5 Numbers to know for Customer Success Leaders
The times have changed. The days of hiding behind the “trusted advisor” cliche are (almost) over, and customer success leaders all over the tech industry are waking up to the need to make friends with the business's rhythm and numbers.
Whether you own and manage a revenue number or not is becoming irrelevant. In order to earn the right to do the work, you need to be able to understand and talk about how your work and the work of your team impact the business you work for financially. You need to know whether you are a growth centre or a cost centre, and you need to understand the metrics that matter and how you can influence them.
I haven’t always been a commercial CS Leader. In fact, I fought an old CRO quite heavily on it. But, as with many things in life, I was wrong. There is nothing inherently untrustworthy about being the person with whom customers can discuss commercials. I think, if anything, it makes you more trustworthy. For me, it’s never sat right that as soon as someone wants to discuss pricing, or expanding their subscription, sales need to be summoned. What I was fighting wasn’t the concept of commercial Customer Success, it was my own insecurity with understanding commercials and how they worked. I didn’t understand the numbers, I didn’t know how to negotiate, and I didn’t think it was a strength.
I was wrong there, too. Turns out I love negotiating, I thrive digging into numbers and I love selling more things by solving more problems.
But anyway, this blog isn’t about sales. Even if you, dear CS Leader, do not have a commercially focused team, I hope you learned one thing from 2023.
If you don’t know how your team impacts the numbers your CFO cares about, you’re a cost centre, and your days are numbered. Yes, we’re here to drive customer success, but we work for our businesses. You need to know how to articulate your value to your customers, obviously. What’s more important, though, is articulating your value to your boss. Some of these numbers are just numbers; you can’t really directly impact them through CS alone, but you can use them to guide your strategy and tell your story. More importantly, to be fluent in CFO*, you need to know what they are.
*Being fluent in CFO also helps you talk credibly to your customers’ CFOs. You’re definitely a cost in their eyes.
Let’s get into it.
1. LTV:CAC Ratio
Or, the Lifetime Value to Cost of Acquisition ratio. LTV, sometimes called customer lifetime value (CLV, it’s slightly different but in reality, the same thing), measures the average revenue your company makes from a customer in subscriptions over the life of their relationship with you. Cost of acquisition is the average amount of money spent on acquiring new business.
LTV makes sense. You want this to be a nice high number. In my experience, I’ve always wanted this to be about 3x higher than my average contract value, indicating that I can retain customers (on average) for more than 3 years. This ratio normally measures your ROI, that is, for every £1 spent on acquiring customers, how many £s do the company get back?
You’re looking for about 3x; you want to see that for every £1 spent on acquisition, you’re getting £3 back. CFOs love this number because it signifies that they’re spending the right amount of money on marketing and that the average customer is happy and stable with their product. If this number is less than 3 for your business, focus on strategies for gross retention.
If you have good gross retention (>90%), then this indicates that you’re not maximising revenue potential from existing customers. If you own the expansion number, I would focus on pipeline management and sales execution across your CSMs (try a framework like MEDDIC, or whatever your sales team are already using). If you don’t own the number, I’d focus on operationalising a “CSQO” (Customer success qualified opportunity) process so you can detail and document the volume of potential revenue expansion opportunities which are being created and handed over to sales or account management.
2. NRR (and GRR)
No good revenue number blog would be complete without NRR.
Now, I’ve started many fights about NRR before. In my opinion, too many people use this as an indication of growth without looking more deeply. Net retained revenue is the amount of revenue you retain in a given period, plus expansions and minus churn. Typically, you want this to be >110%, maybe even closer to 120%. This indicates that you’re growing more customers than you losing.
However, and this is my problem with it, whilst it’s hard to sell your way out of a leaky bucket, it’s not impossible. NRR is only useful when it’s paired with GRR. GRR is the measure of how much revenue you’ve retained in a period, and you want it to be >90%.
Especially if you’re not accountable for expansion, get to know your GRR number, as retention is more easily attributed to successful CS teams. Successful customers grow, so NRR is a good measure of an effective post-sales organisation, but don’t lose sight of pure retention; you’re probably being paid on it.
3. ACV, ARPA and and ARPU
Or, Average contract value, average revenue per account and average revenue per user. These are all measures of SaaS growth.
All of these typically are what they are; they’re just useful to know, and you should know what they mean.
For ACV, take the total value of your contracts minus any one-time fees (or PS) and divide it by the contract length. This is usually just good to know. You can also positively influence this by signing multi-year deals and renewals, for example.
ARPA is the average revenue per account, which is a measure of the total value of your MRR or ARR (depending on how you contract your customers) divided by the total number of customers you have. This is useful for segmentation and can help you strategise when you’re thinking about the types of CS management structures you want. The higher your ARPA, the higher the touch of your CS motion (typically).
ARPU is the average revenue per user. Again, take total revenue and divide it by number of users. If your product is sold by unit, not user, you can divide it that way to get your average revenue by unit instead. I’ve used this in the past to identify risk in accounts. Wild variation in ARPU across accounts suggests inconsistent pricing and can be a problem and suggests a lack of rigour in your sales process that you might want to discuss with your sales leaders.
Most of these metrics will give you a broad picture of how much your customers are spending and on what products specifically. If you're in the segmentation by ARR phase, it’s a very good idea to dig into all of these numbers to understand your customers before you decide where to cut your service tiers by ARR.
4. COGS
Cost of goods sold. The most important thing to know is whether or not you’re in this bucket or not. COGS is the total amount it costs your business to support your product. This typically includes things like hosting and support costs (AWS, for example), technical support, infrastructure teams or DevOps, any third-party software you need and any other direct employee support that your business needs to provide to keep the lights on.
Customer Success is normally in the COGS calculation if you’re an operational team or your only revenue focus is retention. If your focus and function is expansion and cross-selling, you’re probably either wholly or partially included in Sales and Marketing costs. It’s pretty typical for you to be split between both buckets.
This matters because one of the best ways to increase profit margin is to decrease COGS, hence why we saw such an impact on customer success last year. If you’re not actively generating revenue, you’re a cost centre.
5. EBITDA and Rule of 40
EBITDA is earnings before interest, tax, depreciation and amortisation. TL;DR, it’s a measure of profitability. It tells you how well your business is managing its money. This is basically a measure of profitability.
The rule of 40 states that, at scale, the combined value of revenue growth and profit margin should exceed 40% for healthy SaaS companies. The rule of 40 is what is leading the drive towards profitability in SaaS.
Your rule of 40 is your recurring revenue growth rate %, plus your EBITDA margin %.
This is important because previously, SaaS has been focused on “growth at all costs”. The rule of 40 balances growth and profit to determine whether or not your growth is sustainable. If you’re growing at 20% and your profit margin is 20%, you’ve hit 40%. Well done you. Normally, this shows investors that you can make money based on your current business model.
This is why COGS and EBITDA and so important. And this is the context in which you want to make sure you know what these numbers mean, how they are calculated and how your team and strategy support positive impacts across the board. If you’re vague on the value you deliver to your business, you’re in trouble. If your YoY growth is slow, the easiest way to bump the numbers is to reduce your COGS to increase your EBITDA. There’s only so much infrastructure cost you can remove from a business. Teams of people without demonstrable value, on the other hand... Well, there’s the problem.
Understanding these numbers can help you build a strategy that supports the strategic goals of your company. Even if you are a cost centre and have no direct revenue expansion accountability, understanding these numbers and which ones your CFO cares most about should help you design the focus for your teams.
If all of this seems overwhelming to you, I’d start here;
Spend some time researching and reading about these numbers
Ask for time with your CFO or your Rev Ops leader to understand how your business calculates and uses these numbers and which are the most important. I’d also ask them how they’re looking at and measuring your effectiveness as a function, if this isn’t something you know
Align your focus towards strategies which can positively impact the numbers your business cares about
Document and measure this like you would a customer value outcome
Whatever you’re focusing on through your success management practice, ensure you have a solid way to link the results back to one of the metrics that matter for your business. The more you can tangibly link your results to things like EBITDA and profit margins, the more comfortable you’ll feel speaking in these terms.
If you need help understanding how the initiatives you’re working on fit with the numbers of your business, give me a shout. I can help.
Blog Photo by Diana Polekhina on Unsplash
