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Demystifying Customer Health Score

Customer health score
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    Last week we defined the NRR, one of the most important Customer Success KPIs. This week, we will cover the Customer Health Score. The Health Score is an index that helps Customer Success Managers understand the relationship customers have with their SaaS products or online services. How does one calculate it and what’s this metric all about? Let’s explore the ins and outs, touch on some examples, and understand its limitations as a stand alone-metric. 

    What is a Customer Health Score?

    Customer Health Score is a Customer Success metric that helps detect product engagement fluctuations and highlight customers at risk with the help of traditional and basic product usage KPIs. Think of these calculations as periodic medical checkups. The only difference is that you, the customer success manager, are the doctor that’s looking to “diagnose and treat” at-risk accounts.

    You need to consider the following factors while calculating your health score:

    • Company size: Healthy customer behavior can be different for startups, SMBs, and large enterprise-level companies.
    • Industry: Companies from different industries use various indicators and take into account market trends, global developments, and more.
    • Product: The type and size of the product will also affect the calculation and the outcome of the health score formula.
    • Business model: Your business model can shift the focus of the calculation. For example, it can move from churn rate to customer upselling index. 

    Related: Customer Success Strategy: Identifying the Blind Spots

    How to Calculate the Customer Health Score?

    Interestingly, there is no universal method to determine your Customer Health Score. You’ll need to understand your use case/s and decide on the key indicators before getting started with your health score calculation. 

    Here are some key customer success metrics that are commonly used while calculating health scores in SaaS setups today:

    • Product Setup Rate – This KPI measures product adoption and tracks the level of customer engagement. It helps you understand if the users have reached your pre-determined “aha moments” and what features are being used (or ignored) by them. This plays a part in optimizing the user journey because you can then know more about the true value your app is creating. 
    • Product Usage Rate – You need to know more about engagement rates with modern SaaS users because patterns are always fluctuating. Product usage rates help do just that. Usage is not just opening or logging into apps, but actually engaging with features and performing actions. You will also want to normalize your calculations by tracking averages per customer.  
    • Net Promoter Score (NPS) – This benchmark tracks user satisfaction and their likelihood of recommending your product to others. Ask your customers to grade your service on a scale of 1-10. “1-6” are “detractors” and “9-10” are your “promoters”, while the rest are “passives”.  Subtract your detractor percentage from the promoter one to determine your NPS
    • Customer Success Manager Pulse – The SaaS space is dynamic and can have multiple use cases. Companies are also constantly revising their business models and success metrics. Think number of service tickets, chatbot activation frequency, and similar actions. However, this metric is highly subjective and tends to become more and more inaccurate with time.

    You can (and should) use a weighted health score, which refers to a calculation that includes priorities and takes KPIs that are more integral to your health score  into account. The indicators that you choose should be based on your industry, current trends, business goals, and business strategies. In the next part, we’ll calculate some health scores based on a concrete example.

    Related: 5 Customer Success Pro Tips

    Health Score Example and Industry Benchmarks 

    For our example, let’s stay with the four aforementioned metrics to calculate the Customer Health Score. These metrics are considered to be SaaS essentials today and are being used by more and more customer success managers.

    First, let’s establish the health points for each metric:

      Poor  Satisfactory  Healthy
     Product Setup Rate           0 to 50%     51% to 70%   71% to 100%
     Product Usage Rate  0 to 5 5 to 10 Above 10
     NPS  0 to 25 25 to 35 Above 35
     CSM Pulse  0 to 6 6 to 8 Above 8
     Health Points  0 5 10

    Now, let’s fit your customer’s metrics into this formula. Let’s assume:

    • Product Setup Rate – 80% – Translated to 10 points
    • Product Usage Rate – 6 – Translated to 5 points
    • NPS – 32 – Translates to 5 points
    • CSM Pulse – 9 – Translates to 5 points

    Your raw Customer Health Score in this case is 10+5+5+10/4 = 7.5

    As mentioned earlier, Weighted Health Score can help you gain a more detailed picture of what’s going on since the raw calculation is not always accurate. For example, if your product usage rate is more connected to churn (with CSM pulse not really showing any strong connection), you can make the former a “heavier component” in your customer health score formula.

    Assign the weights based on your specific use case:

    • Product Setup Rate – 20%
    • Product Usage Rate – 40%
    • NPS – 20%
    • CSM Pulse – 20%
      Raw       Weight       Weighted score 
     Product Setup Rate           10 0.2 2
     Product Usage Rate 5 0.4 2
     NPS 5 0.2 1
     CSM Pulse 10 0.2 2
     Weighted Health Score  7

    While the raw score is a good way to get started, the weighted metric shows you a more balanced and precise number that can help improve the indicators that are vital to your business growth. The success is in the details.

    What about industry benchmarks?

    Unfortunately, while SaaS companies with efficient customer success teams score 31% higher on average, the inherited inaccuracy of this metric makes it difficult to set an industry benchmark. For example, the NPS is not a trustworthy metric because only 20% of users actually take CS surveys. What you get is a limited and outdated metric that’s only good as a complimentary measure.

    Related: Top 5 Customer Success KPIs to Track in 2022

    Customer Health Score FAQs

    • Can I have multiple Customer Health Scores in my CS playbook?
      Yes, you should ideally be segmenting your accounts or personas and applying differently weighted Customer Health Scores calculations to them.
    • Is the Customer Health Score the gold standard of CS metrics?
      No. The Health Score is usually used to highlight significant changes and at-risk accounts. It’s best when used in tandem with NRR, North Star Metric, and relationship metrics.
    • Does color coding work well with Customer Health Score?
      While color coding (green, yellow, red) customer health is good for promoting cross-department collaboration and transparency, it often over-simplifies things.
    • How often should I calculate the Customer Health Score?
      It should be calculated on a monthly basis and more often for key accounts.

    Health Score doesn’t cover your relationship risks.   

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