In recent years, Customer Success has emerged as a new function within SaaS companies and, owing to the subscription-based business model that allows customers to abandon ship at any time, has become an integral part of revenue generation for SaaS businesses. As Lincoln Murphy put it in Customer Success: The Definitive Guide, “I can say without a doubt that Customer Success must be a fully-integrated, tightly-coupled component of a complete SaaS Business Architecture. Why? Simply put: No Customer Success = No Your Success.”
Murphy then goes on to define this fledgling discipline – being pioneered in SaaS and so lacking in other industries – in such comprehensive detail that I wouldn’t dare paraphrase it: “Customer Success – a proactive, holistic, and organization-level approach that leverages technology and real-enough-time visibility into customer health (not just usage data, but any contextual inputs) to ensure your customers – including those who directly use (users, administrators, etc.) and those who benefit from the use of your product – continually and increasingly receive value from your product over the course of their lifetime as a customer.”
Our favorite SaaS savant, Jason Lemkin, believes so strongly in Customer Success that he advises Founders and CEOs to hire a Customer Success lead very early on and to maintain a ratio of one Customer Success Manager to every $2m in ARR. It’s easy to see why – the SaaS business model is so utterly dependent on reducing churn and maximizing LTV that a key focus of your company must be to ensure that your customers continue to derive value from your product/service, that they achieved the desired outcome they had in mind when purchasing the product and, ultimately, that they remain a customer, keep paying, and become a source of upsell and cross-sell opportunities.
The Headline Metrics
If further convincing were needed, the most eminent of SaaS statisticians, Tomasz Tunguz, steps in to explain the effect over the amount of capital a SaaS company requires to maintain revenue relative to its rate of churn – a company with 4% monthly churn rate will require 90% more capital than one with a -4% churn rate i.e. revenue from its existing customer base is growing faster than its loss from revenue from customers who leave. So it’s apparent then how a focus on Customer Success impacts Churn, ARR, and LTV – but can it also improve your SaaS company’s CAC? Yes, says Tunguz. The example is provided of a company that acquires 1,000 customers through sales and marketing, assuming a 15-month payback period, a CAC of $1,250 per customer, so $1k annual payback per customer. If customer success does their job well and converts just 1 out of 10 of those customers into product evangelists, and each evangelist refers just one other customer in that year, the hypothetical SaaS company’s CAC falls by a third.
The Forgotten Metric
It’s little wonder, therefore, that all of the leading advisers promote a strong focus on Customer Success and I couldn’t agree more. However, as much as we would like to encourage SaaS companies to move away from the perception of Customer Success as a cost center and to see it more as a revenue generator, Customer Success does have a cost associated to it – more specifically, Customer Retention Cost (CRC). CRC is essentially the total cost of all of the activities a company carries out in attempting to retain and drive more revenue from its existing base. Looking at the impact of effective Customer Success operations over ARR, Churn, LTV, and CAC might lead you to believe that there is no such thing as over-investing in Customer Success – but if there must be a defined ROI from your Customer Success activities and CRC must be adequately covered in order for the overall company P&L to stack up.
The Bottom Line
If we return to Tomasz Tunguz’s hypothetical SaaS customer, my question is this: is the third by which CAC falls offset by an increase in CRC associated with the extra resources put into Customer Success? The cost is upfront and once-off by its very definition, whereas CRC is a recurring cost which the company bears for the duration of the customer lifecycle. So is it really wise to increase CRC in order to reduce CAC? The trick, I would argue, is finding the right balance between the two. Should you really spend 5x more on CAC than on CRC is if 50% of your revenue is generated by existing customers? This may well be a contributing factor to the high “sales and marketing” costs (which often bundle in many elements of Customer Success) reported by public SaaS companies, many of whom continue to operate at a loss. Instead of falling into this trap, figure out which from of investment, upfront sales and marketing or in-life Customer Success, drives the greatest ROI in your particular case and structure your business in such a way that maximizes that advantage.
By Michael Cullen @michaelcullen87