What is customer health score & how to calculate it?
Feb 26 2022
Churn is the biggest enemy of SaaS businesses. To minimize churn, companies need to go to great lengths to ensure that customers are satisfied with the product and feel they're getting their money's worth. To that end, many SaaS businesses create customer success teams and take other steps to keep customers as satisfied as possible. However, consistently tracking that level of satisfaction is a key component of measuring the overall success of these efforts. One such metric to pay attention to is the customer health score. In this post, we'll break down what the customer health score is and why it's so important.
A customer health score is a metric used by SaaS companies to measure how at risk a customer is of churning. Because the metric allows you to assess the health of your relationship with the customer, it may also be useful in determining which customers make prime candidates for upselling. Unlike many other metrics, the customer health score doesn't have a set formula. Instead, accurately calculating it depends on your particular product.
Why is a customer health score important?
Once you've begun tracking customer health scores, you'll be able to monitor the progress of your customer success program and make informed decisions about adjustments that need to be made. By applying insights generated by your customer health score, your company will get three main benefits:
Increased Sales - When a customer is very satisfied with your product, it's easier to get them to pay for higher-priced options.
Higher Reputation - Customers who receive stellar service are likely to tell their friends about it. This word-of-mouth advertising can build your reputation and further increase sales.
How to calculate customer health score
As we mentioned earlier, the exact numbers you use to calculate your customer health score will depend on your product. We'll examine what that means as we go through the five major steps in calculating a customer health score.
Determine what to measure
When determining the health of a customer, you want to look at key indicators. This is the value that is unique per product. You may track how frequently the customer uses an important feature, how often they log into the account, or how many support tickets they have. The key here is to think about what makes a customer likely to upgrade and what makes them likely to churn. Those become the factors that go into your customer health score formula.
Establish score distribution
Because we are taking both positive and negative actions into account, both elements need to be reflected in the formula. Separate your actions into a list of good and bad ways customers may use your product. The good actions will be added onto your score, and the bad actions will be subtracted.
Assign an impact score to each action
Not every score in your list will be equally important. For this reason, each action should have a weight attached to it that quantifies its impact on a customer's health. You will want to specifically examine the actions taken by churned customers and customers on your highest price tier. The strength of the correlation between the two shows you the impact particular actions can have.
Segment your customers
Your customers are likely not homogenous, and you've likely already done a fair deal of customer segmentation as part of your marketing efforts. Think about how each of your customer segments may be impacted by different actions and create a set of weights for customer segments with substantially different outcomes.
Now, you'll want to create a template. Count the number of times each action has occurred and multiply that value by the weight assigned to the action. This gives you your total action value. Remember to negate the value of negative actions. You can then simply add the total action values together to get the final customer health score.
The customer health formula is:
Customer health score = total action value #1 + total action value #2 + total action value #3, etc.
Written out with an example of two positive factors and two negatives, you can see that the formula follows this basic format:
Positive action 1 count x Positive action 1 weight + Positive action 2 count x Positive action 2 weight - Negative action 1 count x Negative action 1 weight - Negative action 2 count x Negative action 2 weight
Using the weight from the example above, let's say actions 1 and 2 took place only once each. The formula would then look like this:
For more accurate results, ensure you deduct points if a user has not completed an action within the specified period.
Using this formula structure, you can create a customerhealth score template in your favorite spreadsheet program that lets you quickly calculate the customerhealth score of any client.
Customer health score examples
Once you have a score, you need a way of turning that number into something meaningful at a glance. There are a number of ways you can interpret the data you've created. We've listed some of the most common examples below.
When the maximum value for a health score is known, you can divide the customer's score by that maximum value to get a percentage. This is a great way to see at a glance how the customer's health looks. You can do this for each action and for the score as a whole to get a more granular look.
Is the customer's health green for go or red for stop? Just like the colors of a stop light, dividing the customer's health into three sections and assigning them red, yellow, or green color labels provides an even quicker look at customer health. You don't necessarily need to make sure that each color category has an equal proportion. You can let the data guide you as to which scores fall into which buckets. This strategy is easier to read, but lacks the precision of percentages.
This method mimics the school letter grades of F to A, assigning a given letter range to a health score. This allows for more precision than the color system while translating results into a slightly easier-to-read format than the percentage system.
How to improve customer health score
As a metric alone, the customer health score isn't all that useful. But once you have used it to improve the health of your customer relationships, it becomes a powerful tool. There are a few simple steps you can take to begin moving the needle on improving your customer health score.
Talk to customers
The best way to understand why customers have low health scores is to talk to them. General customer satisfaction surveys may help, but you can do better. Your customer health score has concrete actions that it takes into account. Reach out to customers who aren't scoring highly on those actions and ask them what you can do to help.
Like most data analyses, getting an understanding of what your customer health score is telling you is all about identifying patterns of behavior. For example, if customers aren't using a particular feature, it could be that they have not been properly made aware of it or taught how to use it.
Link business outcome and customer health
Customers maintain a subscription to your product because it provides them with perceived value. Sometimes, that value is very concrete, such as the ROI your product provides. If possible, adding in benchmarking metrics that reflect what the customer gets from your product can help you push usage in the right direction.
Keep track of relevant product metrics with ProfitWell
ProfitWell Metrics is a free tool designed specifically for the SaaS industry. It tracks a large number of metrics that will make it easier to collect data for your customer health scores as well as offers transparency into all other areas of your business. With ProfitWell Metrics, you can:
Get real-time product data
Information about how your product is being used and by whom will be available in real-time via the Metrics dashboard. This allows you to identify and evaluate a customer's score while taking immediate action.
Get a clear overview of the entire customer lifecycle
We connect acquisition data to the entire customer journey. Monitor your customers from the time they first enter the sales funnel to the time they finally churn.
Improve retention rates
Use data about churned customers to determine patterns that will help you reduce churn in the future.
We accurately report revenue trends by tracking existing and new customers, upgrades and downgrades, and churn rates. From this data, you can spot trends and initiate conversations with customers regarding upgrades at the most opportune times.
Product usage patterns are crucial in helping you know if users are having difficulties or success with your products. Our segmentation enables you to evaluate the state of different segments' product experiences. Which gender or location is having the most success?
Customer health score FAQs
How do you measure customer health?
To measure customer health, you first decide on a list of factors that provide a good indication of your customer relationships. You then assign each action a weight based on what impact it has on the relationship. Finally, you add the resulting values together.
What is a customer health check?
A customer health check is when someone from your staff reaches out to a high-value customer to ensure that they are happy and do not need any help with your product.
What is a customer health score?
A customer health score is a metric used to determine how much risk there is of a customer churning or how likely they are to be ready to pay for an upgrade to their service.
What are the benefits of a customer health score?
A customer health score lets you see which customers are at risk of churn so you can take steps to retain the customer before they make the decision to leave. It also allows you to see which customers you have a great relationship with and may be able to successfully upsell.
What is the difference between customer health scores and customer health checks?
Customer health scores are all about interpreting the data that you get from a customer's actions and turning that into a quantifiable number. Customer health checks are direct actions between you and the customer themselves.
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