportunities: Identifying expansion opportunities in customer accounts means finding areas where the customer could see additional benefit or value by upgrading their product or service, adding more users, adding new features or functionality, or increasing service components.
- Expansion Opportunities Created: Opportunities created refers to how many new areas of expansion have been identified across customer accounts.
- Expansion Dollars Won: Dollars won pertains to how many new dollars, whether from a renewal or expansion, originated from a customer account.
- Predict Overall Customer Sentiment: Most customer success executives focus a significant amount of their time and attention on areas 1 and 2. While it’s important to maintain and grow customer accounts, many leave out a very important area of focus that’s more qualitative than quantitative. However, there is a 3rd area that is completely stand alone. This core focus has everything to do with how the customer feels about your product or service and even how they work with their CSM and use your product or service. If this focus area is left out of the equation, then you may be neglecting some of the most telling customer sentiment signs available to you:
- Net Promoter Score (NPS): NPS is a measurement tool that can be used to determine the loyalty of customers to your company. The score can also serve as an alternative to research methods.
- Referrals from Current Customers: Determining if a referral came from a current customer is a great indication of whether a customer is happy and would recommend your company, product, or service.
- Product Usage: Understanding metrics around how many users at a given company use your product, what features or service they use, and how often they use the product or service can be a direct correlation to determine how much value they are receiving.
- Engagement with CSM: While difficult to measure, determining how the customer interacts and engages with their CSM is very telling to how satisfied (or not) the customer is with the relationship. Keep in mind that the sentiment around how the CSM is engaging with the customer can change quickly, so it’s important to monitor this area closely and frequently.
- Customer Surveys: Instituting surveys around key milestones, such as completion of implementation, quarterly surveys, and surveys across various roles can be a good indication of how sentiment may change based on what the company is going through at any given time, across any given role.
Interested in more ways to measure customer satisfaction? Check out this list of ways to assess satisfaction from all angles.
Making every employee a part of customer success
Customer success shouldn’t be a lonely department. It should be ingrained in every employee’s position because when your entire team works to fully engage your customers, you add more value at every stage of the buyer’s journey.
So what should be the role of other teams within customer success? This article explores each team’s potential influence by approaching customer success as a long-term strategy and focusing on how every team member can help customers accomplish their goals. Here are some key moments when other teams should be involved:
- Before the Sale: In this new era of shopping, customers have more information at their fingertips. To stand out from the competition, you need to start engaging your prospects with value. This translates to offering product benefits and prices upfront; sometimes prospects don’t want to wait for a phone call from a sales rep, which will only waste their time with a long sales pitch. Instead, focus on nurturing your leads. Prepare content that will entice prospects to learn more. The key is to understand that lead nurturing shouldn’t be just a sales or marketing goal. Think about how everyone’s core skills can transform prospects into customers.
- Onboarding Engagement: Most SaaS companies fall short in the onboarding process and it’s every team’s responsibility to ensure that customers accomplish their intended goals. Meet with your marketing, sales and product teams to create a targeted approach and to develop an integrated plan will provide a clear perspective on everyone’s role. It’s a good idea to begin by welcoming your new customer into your brand’s culture, perhaps create videos introducing them to your team. And it’s also a good idea to let users know who will be helping them achieve success. Then send tailored emails to your users based on their behaviors, because no two customers are alike. Also be sure to set easy milestones for your customer (what do you want them to accomplish on the first day? the second week?). Overall, make sure there is a natural progression toward the customer’s goals that is supported by all teams.
- Retention Maintenance: To retain more customers, build quality relationships with your customer base – and this doesn’t mean sending emails to them just when you need something. Similar to the pre-sale process, offer your current customers undeniable value (have they set new goals? how can your team help?). When you understand their objectives, then you will have a foundation to build a solid retention strategy. Team meetings should focus on providing more value, not increasing logins. In particular it is smart to identify your brand advocates and enlist these users into a special referral program. Give them discounts for signing up new customers or cool swag bags for spreading the word about your services. All teams should be constantly asking themselves how they can build a better relationship with your customers.
Remember that as you move towards all employees being an active part of customer success, training will certainly be necessary. Many team members will not be comfortable or even familiar with the idea of customer success and you want them to feel ready to engage with customers productively. Check out the full read to learn how set up all your teams for success at customer success.
Measure the return on sales and marketing investments with the CLV:CAC ratio
Math alert! This may be more numbers than you want on a Friday, but hang in, this is important math….
The Customer Lifetime Value to Customer Acquisition Ratio (CLV:CAC) measures the relationship between the lifetime value of a customer and the cost of acquiring that customer. This is a particularly crucial measure for subscription based companies. But how do you know if you’re spending the right amount?
First you need some numbers. First, you need to know how long the average customer sticks with you before they cancel their service. Because, of course, the longer a customer sticks with you, the more valuable they are.
- Start by looking at your churn rate – the number of people who cancel their subscription in any given month. If you have 1,000 customers and every month 20 of them cancel, that works out to two per cent monthly churn. By simply inverting this value ( 1 / Monthly Churn ), you can calculate how many months on average your customers will stick around. At a 2% monthly churn, that works out to 50 months.
- You will also need to know your Gross Margin % (the percentage of profit that remains after you have paid your costs for the product or service), and then how much money the average customer brings in each month.
Lifetime Value = Gross Margin % X ( 1 / Monthly Churn ) X Avg. Monthly Subscription Revenue per Customer
So, for example, if you had a gross margin of 75% and monthly customer churn of 2%, and each customer spent an average of $40 with you every month, the calculation would look like this: 75% X ( 1 / 2% ) X $40 = $1,500 LTV
Now that you have the lifetime value of a customer, you can turn your attention to calculating how much you spend acquiring a customer.
- That’s usually the sales and marketing budgets together. The cost of acquiring a customer is the entire sales and marketing budget divided by the number of new customers acquired in a given period.
- This works really well if your sales cycle is short, where your sales and marketing costs can be tied to new customers in the same period. If it’s longer, you may want to stagger your costs and new customer wins to get a more accurate picture.
Cost to Acquire a Customer = Sales and Marketing Costs / New Customers Won
If you had total monthly sales and marketing expenses of $500K and you acquired 500 new customers in a given month, the calculation would look like this: $500,000 / 500 = $1,000 CAC
Ideally, you want to recover the cost of acquiring a customer within the first 12 months or so. In other words, if the average customer brings you $1,500 over 50 months, you should be spending about $360 to acquire customers.
An ideal LTV:CAC ratio should be 3:1.The value of a customer should be three times more than the cost of acquiring them. If the ratio is close i.e.1:1, you are spending too much. If it’s 5:1, you are spending too little. In fact, you are probably missing out on business.
It sounds straightforward and it is. But the fact remains, you need to know these numbers. Because the more you understand what drives your business, the better the picture you will get of the levers you can pull to grow your business. Check out the full read to dig into more calculation examples.
Word to the Wise
This week’s wisdom comes from an unconventional source but it is sage advice nonetheless.
Since Wolters Kluwer was founded as a legal publisher, serving their customers and inspiring customer loyalty has always been central to their strategy. In 155 years, that hasn’t changed. What has changed is how they serve their customers – and, therefore, how they operate their business.
In this great read, Dr. Ulrich Hermann, Regional Managing Director & CEO of Wolters Kluwer Central Europe discusses how Wolters Kluwer went from a traditional top-down content distribution model to a customer-centric information software and services business. In short, how they build customer loyalty through point of need content distribution:
“It is now crucial that we deliver information at the point-of-need and support customers with legal or regulatory content in the way they find most productive. We understand that customers don’t pay for such legal information per se, but they do pay for productivity increases in their research-based workflows and guidance on how to take the right quality decisions. [… And furthermore,] in true web 2.0 fashion, our customer is now involved in creating content and has become an integral part of the value chain. Over time, our customers, together with our authors and domain experts, will all contribute to a growing network of legal knowledge.”