Mar 18, 2022

Read Time 11 min

Q&A recap: crash course in Customer Success and SaaS metrics with Dave Kellogg

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With so many SaaS metrics floating around, and even more opinions on when and how to use them, it can be hard to know if you’re measuring what really matters. Leading SaaS expert, Dave Kellogg, and ChurnZero CEO, You Mon Tsang, sat down to answer all the questions you want to know about SaaS metrics like ARR, NRR, GRR, LTV, and CAC (i.e., all the metrics your CEO and CFO care about) and set the context for their usage. They also discussed the impact of these metrics on your plans as a Customer Success professional and your company overall.

During the session, we covered:

  • A brief history of SaaS metrics and where they are headed
  • Key SaaS and Customer Success metrics you should care about
  • What boards and investors expect from your Customer Success organization

If you missed the webinar, you can watch it on-demand.

Q&A recap

Speaker: Dave Kellogg, Principal, Dave Kellogg Consulting

Q: In your version of logo retention rate, how would you treat customers on contracts that allow early opt out?

A [Dave]: I would note in the footnotes that some people have opt outs, but personally they were not available to renew. The ability to escape is not the same thing as being up for renewal. I would not count them because they’re not up for renewal, but I would footnote it.

Q: What’s the difference between annual contract value and ARR?

A [Dave]: Most people today use ACV and ARR as synonyms.

Q: Does available to renew mean the renewal date is happening in the period?

A [Dave]: That’s exactly what it means. It was available to renew, i.e., I could choose to or choose not to renew. If I’m on a two-year contract on my first anniversary, I am not available to renew. It’s kind of a built-in renewal. It’s even stronger than an auto-renew. It’s not even a renewal. I’m still in the contract.

Q: How do you define contraction?

A [Dave]: To me, it’s anything that makes ARR go down. You reduce your number of seats. You downgrade to a lower edition. You drop a product.

Q: Is net revenue retention the same as net dollar retention?

A [You Mon]: The answer is yes, except what if you’re in the European Union? You don’t say dollar. You would use euros instead or pounds in the UK. Let’s drop dollar retention and use NRR because that’s global.

Q: What metrics should individual contributors in Customer Success use to measure their performance?

A [Dave]: It’s really hard. My first answer is – just as a business finance-oriented person and former CEO – I like the notion of each CSM having their own MRR. Each CSM is a microcosm of the company. We’re going to give you a cohort of customers worth 100 units and if you can make them worth 115 units a year from now, power to you. If you make them worth 80 units a year from now, that’s not so good. I like to start there. But I often feel in Silicon Valley, we have diving competitions without degree of difficulty. You go up and do a swan dive and get a 10. I go up and do a triple back flip but miss slightly and get a seven. You win the competition. I do think sometimes you ask your best CSMs to do the triple back flip. You give them some really hard-to-handle customers. If I were a CSM or a CSM manager, I would try to somehow weigh or factor that in. I don’t have a great math answer to it. But I don’t want to disincentivize my best CSMs from taking the hardest accounts. I don’t want to reward the people who basically did layups. They got lucky. I handed them super happy customers and now they’re a hero.

I would also look at post-case NPS or post-case CSAT on every interaction with the customer. How are they rating you? I would look at NPS in an annual NPS survey by buyer role. I also like to measure intent to renew. I think people try to use other things as a proxy for intent to renew. I just like to ask, “Are you going to renew?” You might be super happy and not want to renew, or you might be super unhappy and renew. I like to decouple those things.

A [You Mon]: I love the idea that a book of business not only has revenue attached, but it also has difficulty attached.

A [Dave]: This is gameable, but here’s what I’d try to do. I would take each book of business and forecast what’s going to happen to it. Then, I’d measure you off the forecast. For example, say we knew this $500k customer told us they’re not renewing. I’d say [to the CSM], I’m handing you a $2 million book of business where I’m expecting to get only $1.5 million. I’m creating a very clear scenario. I could imagine doing a forecast off the surveys where you use the intent-to-renew survey to say, “We think your book of business at renewal is worth this, go beat that.” I’m just trying to get away from the first or obvious problem that if you hand me an angry customer worth $500k, and I jump through hoops to save them and get the $500k, everyone goes, “Oh, but you didn’t get an expansion.”

Q: Should you be worried if your annual logo churn is between 25% to 30%?*

*This question refers to survey results from KeyBanc Capital Markets. Their report shares the results from a survey of private SaaS companies which KBCM Technology Group’s software investment banking team conducted in June and July 2021. Results include responses from senior executives of over 350 companies.

Annual logo churnSource: 2021 SaaS Survey Results from KeyBanc Capital Markets

A [You Mon]: I will say that on paper it does not look great. But if it costs you 40 cents to get a customer, or something really low, and you get a lot of customers coming in, and you’re churning through most of them, you can probably get away with it. If you’re spending a ton of money to get a customer – you’re enterprise sales, you have expensive sales reps, or a long sales cycle – that’s a disaster. Is that fair, Dave?

A [Dave]: Yeah, in general. If you’re in that range, you should be concerned. We can both contrive examples where it’d be OK. Yours is, you have a super low customer acquisition cost so you can justify that with the super high churn. Another one is when you’re pivoting strategies. You had your old strategy and now your new strategy and those are “old strategy” customers churning off. Another one is trials where they’re all less than $3k in ARR and our average deal is $20k. They were our trial people who we counted as customers, in which case the answer is stop counting them as customers, in my opinion. Then, you can stop counting them as churn. That’s an alarming level churn. You’re going to have trouble raising money with that kind of churn rate.

Q: Should you be worried if your annual NRR is around 101.8%*, which is the median rate of SaaS companies surveyed in KeyBanc Capital Market’s 2021 SaaS Survey?

*This question refers to survey results from KeyBanc Capital Markets. Their report shares the results from a survey of private SaaS companies which KBCM Technology Group’s software investment banking team conducted in June and July 2021. Results include responses from senior executives of over 350 companies.

Annual net dollar retention

Source: 2021 SaaS Survey Results from KeyBanc Capital Markets

A [You Mon]: Once again, I think this is a “it depends” metric. Slack and Zoom both have enormous NRR. And they should because those are land-and-expand products. What I mean by that is, by nature and design, you sell a small piece upfront – one department – and then it’s supposed to expand. If they don’t get 150% NRR, then it actually breaks the business model. Versus, if you’re SAP and you’re selling a big enterprise product and you have to buy and deploy all throughout the company all at once, then you just sold everything upfront, and you’re not going to get as high NRR.

A [Dave]: To me, it’s all about the words going with the music. What do I mean by that? I view the numbers as the words and the music as the story you tell, and they have to go together. If you tell me that we have this awesome land-and-expand model, we go in with a really low price, and then we have a dedicated expansion team that does these upsells, and I say, “Wow, what an amazing story. What’s your NRR?” and you say 95%, then the words don’t match the music. To me, you should have a narrative about what your business model is. I’ve worked with some companies that have a zero percent expansion rate because they sell enterprise coverage on the first deal. The only way they get increases is through price increases. As long as you explain that and say this is not a land-and-expand play because we cover the whole enterprise on the first deal. And oh, by the way, maybe it will be tomorrow, but today’s business is we’re going to land and cover everything. We’re working on a new product, so we think in the future we can get more expansion.

I think the thing that most often goes wrong with SaaS metrics is when they’re incoherent with the story. No metric is inherently evil or good, but it has to match the story. If you’re going to tell a big land-and-expand story, and you’ve got multiple products and cross-sell and additions and price increases, I better see a nice NRR. If you have none of those things, well, first I’m going to wonder why you chose that story. Why aren’t you consumption based in pricing? Why don’t you have additions? But if you have great answers for all those questions, then I can say this is not a big expansion play, but you’ve got a low CAC and your strategy to grow is to get more customers.

A [You Mon]: The other thing is if you’re early in your company lifecycle, maybe you’re in year two and you’re building out the core product so there’s not much to upsell, then your NRR is going to be low.

A [Dave]: Totally agree. The other metric we didn’t talk about here, but I actually look at personally is expansion as a percent of new ARR. When you’re early in your lifecycle, I want most of your new ARR to be new customer, not expansion ARR. I don’t care if that’s low because right now we’re trying to get lots and lots of customers. As long as you have a story, we can upsell them later if you’ve got additions built in or consumption or a second product coming.

Q: What’s a good CAC?*

*This question refers to survey results from KeyBanc Capital Markets. Their report shares the results from a survey of private SaaS companies which KBCM Technology Group’s software investment banking team conducted in June and July 2021. Results include responses from senior executives of over 350 companies.

Source: 2021 SaaS Survey Results from KeyBanc Capital Markets

A [Dave]: If your blended CAC ratio is at $1.20, you’re at the median, so half are better and half are worse. If you’re at $1.54, that means only 25% of people spend more than you do. Is that inherently evil? No, but you better be able to explain why. For example, if you’re growing really fast and hiring lots of salespeople that are unproductive, that’s going to drive your CAC up. Or maybe you have an exceptional customer lifetime value or an exceptional NRR. You get to spend more money to acquire a customer because they’re going to be worth more. Conversely, you can see the [median] expansion CAC ratio is at 63 cents. If you don’t have a great expand story, but just say your new customer CAC is 63 cents, the argument would be that you can get new customers for the price people get existing customers. That’s a great story.

Q: What two to three metrics should an early-stage Customer Success team track?

A [Dave]: First, ATR-based renewal rate. If 100 customers have the chance to renew, how many renew? I would do NPS. The thing that most people get wrong with NPS is they think of it as one per customer. The last company I ran, we sold to the VP of financial planning and analysis. But the users of the software were every manager in the company who had a budget. They’re very different roles. The person who’s writing the check, I ultimately care if they’re happy. But it’s not going to be sustainable if they love us, but all the end users hate us. Over time, they are going to be under pressure to switch the system. People can get lost with NPS by failing to look sufficiently at different buyer roles.

Q: How do consumption-based pricing models change the metrics you track?

A [Dave]: I’m going to be slightly jaded on this one. Because when you’re doing enterprise consumption, enterprise salespeople are really good at one thing: making sure it never goes down. [As a salesperson], I’m going to sell you a bunch of units or points for a year and depending on how you burn through them, it might affect my revenue recognition. But in effect, if you don’t use them, I don’t actually get less ARR than some baseline. There is some baseline committed amount. I’m basically using them as overage minutes. I’m slightly jaded on this perspective, but the more you’re talking true enterprise, the more I’m sure this is the way it works. Because I know how enterprise salespeople work and they want zero risk of going down, so they’re all talking about your future growth and how you can get a better deal on your future growth. That tends to be the spirit of the contract and the contracts tend to be floored.

Now that said, in a consumption model there’s a strong incentive to get them to use those points, even if from a technical perspective, I won’t get churn off it. What I want is expansion. It does mean I want to monitor usage. Just like I said, in the SaaS model, I want to carry you to your first campaign before I declare victory, not implementation. Here, I need to be ongoingly monitoring your utilization and basically calling you and asking you why you’re not using more units. What’s up with you making less API calls this month? What’s changing? What could we do about that? The classical SaaS CSM just wants you to renew your contract and if it goes up 5% or 10%, hallelujah; that’s good enough. Victory is declared. In a consumption model, it’s harder because I need to make sure you’re using the product and using more of it. It does change the operational metrics for the Customer Success department.

Q: What metrics do boards and investors care about most?

A [Dave]: For a company, it’s ARR and ARR growth. It’s subscription growth margin, which plays into CAC payback period. CAC payback period is how many months of subscription gross profit does it take to pay back your customer acquisition costs? Investors look at that metric a lot. All that these metrics are trying to do is figure out if what you’re paying for something aligns to what it’s worth; that’s it. Up until now, frankly, growth has been king. I have to mention that the rule of 40 is the basic way they look at balancing growth and profit. They add your ARR growth or your revenue growth to your free cash flow margin or your operating margin to get a number. The closer that number is to 40 moving up, the more they like it; above 40 is even better. That’s why they call it the rule of 40 because 40 is considered a good score. Given the way the markets are trending, we’re going to go back to a world where it matters, which is why I raised it. Because in the heyday of the last two years, it was all go, go, go at all costs. Now, it’s going back to the more rational, “Hey, you’re growing, but how much cash are you burning to grow?”

A [You Mon]: Therefore, Customer Success metrics would be even more important. Are you keeping your customers and making them happy? That has positive impact on LTV.

A [Dave]: Absolutely, because Customer Success is going to obviously keep the base and they’re going to ultimately help the NRR rate. They’re going help the expansion CAC.

Want more Q&A with Dave on Customer Success and SaaS metrics?

There were so many great questions during the webinar, that we ran out of time before we could get to them all. In part two of our Q&A recap, Dave responds to unanswered audience questions and gives his rapid-fire takes on tracking the retention of auto-renew customers, calculating customer lifetime value as a startup, comping CSMs on expansion, determining the importance of measuring time to value, and much more.

 


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