Unlike traditional business models, SaaS has seen the rise of new kinds of metrics that help measure the pulse of this business. These metrics include Annual Recurring Revenue (ARR), Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC) and Churn. But one of the metrics which is often overlooked, yet stands at par with above metrics, is Customer Retention Cost (CRC).
Customer retention is one of the primary goals for a SaaS business. Major SaaS financial metrics like ARR or CLV depend heavily on the duration for which you are able to retain a customer. And since these metrics are the prime indicators of the health of a business, the whole business can be said to be dependent on customer retention.
Customer retention doesn’t just come naturally. There’s a complete shift in the mindset of an organization required here to nurture relationship with customer and generate further revenues from them. This shift comes in the form of both operational and cultural aspects of a business. There are different strategies, projects and investments needed to bring this shift in an organization. Hence, the overall cost of implementation towards this goal adds up to the Customer Retention Cost.
Why to calculate Customer Retention Cost?
The benefits of customer retention are not hidden anymore. At the end of day, you are investing in customer retention only to increase your SaaS revenue from your existing client base. The ratio between investment and return can have a large variance due to various other factors at play like the complexity of your business, your product price/margin, or your customer size. Still, it is an industry-wide known fact established by Bain & Company that a 5% increase in investment into customer retention can boost profit anywhere between 25% to even 95%.
Hence, by knowing your CRC and measuring the impact at the end of a tenure, you would know the exact impact of pumping money into retention efforts. Based on that, you can improvise your further investments which would most likely produce similar predictive results because of being executed on the same customer base, almost.
Another benefit includes finding the optimum ratio between investment in CAC and CRC. How much should you invest in acquiring new customers is a strategic decision for which knowing CRC is must. It usually takes a couple of months of recurring revenue (around 5 to 6 months for successful SaaS companies) to fully recover the acquisition cost. But without the addition of retention cost for that period, your total recovery time cannot be known. And that’s something you cannot afford to miss.
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How to calculate Customer Retention Cost?
To calculate customer retention cost, you would have to add up the individual costs of all the elements required for customer retention.
- Staffing cost consisting the cost of customer success team, account management team, renewals team, implementation specialists, onboarding manager, etc.
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- Tools and software cost that include the software required for serving the existing clients like customer success platform, customer experience platform or simply a CRM.
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- Customer marketing efforts aimed at marketing products to existing customers.
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- Customer training programs needed to educate and upgrade customers continuously.
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- Customer loyalty programs aimed at cultivating loyalty of the customers.
Note that we have not added customer support cost into the list. It’s because, across the SaaS industry, it is included under Cost of Goods Sold (COGS) because of being something which is needed to keep the product up and running like hosting and data center costs. Whereas retention costs are not about maintenance of the product but to drive customer success initiatives like customer engagement or product adoption.
Anyway, the customer retention cost formula is simple. When you add up all of the above listed costs for a period, you would know the customer retention cost of your client base for that period, say a quarter or a year.
Hence, CRC per customer = Total CRC of client base / Number of active customers in that period.
To calculate CRC for an entire lifetime of a customer, you just need to multiply the above CRC per customer with the average lifetime of your customer.
Average Lifetime CRC per customer = (CRC per customer) x (average customer lifetime)
How to cut Customer Retention Cost?
For any business unit to reduce cost, it has to streamline their process with the least amount of friction so that the operational cost becomes lower. How to achieve that kind of efficiency in customer success is something you must think upon through below pointers:
- Use a dedicated customer success platform
- Educate your customer
- Build product with customer-centric values
When you want to scale, instead of investing solely on more staff, you can use a CS platform to increase the bandwidth of your current CS team. Through this, CSMs would be able to serve both enterprise and SME customers with an optimum combination of high-touch and tech-touch engagement. What more, they can execute actions on a large set of customers through the segmentation feature of the product which is a big time and cost saver.
Educate your customer
The best way to serve a customer is to prepare them to serve themselves. And most of the customers also prefer it that way. Hence, timely demonstration of the new features added, sharing links to the help resources, or giving presentations are few of the ways to educate your customers. As they get empowered, they would bother a CSM lesser which in turn would give more time to CSMs. This doesn’t mean there would be a distance created between the two; the CSMs can always monitor the progress of the clients through CS platforms and keep a check on their health scores.
Build product with customer-centric values
As customer success is growing, the gap between this and product management is reducing. Product teams are more keen now on collaborating with customer success teams to incorporate customer-centric values in the product. When the product itself is made from a perspective of driving customer’s engagement, the retention efforts start from the core and become more effective.
Wrapping Up
Customer retention cost at the core means customer success cost. Customer success is still at its nascent stage when compared with other business units like Sales, marketing, product management, etc. There is a lot of learning and experimentation going on in this discipline. Hence, it takes some time for the companies to reach their optimum level of utilization of this function with respect to its cost. But, once it is achieved, the benefits manifest in various forms which are peculiar to a SaaS firm and hence must be leveraged to get the most out of this promising industry.
Rohan has over 11 years of experience in client services, marketing and hospitality field. Previously, he was head of digital marketing for a hi-tech mobile application. Rohan is driven by new challenges and the possibility of making an impact on individuals and businesses.
Published January 20, 2021, Updated August 31, 2024
