Getting To The Real Cost Of Customer Success

The Cloud and SaaS industry is not immune to churn.  Regardless of whether you sell a suite of SaaS applications or just one designed to help a user do a tactical task better, the ease of SaaS is a double-edged sword.  Just as it is easy to sign up, it is equally as easy for a customer to drop a SaaS application if they are not satisfied.

Each defection costs a vendor more than just lost revenue.  To continue to grow the vendor needs to find two new customers to make up for the one they just lost.  One new customer to replace the lost revenue and a second one to support the vendor’s growth plans.

This fifteen year old industry is waking up to a painful lesson that every other industry already knows – growth is a whole lot easier when customers are loyal.  Except in the case of SaaS that lesson is doubly painful because of the subscription business model.  With the stakes so high, why does the industry insist on measuring customer success in terms of how many new users they can attract?

“The industry has converged around top-of-the-funnel metrics, but the same hasn’t happened for bottom-of-the-funnel metrics associated with churn,” said Bruce Cleveland, General Partner with InterWest Partners. “Yet, churn is the wooden stake through the heart of the SaaS business model.”

Some of the most common SaaS metrics used are Committed Monthly Recurring Revenue (CMRR), Monthly Recurring Revenue (MRR) Churn, Annual Recurring Revenue (ARR), Recurring Profit Margin, Customer Acquisition Cost (CAC), and Customer Life Time Value (CLTV).  Popular metrics such as Scale Venture’s Magic Number, Bessemer’s 5 C’s of Cloud Finance, and David Skok’s work are all primarily focused on the costs and revenues associated with winning new customers.

While these metrics are insightful, they drive company cultures to spend too much on customer acquisition.  That’s not how customer loyalty is built.  Profitable, growing companies are built on the shoulders of successful customers, as defined by those customers.

There is a better way of measuring the cost and ROI of customer loyalty.

Totango, a customer success and user engagement platform vendor, has proposed the industry measure of customer retention cost (CRC) and the CRC Ratio.  The CRC calculation captures all the expenses a company incurs in servicing, retaining and building loyal customers.  Those costs include the cost of the customer success, renewals and account management teams, customer engagement and adoption systems, customer retention and nurture programs, professional services and training, and customer marketing.

Totango’s CRC is a straightforward method to calculate the average cost of retaining a customer by dividing the annualized customer retention costs listed above by the total number of active customers.  If you want the average CRC for the customer’s lifetime multiple CRC by the average customer lifetime.

It was actually an idea from Cleveland, whose firm InterWest has made over 20 investments in SaaS startups, that inspired Totango to develop the CRC framework. “Working with a large number of SaaS companies, we see the urgent need for a new set of metrics that reflects the operational realities and demands of a subscription business,” shares Kaiser Mulla-Feroze, Totango’s Chief Marketing Officer. “We developed the CRC metric to help SaaS companies measure their performance, calibrate their financial health, and steer their investment decisions.”

What does the CRC tell you?

How much it costs to effectively staff, automate, and manage customer retention programs to achieve target customer loyalty.  By trending your CRC measurements over time and across customer segments you’ll not only get a deeper understanding of how the core engine of business growth operates but several myths will be debunked along the way.

In aggregating and analyzing their data Totango found that CRC does not and should not reduce over the lifetime of the customer.  The value proposition of SaaS is that customers have access to a steady stream of innovation, which in turn requires vendors to invest in a regular cadence of customer education and engagement to maintain satisfaction and loyalty.  Additionally, as you cross and up-sell customers, the level of ongoing care they require increases.

Here is where many SaaS companies drop the ball.

Because management is fixated on revenue there is a belief that once a customer is successfully onboarded the level of ongoing engagement can be minimized. As well as the associated costs.  In reality, this is where and often why SaaS customers churn. Their satisfaction is based on a level of enablement and engagement that is polar opposite from what vendors believe the customer needs.

Totango’s CRC Ratio answers the question of what is the right level of investment needed to ensure a vendor can retain and renew every dollar from their install base.   SaaS companies need to continually protect existing revenue streams, not just those that are up for renewal this month.   The CRC Ratio, in its simplest form, is calculated by dividing that Annual CRC by Annual Revenue or ARR.

“It makes so much sense to pay attention to how much you are investing in the success of your customers.  At Autodesk, we know that helping our customers succeed, from early in the relationship, greatly increases the likelihood that they’ll remain customers for a long time,” says Jeff Wright, VP Customer Retention and Engagement for Autodesk. “Tracking a metric like CRC will help companies allocate investments more effectively.”

To get a good handle on what it takes to successfully manage a recurring revenue business, combine Totango’s CRC with CAC.  Keep in mind that CAC is a one-time cost to acquire customers while CRC is an annual recurring cost.  Combining these two metrics will tell you whether you are under or overinvesting in customer retention compared to customer acquisition.

“As a CFO, I love the thinking that has gone into the development of the CRC framework…it goes to the essence of running a subscription business,” shares Mark Klebanoff, Chief Financial Officer of PayScale.

As any leader will tell you, keeping a customer is more profitable than winning a new one. For the SaaS industry the key is balancing investments so businesses can scale, profitably.  Getting to the heart of the costs of customer loyalty is the right step forward.


First published in Forbes.

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