Updated: Apr 13, 2022
We often talk about increasing customer retention and reducing churn. But how are you going to achieve any goal without a proper metric to measure success? And how do you know whether you are on the right track?
To assess your progress correctly and effectively, every account manager should know these five critical metrics.
Customer Retention Rate (CRR)
This is the most fundamental KPI for measuring retention. CRR measures the percentage of existing customers over a given period. A high rate signifies that your effort in retention is effective.
How to Calculate:
You measure CRR for Q2 of 2021. At the beginning of Q2, you had 200 customers. During this quarter, your company got 50 new customers. However, you also lost 70 customers to the competitors due to various reasons.
By the end of Q2, you have
200 + 50 – 70 = 180 customers
Net Dollar Retention (NDR)
NDR is essential to many SaaS companies because it calculates the changes in recurring revenue over time. In other words, NDR shows how much money you have gained or lost from existing customers.
Three factors contribute to NDR calculation:
How to Calculate
You have been generating consistent $60,000 in recurring revenue monthly. However, this month you receive $20,000 expansion revenue, $8,000 downgrades, and $2,000 lost to churn.
Your NDR is:
Wow, over 100%? You are killing it!
Customer Health Score (CHS)
This KPI is the most powerful KPI for any customer success team. This metric shows the team which customers are likely to churn or who are suitable for upsells. To simply put, Customer Health Score helps customer success teams to strategize, prioritize, and get ahead of the game.
Often, companies measure customer health in different ways. However, you need these 9 critical data sets to calculate the health score accurately.
Yes, it is complex and is quite overwhelming for anyone to do manually. But it is extremely powerful for your firm to measure because it can predict churn and give you great insights into customer behaviors.
Don’t be discouraged!
There are advanced tools you can use to compile raw data into meaningful observations. involve.ai 9Factor module automatically collects, analyzes all your customer data (whether it’s qualitative or quantitative), and gives you 86% accuracy from the moment you go live.
Customer Lifetime Value (CLV)
This value estimates the total dollar amount each customer will be spending with you throughout their journey with your firm. Therefore, increasing CLV will increase your bottom line tremendously.
There are two leading indicators in this metric:
Annual revenue per customers
Average length (lifetime) of customer relationship
How to Calculate:
CLV = (Annual rev per customer x average length of customer relationship) – customer acquisition costs
Let’s say your SaaS firm generates $4000 per customer annually. Customer acquisition cost is $5000 per customer, but they tend to stay for 10 years on average.
Your CLV is:
CLV = ($4000 x 10) – $5000 = $35,000
Understanding your CLV also helps you better allocate budgets to acquire new customers.
Bonus: Customer Acquisition Cost (CAC)
Customer Acquisition Cost can be calculated by dividing all costs spent on acquiring new customers in a period by the number of customers acquired during that period.
Your company spent $5000 on marketing in Q2 of 2021 and acquired 10 customers during this period.
Your CAC is
CAC = $5000/100 = $500 per customer
Customer Retention Cost (CRC)
This KPI measures how cost-effective your customer success efforts are. Of course, knowing customers are happy and satisfied with your brand is great, but you must also measure CRC to determine if the investment in customer success is worthwhile.
How to Calculate:
Comparing CRC to CAC, you can assess your ROI for efforts to grow your business. Although acquisition and retention are equally important, retention is less costly and builds greater brand loyalty.
Leverage Your Data
To reiterate, the top 5 metrics for managing retention include customer retention rate, net dollar retention, customer health score, customer lifetime value, and customer retention cost. These KPIs provide the customer intelligence you and your account management team need to deploy a successful retention strategy. Ultimately, customer data is your business’s most valuable asset, so leverage it!