Something that we care a lot about here at Bowery Capital is preparing and supporting our companies that have achieved product / market fit in their next round of financing. We find, in particular, that many of these companies have achieved outsized growth on the sales and marketing fronts. The numbers look great and they are prepared to talk the talk and walk the walk when they seek to raise follow on capital. One thing that is continuously discounted is the third vector of revenue: customer success. In particular, we’ve been spending more and more time on two customer success metrics that matter. We think they are critical to any SaaS founder thinking of going out for their next round of financing and it is getting tougher and tougher to raise if you don’t have this nailed in the early stages of your company.
The first of the two customer success metrics that matter is LTV:CAC. Really understanding what the lifetime value of your customer is and the cost of acquiring those customers makes the difference between a founder who is making it up and one that has incredible command of the numbers and their revenue generation. Narrowing even further, understanding each segment within LTV:CAC is even more key. LTV:CAC calculated from company data becomes relevant when the growth process becomes both repeatable and scalable, and the data feeding into it is instructive as to what future outcomes will be. Thus, we wouldn’t recommend doing this until you have some semblance of product / market fit. For us, the key number remains 3x even though a some folks dispute it. For us, if LTV:CAC is not greater than 3x on average for new customer acquisitions during the most recent quarter or two per segment we just have a tough time seeing that the business is ready for scale.
The second of the two customer success metrics that matter is your customer success score. Teams use all sorts of metrics to develop a score of the health of each customer. Some metrics within our portfolio are product configuration, usage metrics, executive sponsor buy-in, champion buy-in, customer interaction, product value, and many others. Many companies apply multipliers to this and the end result is a score for the health of each customer. Within this scoring system you can usually bucket your customers by “green” or healthy, “yellow” or nervous, and “red” or failing. We work hard with founders to develop this scoring system from Day 1 and ensure that they are paying attention to who is using the product and why. If you don’t have an active user base continuously coming back you also are really not ready to scale. We coach that a founder needs a passing score (green) on 80% of new acquisitions within the first 60 to 90 days post onboarding to prove to us that they have really found product / market fit.
Customer success is the lifeblood of any business. If you don’t have it you are likely dead. Making sure you have a truly scalable company through these efforts will result in a much better outcome as you continue to move into the fast scale and blitzscale phases of your business growth. If you scale too early, you’ll be working against yourself and having to go back and get these metrics right. Even worse, you might go bankrupt.
If you liked “Two Customer Success Metrics That Matter From Zero To One” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.
This week Oleg Campbell, Founder and CEO of Reply.io, joins the Bowery Capital Startup Sales Podcast to discuss "Evolving Your Sales Tech Stack."