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In a recent article, we looked at the Five C’s of SaaS. As a refresher, these are:
- Committed Monthly Recurring Revenue (CMRR)
- Churn
- Cash flow
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (CLV)
However, there is really no finite amount of financial metrics that can evaluate a company’s revenue model. This article will focus on one additional metric that is especially important: Customer retention cost. The key question of this metric — if we know exactly how much we are spending to get customers, how much value they create on average, and how likely they are to remain subscribed, shouldn’t we also know how much is being spent on making sure they remain a customer?
We present the sixth C of SaaS: Customer Retention Cost (CRC).
What is Customer Retention Cost (CRC)?
CRC is an umbrella term that counts all company expenses towards creating customer success. This includes staffing, marketing, training, customer engagement, and potentially more depending on the company.
Once a customer signs or pays an initial subscription fee, CRC covers any expense that ensures the customer benefits from the service enough to continue making payments down the line. Ideally, there should be a positive correlation between CRC and Customer Retention Rate — the more you spend to retain the average customer, the more likely a customer should be to stick around and even become a brand ambassador.
Understanding the long-term goals of each component of a CRC plan is so critical because they vary significantly across companies. What goes into each of these components? And why are they important?
Customer Retention Cost Formula
There is no universal formula to calculate Customer Retention Cost. However, when thinking about what expenses go into retaining and developing customers, the following equation should act as a baseline.
Customer Retention Cost = Cost of (Customer Success Team + Renewals and/or Account Management Team + Customer Engagement and Adoption Systems + Customer Engagement and Adoption Programs + Professional Services and Training + Customer Marketing)
Once you decide on the right formula for your company’s needs, a more detailed analysis can be conducted. If a business has 100 customers and determines its CRC to be $100,000, its average customer retention cost would be $1,000. Furthermore, assuming a Customer Retention Rate of 80%, the real customer retention cost (RCRC) would be $100,000/(100/0.8) = $1,250.
Customer Retention Cost vs. Customer Acquisition Cost
The key difference to remember is that CAC represents a one-time cost to bring in a customer, while CRC is the annual cost of keeping a customer around.
By now, it should be clear that these two metrics have some overlap but require individual attention for a successful financial plan. Some marketing expenses will almost always be shared across metrics, however it is important to differentiate between new and existing customer marketing. For example, any customer-exclusive promotions or discounts would apply only to CRC, lead generation would fall under CAC, and social media marketing could factor into both.
Although calculations should remain separate, using both metrics together can be extremely beneficial. Businesses may want to rethink acquisition and retention budgets after discovering that it takes $X to bring in 1 subscription fee from a customer and $Y to secure a renewal.
Developing the Right Staffing Plan
Let’s take a closer look at some of the actual changes that can be made to create desired changes in CRC. Much has been written on the optimal staffing level, but the truth is it depends on the company. The rule of thumb is that the more complex your business model, the more customer success employees you will need. Here are some important considerations when making this decision:
- Product Learning Curve: If your product is extremely technical, customers will need more hand holding. Oftentimes, SaaS executives will underestimate the complexity of their product because of familiarity. Consider bringing in external opinions or collecting sample data to prevent this mistake.
- Industry Development: Similarly, if you are pioneering a new segment, customers will need more product education.
- Company Development: Earlier stage companies have more to figure out about their own product and customers. As a result, they usually require a higher staffing ratio compared to more developed companies.
Fostering Customer Success
After figuring out staffing needs, the most important next step is implementing the right systems and programs. Pay extra attention to priorities here — first should be putting systems into place that increase customer retention rate, and second should be optimizing revenue allocation among them to reduce CRC.
- Productivity-boosting applications: Mostly, these are process management and workflow applications. Ideally, about 0.1-0.3% of revenue should be spent on this.
- Customer monitoring tools: Equally as important is software that can analyze customer behavior, identify churn indicators, and provide insight about important financial metrics. Leveraging big data for predictive health analytics is no small task, and typically around 0.5-1% of revenue is dedicated to this.
- Success Programs: Building a strong customer community is not just the job of the marketing department. Webinars, training programs, and engagement programs all improve adoption and customer retention. About 1-2% of revenue should go towards programs that encourage customer success.
Real-World Examples of CRC
Successful CRC management begins immediately after a client is required, and Insightly is an excellent example of this. This CRM software appoints a personal specialist to each additional client that is acquired, and assists with any questions or concerns throughout the onboarding process.
Although this requires a significant portion of the customer success budget, it is a strategy that makes sense for complicated products. For a less technical product, it would likely be more effective to build out a centralized library of onboarding content that customers could access at any time.
How Does This Relate to the Other Five C’s?
Successful companies need to maintain an equal focus on bringing in new customers as well as retaining existing ones. Each of the (now) six C’s is inter-connected and deserves the same attention. It is crucial to have a customer success plan that understands this concept and can leverage real-time data to make adjustments.
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