The Missing SaaS Metric - Customer Retention Cost (CRC)
Bruce Cleveland
Author of the best seller “Traversing the Traction Gap", Enterprise software executive and investor
On a quiet Sunday, I was reading through some of my board decks getting prepared for some upcoming board meetings.
A common theme among those decks was a section on churn and the impact it was having - both positively and negatively - on my portfolio companies. Some of those companies, fortunately, are experiencing negative churn as their customers increase the footprint of the portfolio company's technology.
I got to thinking about this issue.
We have a significant number of metrics we use to measure top of the funnel health for companies that use a SaaS business model - Customer Acquisition Cost Ratio (CAC Ratio), Customer Lifetime Value, etc. These are tried, tested and proven metrics management teams and investors use to evaluate how well a company with a recurring revenue model is performing.
However, churn is also a critical component of the SaaS model. I asked myself, "Why don't we have a common metric to measure the health of the bottom of the funnel?"
Key questions are:
- Shouldn't we know how much we are spending to retain a customer?
- At what point should we "fire" a customer - if ever?
- Should that point vary by industry or type of customer?
- When should we parachute in our "customer success" teams?
It seemed to me that if we have a Customer Acquisition Cost metric, shouldn't we have a Customer Retention Cost (CRC) metric and what would be the elements we would use to measure the CRC and CRC ratio?
So, I put together a bunch of thoughts on what should go into the calculation of such a metric and sent that over to one of my portfolio companies - Totango.
Totango provides a customer success platform. Software companies and others use their platform to determine whether or not a customer is deriving value from a software product. This enables customer success teams to "parachute in" and help a customer derive value from the vendor's software product and mitigate a key issue associated with churn.
Given they are "in the business of reducing churn", it seemed to me only natural that they take these initial concepts and launch the CRC and CRC Ratio metrics into the industry as a whole.
They did this with a fantastic white paper on CRC. I would encourage anyone dealing with churn/retention, to read this paper and add to the conversation.
The CRC and CRC Ratio are not metrics to be owned by any one individual or company. They need to be owned by the industry and your contributions are welcome.
HI Bruce, Thanks for reposting your article. This Totango work provides an excellent model to allocate customer retention resources while balancing overall investments for subscription-based companies. It’s an area where companies continue to struggle and under invest. I’m advising a startup re-evaluating their organizational spend to determine the appropriate investment in Customer Success resources. They also want to determine which existing customers create ongoing positive value vs. those who have become a cost center. This brings me to my question. Is it still a best practice to include Customer Support costs in CAC? At the risk of adding undue complexity, I believe including customer support in CRC creates a more accurate view of customer retention. In my experience (enterprise software), support plays a key customer retention role in interacting directly with users and admins (influencers) by recommending and managing product updates, handling trouble tickets, advising on best practices, and much more. In many cases, support has more customer engagement than any other organization within the company. Another reason to include Customer Support costs in CRC is that support costs can vary significantly across different customers whereas renewals, marketing, programs and account management are typically spread evenly across all customers (usually based on revenue). Measuring this variance could lead companies to double down on customers who build value for the company and target similar prospects. It would also allow companies to better identify high cost customers. I would be interested to learn if there are ratios, tolerances or standard deviations of how an individual customer's CRC should compare to the overall company CRC.
Leading digital transformation and delivering business outcomes
7yInteresting perspective. This is also a way to measure trends. Startup cost may be high but you would expect to see the costs decrease over time as training kicks in and implementations complete. Good risk indicator.
Enterprise Revenue Builder, Leader and Advisor
7yThanks. Very timely post.
Operations Leadership | Quality Management | Project Management - Delivers behavior-based solutions
7yMaybe the pdf file referenced in the post addresses this question, but does the proposed CRC only address costs of retaining customers who are not unhappy with the service or does it address costs of all customers. I suspect the latter. If so, the CRC would be a useful metric if the metric was viewed in the context of the customer relationship i.e. how valuable is the customer (past, present and future), how "happy" is the customer, etc. Thanks for starting this conversation.