Top 4 SaaS Performance Metrics Tying Customer Success to Bottom-Line Revenue

Jayaram Bhat | October 26, 2018

A calculator, pen, and ruler sit on top of graph paper

Customer success professionals provide an essential benefit to customers through onboarding, ongoing education, and other programs that help ensure the latter is able to wring the maximum value from a company’s products or services.

But the success department does not only benefit customers. It can also have a significant impact on the overall health of a business’s bottom line, particularly for a SaaS business.

In order to fully understand the size and character of that impact, it’s critical to measure and analyze a few key metrics. In this post, we’ll discuss the top four SaaS performance metrics that tie customer success to bottom-line revenue.

The Top 4 SaaS Performance Metrics for Customer Success Impact are:

  1. Referrals from Existing Customers
  2. Expansion Growth Rate
  3. Revenue Retention Rate
  4. Customer Retention Rate

Analyze Referrals from Existing Customers

One of the most fundamental ways that customer success can boost the bottom line of SaaS providers is by contributing to the acquisition of new customers via referrals from existing customers.

As CustomerSuccessBox explains, “Customer advocacy goes hand in hand with success. Happy customers will readily refer people, give reviews and be part of those ‘always in demand’ case studies.”

There are a couple of approaches to calculating the success team’s effort when it comes to referrals.

ClientSuccess recommends a straightforward formula that calls for simply adding up the “number of customer advocacy activities they are able to drive” including everything from “a customer referral or reference call, new case studies, or positive customer reviews.”

Meanwhile, Userlane advocates using a viral coefficient in which “the value indicates how many new customers you can expect to acquire through referrals of each existing customer…Such coefficient of advocacy is defined as viral since it possesses intrinsic exponential characteristics that might allow your business to spread like fire!”

Here’s the viral coefficient formula from Userlane:

Mathematical formula for how to calculate viral coefficient

Whichever calculation method you choose, it’s clear that referrals from existing customers are an important metric to track when assessing the impact of customer success on a SaaS business’s bottom line.

Calculate Expansion Growth Rate

Expansion “refers to the opportunity for a customer to start small with your product and then expand their use of it over time,” writes Gainsight.

“The expansion could be as simple as buying additional licenses for new users (usually called upsell) or as complex as selling your entire solution to a new division of the same company which is often referred to as cross-sell,” continues Gainsight. “And between those two ends of the spectrum would be selling additional products or features to your original buyer.”

To calculate the expansion growth rate, you must first calculate the expansion MRR, which is the monthly recurring revenue that resulted exclusively from upsells and cross-sells. Then you simply divide the expansion MRR by the overall MRR from the previous month.

Here’s the simple formula from ClientSuccess:

Mathematical formula for how to calculate expansion growth rate

Revenue Retention vs. Customer Retention

So far we’ve discussed the role of customer success in boosting a SaaS company’s bottom line through (1) the acquisition of referrals that lead to new customers and (2) an increase in revenue from existing customers via upsells and cross-sells.

Now it’s time to examine how success professionals can impact retention, the importance of which can’t be understated. As Gainsight puts it, “After all, the reason the Customer Success organization came into being, and exists to this day, is to retain customers and revenue.”

As that quote indicates, there are two components to measuring retention: revenue retention rate and customer retention rate.

“While both revenue retention and customer retention are important, many SaaS companies place a higher value on revenue retention because revenue is king in any SaaS business,” explains ClientSuccess.

Why? Consider this example from ClientSuccess:

You “lose 10 customers with subscriptions of $10,000 each for a total of $100,000 in lost revenue, or one larger customer with a subscription of $150,000. In this case, it may be better to lose the 10 customers equaling $100k in ARR, rather than the one customer and $150k in ARR. Just keep in mind that the 10 lost smaller customers carry additional hidden costs as they may become negative advocates in the market.”

Calculate Revenue Retention Rate

Userlane defines revenue retention rate as “the total amount of recurring revenue your organization retains over the period of observation. It can be calculated as gross (without considering any lost revenue) or net (considering upsells and expansions).”

As indicated by the Userlane formulas below, in either case, you calculate the revenue retention rate by taking the current MRR and dividing it by the MRR from the same group measured a year ago.

Mathematical formulas for how to calculate revenue retention rate

Customer Retention Rate Formulas

The final performance metric we’ll examine is customer retention rate and its counterpart, customer churn rate.

As the name implies, the customer retention rate is the percent of customers retained (i.e. who remained customers) during a specific time period.

In contrast, the customer churn rate measures the percent of customers that are lost (i.e. they cancel their subscription) during a specific time period.

The formulas for customer retention rate and customer churn are as straightforward as they sound:

Mathematical formulas for how to calculate customer retention rate

Time to Start Crunching Some Numbers

Now you know the top four performance metrics for assessing the impact of customer success on a SaaS company’s bottom line, including referrals from existing customers, expansion growth rate, revenue retention rate, and customer retention/churn rate.

If you don’t already have a process in place to measure these metrics, there’s no time like the present! But be sure that you don’t stop with the calculations. After all, the data is only useful if you examine it closely and then change your actions accordingly.