Customer Health Score: Definition + Formula for SaaS Companies
What if you could predict—with high accuracy—which customers are on the verge of churning before they even consider leaving? Or identify those ready to upgrade to a higher-tier plan? A customer health score provides these valuable insights and empowers you to proactively improve customer relationships.
This article takes a deep dive into this essential metric. We’ll explain what it is, why it matters, and how to effectively track it to drive customer success and business growth.
What is a customer health score?
A customer health score is an index that SaaS businesses use to assess a customer’s overall satisfaction with a brand. A higher health score indicates a healthy, satisfied customer, while a lower score may signal issues that could lead to churn.
Why is the customer health score important? Calculating and tracking health scores empowers you to consistently:
- Improve retention.
- Maximize account expansion opportunities.
- Measure the effectiveness of your customer success efforts.
- Enhance customer satisfaction.
Before we proceed, it’s worth noting that this is a customizable metric based on individual business needs. A good health score might look different for every SaaS business.
Three types of customer health score scales
From simple color coding to more complex numerical systems, customer success teams use various scales to record and interpret health scores.
This section shows you three of the most effective scales, along with customer health score examples for each type.
1. Color-coded scale
Often referred to as the “traffic light model,” this rating scale uses green, yellow, and red to visually represent customer health.
- Green signifies healthy customers who are on track for success and require minimal intervention.
- Yellow indicates customers who need attention or are showing signs of potential risk.
- Red flags at-risk customers who require immediate intervention to prevent churn.
This scale’s visual nature makes it attention-grabbing and simple to interpret. It’s particularly useful for customer success managers who need a quick, at-a-glance overview of customer health, such as in customer success dashboards or reports where detailed information might be overwhelming.
2. Letter grade scale
Similar to academic grading, the letter grade scale uses letters A, B, C, D, and F to categorize customer health scores. An “A” represents excellent health, while an “F” indicates a high risk of churn.
This scale provides a more granular view than the color-coded system and allows you to create finer distinctions between customer health levels.
For example, you might have different action plans for a “C” customer compared to a “D” customer. This nuanced approach is handy when analyzing individual user profiles or segmenting customers for targeted campaigns.
3. Percentage scale
The percentage scale offers a more comprehensive approach to measuring customer health. It involves tracking multiple customer health score metrics, such as adoption, product usage, support tickets, and customer feedback.
These individual metrics are combined and weighted to generate a global health score, represented as a percentage. This global score provides a holistic view of the customer’s overall relationship with your company and allows you to assess their engagement, satisfaction, and potential for churn.
The percentage scale is a great choice if you need to precisely measure incremental changes. Here’s an example:
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6 steps to measure customer health scores for SaaS companies
Ready to start tracking the customer health score for your business? Here’s a step-by-step process to follow:
Step 1: Define what the customer health score means to you
Begin by clarifying the purpose of this exercise. What’s your company aiming to achieve by tracking the customer health score?
Will the metric primarily serve to spot at-risk customers? Or will you use it to measure customer satisfaction and identify upsell opportunities? Clearly defining the purpose will guide your selection of metrics and the design of your scoring system.
For greater impact, connect your chosen objective with specific business objectives, such as increased retention, revenue growth, or improved customer satisfaction. This makes it easier to track your efforts, demonstrate the value of customer success initiatives, and maintain accountability.
Step 2: Segment your customers
A one-size-fits-all approach to health scoring can be misleading.
For example, a high-volume customer might have more support tickets than a low-volume customer, but that doesn’t necessarily mean they’re less healthy. Segmenting your customers allows you to tailor your metrics and create a more accurate picture of their health.
The ideal segmentation strategy will depend on the objectives you defined in Step 1. However, a good starting point is often segmenting by pricing tiers. Customers on different pricing plans usually have varying levels of product access, support expectations, and engagement patterns.
Userpilot makes segmentation easy. With just a few clicks, you can create customer segments based on demographics, pricing plans, product engagement, and so on:
Step 3: Consider factors that likely impact a customer’s health score
Now that you’ve defined what customer health means to you and segmented your customers, it’s time to identify the specific factors that influence their health. These factors will serve as the building blocks of your customer health score.
Just as in step 2, the factors you choose here will depend on your business, your customers, and the goals you’ve set. Common categories to consider include product usage patterns, customer support, and customer engagement.
Step 4: Note user actions under each category
After listing all the factors that apply to your specific situation, the next step is to note user actions under each category. For product usage, you can have: key workflows completed and time spent in-app. For customer support, you might note activities like support tickets, resource center engagement, etc.
Note: It’s important you keep customer data accurate and up to date. Wrong or outdated information can skew the total customer health score and lead to ineffective strategies or even wasted resources.
This is where product growth tools like Userpilot come in. For instance, instead of relying on a historical report to gauge customer loyalty, quickly utilize Userpilot to deploy a net promoter score survey to gather fresh data.
Step 5: Assign impact scores and calculate
While all user activities contribute to the overall picture of customer health, some hold greater significance than others. Assigning impact scores allows you to weigh these factors accordingly and ensure your health score accurately reflects their relative importance.
A simple way to decide on your impact scores is to consider how much each factor affects your key business outcomes and contributes to overall customer satisfaction.
Imagine you’re trying to increase core feature engagement for your analytics platform. You might track actions like report generation (key action #1), predictive analysis (key action #2), and data visualization (key action #3).
All activities are important, but in this scenario, data visualization applies more to your product’s use case. To simplify your calculation, create an impact scale that ranges from 1 to 10 and assign points to each action accordingly. Drawing back to the example above, you might assign 10 points to data visualization, 4 points to report generation, and 1 point to predictive analysis.
Once done, create a table like the one below and track the action frequency (number of times it occurs over a specific period).
How to calculate the action values
To obtain the total value for each user activity, multiply the impact score by the action frequency.
For example, the table below shows that key action #1, with an impact score of 4, occurred 17 times. So, the total action value will be 4 X 17 = 68.
Repeat the same for all your key actions.
After tracking your total positive action values, create a separate table for negative values and repeat the same thing.
For instance, negative value #1 could be support tickets. Negative value #2 may be bad feedback, and so on.
Let’s say you assign them impact scores -8 and -5, respectively, and each occurs 12 and 7 times.
Here’s what the total action values for each will be:
- Support tickets: -8 X 12 = -96
- Bad feedback: -5 X 7 = -35
When you’re done, input the values into the following customer health score formula:
Customer health score = total action value #1 + total action value #2 + total action value #3 + …
If we combine the positives and negatives from our example, the customer health score will be:
68+42+110-96-35 = 89.
Step 6: Create a customer health scale
After calculating your health scores, it’s time to create a customer health scale that categorizes and interprets them.
As mentioned earlier, you can use any type of scale that meets your needs. Just ensure the labels you use are easy to understand. Here’s an example of using simple, descriptive labels:
- Negative score = very sick (high risk of churn)
- 1-40 = sick
- 41-70 = somewhat healthy
- 71-100 = very healthy
- 100+ = happy customers
Step 7: Define actions for each category
This is where your customer health score truly becomes a driver of customer success. For each category on your scale, define specific actions or interventions to address the unique needs of those customers.
Using the descriptive scale from Step 5, you can tailor your actions to each health category:
- “Very sick” customers: These customers require immediate intervention to prevent churn. Your customer success team should reach out personally, offering dedicated support, addressing concerns, and developing a plan to get them back on track.
- “Sick” customers: Proactive customer success outreach is crucial for these customers. To address potential challenges and encourage more engagement, consider personalized emails, in-app messages offering relevant resources, or invitations to webinars.
- “Healthy” and “very healthy” customers: These customers are on the right track, but there’s always room for improvement. Use in-app messages to guide them towards valuable features, encourage further exploration of your product, and promote relevant resources or events.
- “Happy customers”: These are your advocates! Nurture these relationships and explore opportunities to deepen their engagement. Target them with contextual in-app messages or emails promoting relevant upgrades, add-ons, or new features that can help them derive even more value from your product.
Do you need more than one customer health scoring system?
Short answer: yes!
While a single score can be useful, a multi-dimensional approach provides a more nuanced and complete picture of customer health.
This allows you to tailor interventions, improve customer communication, and generally make better decisions. For example, you might combine separate scores for product adoption, engagement, and financial health (subscription tier, LTV, and renewals).
Conclusion
Customer health scoring is not a one-time task. It’s an ongoing process that requires regular monitoring, analysis, and refinement to ensure your system remains aligned with evolving business goals and customer needs.
Do you need a tool to automate this? Userpilot can help! Book a demo today and discover how our platform can empower you to track your customer health score, segment users, and deploy contextual in-app interventions that drive product adoption and customer success.
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