4 SaaS measures of customer health

In software, there are a few ways to measure the health of the customer base and stickiness of the product. Zuora, which recently went public, does a nice job of showing four measures of customer health in their S1.

Processed Transaction Volume

Zuora’s first measure of the overall health of the business is processed transaction volume. According to their S1, “Our customers’ increasing usage of our solution is evidenced by the growing amount of transaction volume processed by our customers on our platform. For the quarter ended January 31, 2018, our customers processed nearly $7.0 billion in invoice volume through Zuora Billing.” The chart below shows the volumes.

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Processed transaction volume is good to know, but it’s a very basic measure that doesn’t isolate existing customer from new customers. In other words, so long as you were adding more new customers than you were losing, the chart above would look good even though you may have a big problem with churn.

ACV Growth in Cohorts

One measure we like is ACV growth in cohorts. In other words, for a particular set of customers that signed up X months ago, what are they spending on your product now versus when they initially signed up in month X. It’s a great measure of customer health. According to Zuora, “Customer expansion can be seen in the ACV growth in cohorts over the last three fiscal years. Our cohorts of customers from fiscal 2016, 2017, and 2018, that had greater than or equal to $100,000 in ACV, combined together, have grown their ACV, on a dollar-weighted average basis, by 4% by the end of the first year, 27% by the end of the second year, and 39% by the end of the third year.”

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Growing revenue from existing customers is a better way to grow than having to acquire new ones. As Zuora notes, “given their significant potential lifetime value, we invest upfront in acquiring our customers and facilitating a successful deployment. Our ability to participate in our customers’ growth does not require the same investment as selling to a new customer, which we believe will result in increased margins over time.” Onboarding and ongoing customer service are critical.

Dollar Based Net Retention

This is our personal favorite measure. Zuora explains how they measure dollar based net retention: “We calculate our dollar-based retention rate by starting with the sum of the ACV from all customers as of twelve months prior to such period end, or prior period ACV. We then calculate the sum of the ACV from these same customers as of the current period end, or current period ACV. Current period ACV includes any upsells and also reflects contraction or attrition over the trailing twelve months but excludes revenue from new customers added in the current period. We then divide the current period ACV by the prior period ACV to arrive at our dollar-based retention rate.” In other words, Begin ACV+upgrades-downgrades-churn all divided by Begin ACV. Zuora’s net dollar retention of 110% means upgrades are outpacing downgrades and churn. It’s where you want to be.

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Percentage of ACV from Upsell

Looking at how much of your bookings comes from upsells versus new contracts is also a nice measure of customer health. Upselling existing customers is easier than acquiring new ones, so ACV or bookings from upsell should generally become a larger portion of total bookings each year, as it is with Zuora. In this case, nearly 50% of new bookings for Zuora come from upsells.

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Zuora does a nice job of putting together the key metrics of customer health in software. So long as these statistics are moving in a direction similar to Zuora’s, you’ll be on your way to an exit like theirs.

Written by

co-founder at Blossom Street Ventures

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