There are multiple ways to measure how an engagement with a customer is going. You can analyze the feedback they provide with you. You can look into the value they are getting from your product or service. You can even look into their financial commitment with your company and see if they're investing more or less in your engagement over time.
All of those factors can help you understand different aspects of how a customer is doing, and together they form customer health.
What is Customer Health?
Customer health is a quick summary of how a customer is doing in regards to their engagement with your company. It’s typically presented as a score, and when done effectively, it can be used to predict a customer’s likelihood to renew and upgrade.
“What customer health aims to do is provide a simple scoring mechanism — like a color code — so that you almost don’t have to understand all of the detail behind the data and know every single one of your leading indicators when you’re a CSM or a sales rep trying to talk to a customer,” says Mike Redbord, the Senior Vice President of Operations at SaaSWorks.
To most effectively categorize your customers, the scale you create should have an even number of tiers. For example, you could use red, orange, yellow, green or at-risk, unengaged, engaged, power user. Using an even health scale prevents you from having a neutral, middle tier that customers can fall into, making your health score system more clear and conclusive as a whole.
Factors of Customer Health
Customer health is comprised of all of the factors that impact a customer’s ability to see success with your company, including usage, engagement and financials.
The usage component of customer health encompasses how much they leverage your product or service, how they use it and what kind of results they see from it.
“At the simplest level, people that use products tend not to cancel them,” Mike says. “An easy way to think of that in terms of software metrics is just activities or logins or gross number of clicks. You could create a health score off of that. It would be roughly right to say that the people with the top 25% of usage is green and the bottom 25% is red. It’s a reasonable starting place.”
But if you have systems in place that allow you to be more sophisticated in your usage analysis, you should try to identify outcomes based not just on broad, aggregated metrics, like total number of logins, but instead on deeper usage actions that are more specific to the value your customer gets from your software.
Taking an action within a software is better than just logging in, and exceeding your performance goals is better than just receiving a deliverable.
The goal of analyzing usage data as a component of customer health is to understand what usage behaviors are leading indicators of renewals, upgrades, downgrades and cancellations.
“You want to find the pieces of data that are predictive of the outcomes you want,” Mike says. “So, if a certain behavior is highly correlated with cancellation, you’d want to have a decline in customer health for that. If a different behavior was positively correlated with upgrading and renewal, you’d want to have a positive correlation in customer health for that.”
Part of a customer’s ability to see success occurs outside of the platform, so engagement is an important element of customer health.
“I like to look at engagement as the human story that goes with the numerical story of usage,” Mike says.
At a high-level, there are two types of engagement customers have with your company: support and non-support.
Support engagements include submitting tickets, reaching out to support representatives and consuming knowledge base articles. While too much support engagement is a bad sign, some level of support requests is actually a sign of good health.
“Most B2B SaaS platforms require some human help along the way. So if you’re a customer of one of those platforms and all your usage measures look good, but you’ve never talked to anyone at that company that could be a point of concern,” Mike says. “It's not unhealthy to have a ticket now and then. It indicates deep usage.”
When analyzing support engagements to determine how they impact health, look at frequency, recency and type.
Non-support engagement includes interacting with customer marketing, providing feedback, communicating with CSMs and attending meetings like quarterly business reviews.
If a customer is completely ghosting you after your proactive engagement attempts, that’s a sign that they might not be gaining value from your outreach and their lack of engagement should result in a lower customer health score.
A main aspect of financial health is whether or not a customer pays on time. But, a customer’s payment history isn’t the only way financials should be taken into consideration when calculating customer health.
If you accept multiple payment methods, you might have different retention rates and payment failure rates between them. For example, it could be healthier for a customer to have auto-payments set up on their credit card than manually pay invoices or if you have a high credit card failure rate, you might prefer invoices.
The other way you can look at financial health is by analyzing the revenue change of the account. Is what a customer is paying now more or less than what they paid when they first became a customer? Have they upgraded or downgraded recently?
Those changes in revenue aren’t black and white in terms of healthy or not, but good factors to keep track of in context. A customer who just purchased an additional software might need additional support in the short-term as they onboard onto the new tool. A customer who downgraded might now be seeing a more equivalent price to value and therefore be more likely to renew.
Why Companies Should Care About Customer Health
“[Customer health] is the simplest way to talk about leading indicators of retention. It gives you an at-a-glance method to understand how one account is doing, how multiple accounts a CSM owns are doing or how an entire install-base is doing, particularly when you look at the movement of health over time,” Mike says.
You can use customer health to understand segments of your customer base and specific product users. That knowledge can help you optimize your business practices so you target the right prospects and sell them products or services that result in real value.
“The point of health scores is not to have a good health score. It’s to create healthier customers,” Mike says. “So although health score can be as complicated as you like, starting simple, with perhaps a single usage metric, and building from there is the path to growing a better business with health scoring.”
The way customer health scores change can also help you proactively engage with your current customers to optimize their lifetime value. However, it’s important to keep in mind that while customer health is summarized as an objective score, the best way to act upon it is subjective.
“Customer health is essentially a mathematical exercise, but then what happens? You have some formula that you use for health and then you need to operationalize it with people or you need to automate it with technology,” Mike says. “There’s a lot of art in the operation, education and automation.”
An orange account might be more in need of immediate outreach than a red account, and a yellow account that used to be green should be treated differently than a yellow account that used to be red. Your team needs to be able to make judgment calls.
Quinn is a writer and copyeditor whose work ranges from journalism to travel writing to inbound marketing content.