How to Measure Customer Growth?
Recent research by McKinsey indicates that nearly 70 percent of customer purchases are driven by growth. Any company records its success or growth to determine where they stand and where they want to reach. Growth for a business can be defined in terms of revenue, operations, management, or customer success. And customer success is a great field to analyze in order to reflect the company’s growth. Customers feel successful only if they grow with the business, which in turn happens when they get the best product value.
So what exact metrics can you use to measure customer growth? Before we go to that part, let’s do a quick warm-up but looking closer at what customer growth is about.
Customer Growth: Explained
The ideal customer journey involves the following steps:
- Customers adopt the product
- They use the product and are retained
- They expand their accounts through cross-selling and up-selling
- Current customers become brand advocates to refer new customers in
Having that in mind, the customer growth covers two aspects. The first one – it is about the growth of a single customer through your products or services. The second one – the growth of a customer base in your company.
Some of the key questions to answer here are:
- How much has their footprint increased?
- Have they re-subscribed?
- Are they looking at purchasing other products or services?
- Are they willing to recommend your business to others?
The approach based on the customer growth requires the mindset shift from a buyer perspective to a customer perspective. And implementing a customer growth strategy is essential to reduce churn and improve revenue for the company.
Customer growth can be also defined as the rate at which your customer base grows (both financially and nominally) over a period of time. It indicates how well you are performing as a company and how impactful what you offer is to the market.
Metrics to Measure Customer Growth
Once you onboard customers, you need to start maintaining a relationship with them to understand what drives them. But how exactly can you measure customer growth? Here are some examples of the most common metrics.
I. Customer Churn Rate
The rate at which customers leave or stop doing business with you is the churn rate. It is measured over a given time period. It can be calculated on a monthly, yearly, or even quarterly basis. To calculate a % churn rate easily, you can use the following formula:
Churn Rate = (the number of customers unsubscribed) / (total number of customers at the beginning of the period) x 100
The lower the churn rate, the better. A higher churn indicates that customers are not able to achieve the success they want through your product or service. A minimum or negative churn rate is what companies should aim for.
II. Monthly Recurring Revenue (MRR)
MRR is a great metric used predominantly by subscription-based businesses to determine how much their customers’ spending has increased since they began buying from them. MRR reflects the amount of money your customers are spending with your company offerings every month. This can be compared over a given period of time to check in which direction and how fast your recurring sales revenue changes.
You can also calculate the Expansion MRR to measure additional revenue coming from the existing customers. It is simply new revenue generated this month compared to last month, but without the MRR contributed by new subscribers. With loyalty programs, up-sells, and cross-sells current customers can easily add more revenue to the company.
III. Net Promoter Score
A Net Promoter Score (NPS) is what reflects the success of your offering and business as the whole. To be able to calculate NPS you need to ask customers a question about how likely they are to recommend your company (or offering) to a friend. The respondents leave an answer on an 11-point scale (from 0 to 10), with 0 meaning “not likely at all” and 10 – “extremely likely to recommend”. If someone is likely to recommend your company to another person, it is the biggest indicator of customer growth. Customers with answers 0-6 are then classified as Detractors, those rating you 7 or 8 are Passives while the ones selecting 9 or 10 are true Promoters. You can then calculate the NPS according to the formula below.
NPS = Percentage of Promoters – Percentage of Detractors
Its value ranges from -100 to +100. Ok, but which NPS value is a good value? In general the higher the NPS, the better. While doing additional internet research you may find different opinions on NPS benchmarks per industry. However, the most crucial thing is to monitor this metric on a regular basis and check how it changes for your company month-on-month. It will allow you to understand whether your actions bring positive results reflected in the overall customer satisfaction.
IV. Customer Lifetime Value
An average Customer lifetime value (CLV) for your company shows the total revenue a single customer can be expected to generate over the course of their relationship with your business. In simple words, CLV determines the value of customers. If your company knows how the customer reacts to the products or services, they will be able to work on amplifying that experience.
If you run an e-commerce store, CLV can be calculated by multiplying an average purchase value by an average number of purchases and expected time of engagement. And if you run a subscription-based business, it can simply be the monthly average revenue per user (ARPU) divided by your average churn rate.
If the LTV value increases over time, then your company products and services are highly impacting customer success. If there is a decrease, a business needs to re-evaluate the way it operates and try to identify and fix issues in customer experience.
V. Customer Retention Cost
Customer retention cost (CRC) is the cost of retaining the existing customers. In other words, it is the money you spend on various customer success activities. Tracking the customer retention cost helps businesses invest in their programs in an effective manner. With smart investment calls, you can increase revenue and decrease cost.
Expenses on customer success-related payroll, account management, engagement activities, and adoption program can be all added up to get a wholesome expense sum. Then divide the expense sum by the number of customers to get the average CRC per customer / user. The CRC is usually calculated for a given timespan, for example annually. You can compare the annual CRC to the annual recurring revenue (ARR) to check the effectiveness of your customer retention operations.
VI. Customer Engagement
Are your customers engaged well with your product or service? While there are various ways to measure and gauge customer engagement, some of the simplest ones are time on site, repeat visitors or social media reactions (likes, shares and comments). The higher those values, the more active your users are.
So improving the ratio of active users is necessary to improve the customer engagement scores (which are usually more complex metrics adjusted to your business’s specifics). If you want to track user engagement e.g. in an application you sell in a subscription-based model, you can calculate the daily active users (DAU) to monthly active users (MAU) ratio. It will give you the proportion of monthly active users that are engaged with your product on a single day.
Customer-centricity Supports Growth
Supporting customer growth is important to be able to constantly increase revenue of the company. To achieve success in this area, businesses have to meet the expectations and desires of their clients. Customer growth is an evolving process and requires a long-term strategy. And a qualitative approach is necessary to keep track of customer progress as well as the effectiveness of your operations.
The most crucial thing, however, is putting a customer (not a buyer!) truly in the center of everything you do. Understanding what your target group really wants, selecting the right growth metrics to keep an eye on and optimizing your actions based on the results is the key to a continuous and healthy business development.