All You Need to Know About Net Revenue Retention Rate (NRR)

Also known as Net Dollar Retention (NDR) in some scenarios, Net Revenue Retention Rate (NRR) has become the new benchmark metric for Customer Success today. What is it all about, how is it calculated, and why is it so important to keep track of it to achieve sustainable business growth? Let’s take a closer look at things.

What is Net Revenue Retention Rate (NRR)?

Net Revenue Retention Rate (NRR) is essentially a metric that helps Customer Success Managers (CSMs) get a bird-eye view of positive and negative revenue changes in a pre-defined time period. This is achieved by calculating the total percentage of recurring revenue from current customers, including factors like upsells, downgrades, and the thing SaaS businesses dread the most – churn. 

The following scenarios can impact your Net Revenue Retention Rate

  • Customers leaving you entirely
  • Customers upgrading or downgrading their subscriptions (tiers)
  • Customers stopping the use of a few of your features
  • Customers buying additional features or services
  • Customer removing or adding active users (with relevant pricing models)

Why is Measuring NRR Important?

Subscription based businesses need sustainable growth today. This means that they need to retain existing customers and focus on growing these accounts. Metrics like Monthly Recurring Revenue (MRR) can help to a certain extent, but can also paint an inaccurate picture if your acquisition rates are high. Net Revenue Retention helps you understand what’s going on with your churn and account growth. 

SaaS companies aspiring to enter hyper-growth or looking to extend the window need to calculate, track, and monitor their Net Revenue Retention Rate very closely. Just a 20% NRR difference between two companies can mean that the higher scoring one will be in a totally different place in a couple of years when it comes to exponential growth, putting less stress on Sales teams, and staying ahead of the competition. 

What’s The Difference Between NRR and GRR?

Net Revenue Retention is not to be confused with Gross Revenue Retention, also known as GRR. The latter calculates all customer recurring revenue, excluding upsells and expansion income (unlike NRR). What this essentially means is that GRR helps track customer health by determining how much revenue is lost in total over a period of time, most commonly on an annual basis.

Unlike Net Revenue Retention Revenue rates, the GRR cannot go above 100%.  Enterprise-level businesses should strive to get their GRR levels to over 70%. Anything less means that you are not growing fast enough. That said, Gross Revenue Retention is less of an actionable metric when it comes to smaller businesses, SaaS companies, or organizations that are in the hyper-growth stage.  

How to Calculate NRR?

Before getting started with your Net Revenue Retention Rate calculation, you need to calculate a few KPIs. These are some traditional metrics that will eventually blend together to give you your current monthly or annual NRR.

  • Monthly Revenue Rate (MRR) – Multiply the number of your monthly subscribers by the Average Revenue per User (ARPU). The Monthly Revenue Rate is also a good metric to track in a vacuum.
  • Expansion Revenue (ER) – ER is the next ingredient to go into the Net Revenue Retention Rate formula. This is basically the total sum of all revenue received from upsells and cross-sells, both key growth channels today.
  • Contraction Revenue (CR) – As the name suggests, you will also need to know how much your existing accounts have shrunk. Shrinkage examples include downgrades, reduced active users, and lower feature usage.
  • Lost Revenue via Churn – Losing customers and closed accounts are the worst thing that can happen to CSMs and SaaS companies in general. You’ll need to know how much revenue has been lost to calculate your NRR.

You can now start your NRR calculation as per the formula shown below:

Net revenue rate (NRR) formula - Staircase AI

Looking to calculate your annual Net Retention Retention Rate? The formula stays the same. Just replace the MRR with your Annual Revenue Rate, also known as ARR. Also, make sure you are excluding all new deals from your calculations.

Related: Customer Success KPIs: What You Need to Track in 2022

NRR Example and Industry Benchmarks 

Let’s start things off with an example.

Assuming your business started March 2022 with a Monthly Revenue Rate of 27,000 USD and ended it with a MRR of 35,000 USD following some successful upselling, but you also had 5,000 USD in revenue churn. Your NRR will be 111%.

So what NRR should you be aiming for?

The answer can vary based on your specific industry, the company size, and what audience you are targeting. For example, enterprise-level SaaS companies should definitely be looking at three-digit figures of 130% and above. Things change when we look at businesses that are targeting SMBs and startups, where even a Net Revenue Retention Rate of 90% can be seen as encouraging and positive. 

Just for reference, SnowFlake had a Net Revenue Retention Rate of 158% in 2021. Twilio wasn’t far behind with a NRR of 155% and Elastic put up a handsome 142%

Related: Navigating Success with the North Star Metric

What is a Good Net Revenue Retention Rate?

As mentioned earlier, true industry unicorns have NRR rates hovering around the 150% mark. But the rule of thumb approach says that you should have a Net Revenue Retention Rate of above 100%. Anything below that should be a major red flag and you should be conducting a comprehensive churn analysis to rectify the situation, along with a thorough post-sales (especially CS) cycle revamp.

Besides the obvious operational and financial implications of having a healthy NRR, investors are now also looking at this metric to make their decisions. A business that’s not dependent on sales and acquisition is now seen as a promising one.

Net Revenue Retention Rate Best Practices

It’s common knowledge that the modern Customer Success Manager needs to minimize churn, establish a healthy relationship with the product manager, and also be in sync with the development teams. But there’s more to it than that.

Here are some proven and tested ways to boost your NRR:

  1. In-App Communications – Besides the obvious chatbots and in-app messaging, CSMs should also implement Modals. Modals are pop-up overlays that highlight important CTAs at crucial touchpoints. A well-planned in-app communication strategy, implemented with the help of the product team, can help customers reach coveted “aha moments” faster.
  2. Executive Business Reviews (EBRs) – Customers like businesses that care and give them attention. That’s why CSMs should reach out more, feel the pulse, and showcase customer wins to elevate satisfaction levels. Many CSMs are now reaching out with direct renewal questions a few months before D-Day to understand the customer’s sentiment and act accordingly.
  3. Create an Ideal Customer Profile (ICP) – The SaaS space is becoming increasingly dynamic, with a plethora of use cases and requirements. You may be onboarding healthy amounts of customers, but that doesn’t always mean that they’ll stick. Low NRRs can be a good reason to realign with the Sales and Marketing managers. Creating accurate ICPs is very important.

Net Revenue Retention Rate FAQs

  • Your NRR is above 100%? What does it mean?
    Your upselling and cross-selling revenue is higher than your churn revenue loss.
  • What else can I do about churn?
    Churn surveys are a great way to understand why you are losing business.

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Customer Success KPIs: What You Have to Track in 2023

Until recently, Customer Success teams primarily supported the transition from Sales to your SaaS product. But the SaaS revolution, along with the Product-Led Growth (PLG) shift, is turning Customer Success Managers (CSMs) into key business stakeholders. What are the goals behind this massive and rapid transformation? Let’s take a closer look at some vital Customer Success KPIs, what to look out for while tracking them, and how the future is shaping up.

Finding new customers is challenging, but making them stick is the real problem SaaS businesses are facing today. In a recent Gartner webinar, Gartner experts pointed out  how “Retention is becoming the New Acquisition”. Upselling and cross-selling are now seen as the modern revenue-growing channels, both responsibilities of the modern Customer Success Manager. It’s no surprise that CS KPIs have also evolved.

What are Customer Success KPIs?

Customer success KPIs help businesses track retention performance, analyze churn rates, and understand how they are utilizing new growth opportunities. These metrics help adopt a proactive approach that can help CS leaders create better data-driven strategies that are based on unbiased insights created with the help of multiple data sources, including multiplying communication channels..

The modern post-sales lifecycle needs to be robust and accurate for best results. Traditional metrics like customer lifetime value (CLV) and net dollar retention (NDR) have been in use for more than a decade, but you now need to be more hands-on with your analysis. The metrics need to be less responsive in nature to help CS teams respond faster to churn risks and tweak their playbooks as needed.

Why Do CS Teams Need Accurate Metrics in 2023 

Use cases are multiplying. Market trends are becoming harder to predict. Businesses are scaling up (and down) faster. To make matters more tricky, customer accounts are also constantly fluctuating with changing relationship dynamics and sentiment changes. All of these factors mean that CS leaders and teams need to adopt a more data-driven (product, customer, and BI) to achieve sustainable growth. 

Adopting, tracking, and optimizing the right metrics can help you:

  • Streamline and optimize onboarding processes
  • Elevate account transparency for better upselling and retention rates
  • Analyze and understand customer journeys to offer more value
  • Track customer sentiment fluctuations for better damage (churn) control
  • Improve business processes and alignment with the main goal
  • Boost productivity and make CS operations more efficient
  • Turn customers into brand advocates (mouth-of-word)

The aforementioned benefits can be achieved by picking the right metrics for the specific business. Having too many KPIs to track can prove to be counterproductive. We have shortlisted the top 7 customer success KPIs you need to track in 2023.

Related: Customer Success Strategy: Identifying the Blind Spots

Top 7 Customer Success KPIs for 2023

Over the last decade, CSMs have been trying to move the needle with traditional metrics and direct feedback collection. While still useful in many cases, the old KPIs are no longer enough to measure the fluctuations and changes in today’s dynamic SaaS space. Customer Success has evolved and so have the metrics that need to be tracked and monitored on an ongoing basis. 

Here are 7 key metrics that need to be a part of your CS strategy today:

1. Net Revenue Retention (NRR)

The NRR metric allows you to calculate the total revenue (including upsells) during a predetermined period of time, minus the revenue churn that has been experienced. When this key KPI is above the 100% mark, it means that the business is healthy and is actually growing even without onboarding new customers. The NRR metric needs to be calculated carefully and as frequently as possible.

2. Customer Churn Rate

Also known as customer turnover, Customer Churn Rate is one of the most important CS KPIs today, as it tracks the rate of customers leaving the service. It’s calculated quite simply – Lost Customers divided by Total Customers (at the start of the relevant time period), multiplied by 100. Besides detecting churn fluctuations, CSMs also need to understand why it’s happening. If it’s the user experience, the product team should be involved as soon as possible.

Customer Churn Rate should not be confused with Revenue Churn Rate (RCR), another important metric you should be tracking. 

Calculating NRR and Churn rate, Staircase.ai

Customer success KPIs - NRR, Churn rate

3. North Star Metric

The North Star Metric aims to help companies align teams on a key metric that measures the delivered value as an indicator for growth. With Sales, Product, Marketing, Support, IT, and Customer Success teams all focused on their own sub-metrics and sub-goals, the North Star acts as a Single Source of Truth to align the whole company with the common goals and boost cross-department visibility.   

A good NSM should be able to:

  • Measure Product Value – It should be able to track the moment where your customers find value in your product (a.k.a the “aha” moment)
  • Represent Product Strategy – The core of your product strategy 
  • Be a Leading Indicator of Revenue – It should become a leading business indicator for your company rather than a lagging one (like churn)

North Star calculations vary from one company to another. For example, take Dropbox. When it was a growing company, the North Star Metric was monthly active users. But now that the company has grown, the NSM revolves around paid accounts, rather than Freemium ones.

North star metric examples

Courtesy of Grow with Ward

4. Relationship Score

A relatively new arrival on the scene, The Customer Relationship Score have become an essential part of all CS strategies, especially when it comes to big and strategic accounts. The relationship score helps companies identify relationship-based risks and opportunities, taking into account multiple stakeholder relationships engaging with your company.

Once your relationships are mapped, you need to rate how strong your relationship with the customer is. As human estimations can be biased, you ideally want to use a Relationship Intelligence solution to provide unbiased feedback. 

Creating strong relationships with key influential stakeholders will not only help you retain more customers, but will also boost your upselling and cross-selling efforts. These relationships also create strong brand advocates.

5. Customer Health Score (CHS)

As the name suggests, the Customer Health Score helps determine the likelihood of retaining customers by measuring their current level of engagement. This churn management KPI can be calculated in many ways with a varying number of parameters. Most CSMs factor in indicators like product usage, relationship strength, unresolved tickets, and other subjective metrics to calculate their CHS. 

For example, it’s common to see the CHS being calculated with the time users spend on using the product and the adoption rate or how many features are actually being used, along with the amount of active users in the specific account.

Related: 5 SaaS Customer Success Pro Tips

6. Net Promoter Score (NPS)

The NPS is a commonly used metric in CS circles. It’s a measurement that basically helps evaluate how satisfied customer are and also helps understand where their loyalty levels stand. These scores are determined via surveys, where participants also need to explain their scoring (usually -100 to 100). This helps businesses determine where they stand with their customers and deteck underlying issues.

A common question ased in NPS surveys is “how likely are you to recommend our offering on a scale of 1-10”. Customers answering 0-6 are classified as “detractors”, while scored of 9-10 are your “promoters”. 7-3 raters are considered “passive”.

7. Customer Sentiment Score

Customer sentiment is a dynamic and fluid notion that involves the actual experience (the opinion), along with an emotion propted judgement (the predilection). Accurately tracking customer sentiment help you track trends to create an up-to-date CS strategy. It also helps connect the sentiment to the product in real-time and understand what’s triggering the changes. 

But as you can imagine, calculating sentiment is not easy. There’s no real formula to calculate this metric and every vendor has it’s own proprietary formula. But an accurate customer sentiment score has to be calculated with human signals, product engagement data and unbiased insights from the various communication channels – emails, support tickers, chats, video calls, social media, and more.

Numbers Don’t Tell the Whole Story

Establishing and tracking KPIs is great, but they simply cannot tell the whole story due to the dynamic and unpredictable nature of today’s SaaS consumption. You really need to understand and break down the relationships, hierarchies, and dependencies in your key account to get real visibility into the risks and opportunities. Besides that, here are two factors you need to consider while devising your CS strategy.

  • Expansion is the New Customer Success KPI – Gone are the days of minimizing churn rates and signing off. No CSM today can be satisfied without creating a serious uptick in upselling and cross-selling metrics.
     
  • KPIs Can Vary From One Use Case to Another – Target audiences are becoming more and more diversified today. With the rise of Product-Led Growth, the boundary between B2B and B2C is also vanishing. This means that you can have users from different sectors with different needs where the same KPIs can paint completely different pictures. 

Summing it Up

The modern Customer Success Manager has to strike the balance between customer satisfaction and elevated business revenue. Unfortunately, every customer is different and sticking solely to Customer Success KPIs can turn out to be counterproductive. This is why understanding relationships and hierarchies in key accounts is key.

With Staircase’s AI-driven Customer Relationship Intelligence solution, you can get deep insights on customer relationships on the go, monitor sentiment and engagement trends, and create actionable insights that just dry metrics simply can’t give you anymore.

Frequently Asked Questions

How will Relationship Scoring help me?

Relationship scoring is a unique CS metric that helps uncover NRR blind spots by providing bi-directional visibility into teams and customers. You can track stakeholder changes, churn risks, and sentiment trends for a proactive approach. 

How can I boost my NRR?

Besides tracking relationships and performing sentiment analysis in real-time, you can boost your NRR with good in-app/in-service communications, which should get you actionable customer insights and help you get rid of account blind spots. 

Is One Metric That Matters (OMTM) the same as North Star Metric?

While both seem the same, they are quite different. The OMTM is more of a short term goal (few months at a time) that specific teams adopt to achieve quick wins. The North Star Metric is more of a long-term company-wide pointer. 

How can the Customer Sentiment Score help my business?

Besides the obvious churn reduction, risk flagging, and improved retention rates, you can target neutral customers and turn them into advocates. This helps improve brand performance and organic growth in your specific industry. 

What is eNPS?

With more and more businesses scaling up fast, there’s a huge influx of in-house and remote pros. Employee New Promoter Scores help determine employee sentiment and understand how like they are to recommend your business as a workplace.

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NRR SaaS: Helping Evaluate Customer Success Performace

Net Revenue Rate (NRR) has become the new customer success benchmark in the SaaS space. This Customer Success KPI is helping online businesses measure and track their growth, while also pointing at negative changes as they occur. Let’s take a closer look at NRR SaaS and understand why you need to measure it constantly.

SaaS: The Business Challenges 

SaaS businesses, especially customer success executives, are facing many challenges today due to the dynamic nature of things. As mentioned earlier, this unpredictability is limiting the validity of traditional customer success KPIs. 

Here are just a few of the biggest challenges:

1. SaaS Customers are Picky. Are Mine Loyal?

If SaaS companies are afraid of something, it’s churn. Many variables that can contribute to customer frustration today – cumbersome onboarding, in-app friction, lack of support, and a poor user experience, just to name a few. There’s also the matter of increased competition. Customers are simply not loyal anymore and will leave as soon as they get frustrated or see a better offer elsewhere.

But how can SaaS businesses know more about their current churn performance and growth progress? There’s a need for an accurate and proactive measurement of where things stand on the retention and growth fronts. Enter NRR SaaS.

2. Retaining is More Profitable Than Acquisition. But How?

The old business model was based primarily on acquisition. But the SaaS market is more about retaining customers and nurturing accounts to promote expansion or upselling. Traditional KPIs are not able to assist with this business goal as they are more reactive in nature. NRR SaaS is helping measure retention and expansion performance. It’s directly tied to customer sentiment and satisfaction.

Here are just a few statistics that show how crucial retention is today:

  • It costs 7x to acquire a new customer when compared to retaining an old one
  • Loyal existing customers spend almost 70% more than new ones
  • SaaS companies get over 60% of business from their existing customers

Related: Navigating Success with the North Star Metric

What is NRR in SaaS? 

The Net Revenue Rate metric is helping measure the performance of SaaS businesses. It’s helping customer success teams track negative and positive revenue fluctuations within pre-defined time periods. By calculating the total recurring revenue from current customers with NRR SaaS, it’s now possible to follow key upselling, cross-selling, downgrading, and churn trends. 

With the SaaS distribution model constantly changing and customers having multiple options in the market, reducing churn and improving engagement is becoming increasingly challenging for customer success executives and CSMs. This is because traditional measurements splits company revenue into specific parameters, things like new deals (the holy grail), renewals, upsells, and cross-sales. There’s no bird’s eye view. 

NRR SaaS helps businesses feel the pulse when one or the following things happen:

  • When customers churn or leave your business altogether 
  • When customers downgrade to free versions or lower-paying plans 
  • When customers sign up for paid plans or buy a new product 
  • When customers upgrade to a costlier subscription plans
  • When customers add more users to make account bigger

The NRR is now becoming a crucial CS metric that SaaS businesses looking to achieve hyper-growth or become SMBs need to track and monitor closely. Even a 10% NRR difference between two SaaS startups can predict a different future for them – one can sink into mediocrity, while the other can experience exponential growth with a loyal customer base with dozens of brand advocates. 

Related: Customer Intelligence: A CS Playbook Essential

NRR SaaS Real Life Example 

You’ll need to calculate a few values to determine your current Net Revenue Rate. These are a blend of some traditional KPIs with key indicators that should paint a complete picture of your current growth trajectory.

Here are the NRR SaaS components:

  • Monthly Revenue Rate (MRR) – This is calculated by multiplying the number of monthly subscribers by the Average Revenue per User (ARPU).
  • Expansion Revenue (ER) – ER is basically the total sum of all revenue received from upsells and cross-sells, both key SaaS growth channels.
  • Contraction Revenue (CR) – CR determines how much your existing accounts have shrunk – reduced active users, downgrades, and less feature usage.
  • Lost Revenue via Churn (LR) – You’ll also need to know how much revenue has been lost by closed accounts or lost customers.

NRR SaaS can then be calculated by using the following formula:

NRR SaaS = (MRR + ER – CR – LR) / MRR

For example, let’s assume your SaaS business had a Monthly Revenue Rate of 27,000 USD at the start of June 2022 and finished the month with a MRR of 35,000 USD, along with 5,000 USD in revenue churn. Hence, your NRR SaaS is 111%.

So what NRR should you be going for?

There’s no clear answer to this question. Your company size, growth stage, specific target audience, and other factors need to be considered. Big enterprise-level SaaS companies should aim for three-digit figures of above 130%. These numbers are obviously unrealistic when we are looking at startups and SMBs. In these cases, a NRR of 90% can be a good customer health indicator.

Let’s take a look at some SaaS success stories you can draw inspiration from today. SnowFlake reported an impressive NRR of 158% in 2021. Communication tool vendor Twilio was close behind with a NRR of 155%. Elastic finished 2021 with 142%. 

Related: Customer Insights Platform: Why Do You Need One?

Boost NRR SaaS with Staircase AI 

Executive Business Reviews (EBRs) and fine tuning Ideal Customer Profiles (ICPs) can help SaaS companies optimize their CS playbooks and elevate their NRR, but they simply cannot help with the human side of things. Human insights are crucial to elevate NRR SaaS because they help break down sentiment fluctuations and also clear up relationship dynamics with ongoing analysis. 

More and more SaaS businesses are understanding the need to feel the pulse, identify sentiment trends, and respond as soon as possible to minimize churn. NRR will flag sudden drops and fluctuations, but you also need to identify key topics that are either problematic to prevent churn or can be leveraged to create new growth opportunities. Also, customer feedback loops need to be nurtured and prioritized.

How can all this be achieved to create a positive NRR trajectory?   

Staircase AI is a Customer Relationship Intelligence platform that leverages AI to analyze millions of customer interactions and turns them into actionable insights that are impossible to spot with the naked eye. It’s now possible to uncover customers’ health, journey events, and at-risk accounts. Cutting through the noise is allowing more and more SaaS businesses to reduce churn and improve their NRR. 

Boost Your Net Revenue Rate Now 
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Navigating Success with the North Star Metric

The North Star Metric is an important reference pointer that’s predictive of a company’s long-term success. It pushes all departments towards a common business objective to help achieve sustainable growth. Once leadership establishes this pointer-metric correctly, teams and stakeholders can work together with added purpose.

Before diving into North Star Metric specifics, we invite you check out our articles about other top Customer Success KPIs that are in use today. 

What is North Star Metric?

North Star Metric is a strategic cross-department metric that helps SaaS businesses establish a clear direction for long-term growth. Once the company’s core value proposition is established, all departments can work together in sync.

A well-established North Star helps on multiple fronts:

  • Product-Focus: At the team level, there are multiple tasks and deadlines, but everyone’s locked in and moving towards the same product goals. 
  • Clarity: Product, sales, and marketing teams often find customer success KPIs hard to decipher. The North Star Metric is clear and easy to understand.
  • Customer-Focus: The company becomes more dedicated to adding value to the offering. Everything starts revolving around retention and upselling.

You should also not confuse North Star with One Metric That Matters.

One Metric That Matters is quite similar to the North Star Metric, but they are two different things. The former applies to specific teams in the company that want to focus on one feature or goal for a predefined time frame, usually a few months. North Star Metric is more of a long term guide that applies to all departments. The North Star should ideally capture your customers’ ultimate “aha” moment. 

Related: All You Need to Know About Net Revenue Rate (NRR)

How to Calculate North Star Metric?

Your North Star Metric should not be based on revenue. It should be determined by asking key questions related to your value proposition and your customers’ biggest success moment. Needless to say, these moments need to be measurable.

Let’s take a look at how Spotify calculated its North Star.

First, the company looked into what value customers get from the platform. Then it looked into Pirate Metrics that could impact the North Star Metric. Pirate Metrics are also known as AAARRR (Awareness, Acquisition, Activation, Retention, Revenue, Referral). There were also a wide range of input metrics that had to be considered at the time. But “Time Spent Listening to Music” was eventually chosen as the North Star Metric.

North star metric - SPOTIFY

Source: Reforge

If external factors are constantly impacting your North Star Metric, you need to get back to the drawing board. For example, you can’t have 5-star ratings as your North Star Metric if you are a tourism service provider. This is because the ratings can be affected by bad weather, flight delays, hotel issues, and other third-party variables. The North Star Metric should encapsulate the core functionality of your business. 

Related: 5 SaaS Customer Success Pro Tips

North Star Example and Industry Benchmarks 

LinkedIn is a great example of a leading company that had to experiment a bit before finding the sweet spot with its North Star Metric. The whole case study has also been made public and is a great way to understand how the process works.

LinkedIn’s initial North Star Metric was the “Number of Endorsements Given” by members. Since this is a professional network powered by professionals and recruiters, this idea made sense in 2012 when this newly-introduced feature was gaining traction fast in correlation with the usage rates. Secondary engagement metrics were also defined at that time – unique recommendation recipients and endorsers.

Unfortunately, the number of falsified endorsements spiked as the platform started scaling up, eventually making this North Star Metric irrelevant. Following the big Microsoft takeover, LinkedIn went with “Monthly Active Users” as its new North Star Metric, just like Facebook had done earlier. The platform had simply become too versatile, diversified, and feature-rich to focus on a specific user-action or activity.

Here are some industry benchmarks.

North star metric EXAMPLES

Your North Star should define your customers’ ultimate “aha” moment and should be directly linked with business growth. Once you have nailed it, you should be able to make good progress. More and more SaaS companies are also supplementing their North Star Metric with a comprehensive Objective and Key Result (OKR) framework, which helps orchestrate cross-department operations.

North Star FAQs

  • Can the North Star Metric and One Metric That Matters be used together?
    Yes. It’s a potent combo that can help startups and SMBs avoid tunnel vision.
  • Are North Star Metrics supposed to change with time?
    No, not unless you are massively revamping your product and its features.
  • Should North Star Metrics be measurable?
    Yes, you should be able to measure and set a target level for your North Star Metric.
  • Can North Star be a full-fledged strategy today?
    Technically, yes. But it’s too basic/simple to help CSMs as a stand-alone tactic.

Demystifying Customer Health Score

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: Top 10 Customer Success Tools for the Productive CSM

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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