{"id":170225,"date":"2015-03-19T12:59:29","date_gmt":"2015-03-19T19:59:29","guid":{"rendered":"http:\/\/customerthink.com\/?p=170225"},"modified":"2017-12-14T00:07:56","modified_gmt":"2017-12-14T08:07:56","slug":"how-much-does-it-really-cost-to-keep-your-customers","status":"publish","type":"post","link":"https:\/\/customerthink.com\/how-much-does-it-really-cost-to-keep-your-customers\/","title":{"rendered":"How Much Does it Really Cost to Keep Your Customers?"},"content":{"rendered":"

\r\n We\u2019ve all heard the statistics: It cost 5 times as much to acquire a customer than to keep one (Forrester<\/a>), reduce churn\r\n by 5 percent and increase profits up to 125 percent (Leading on the Edge of Chaos<\/a>), and that 70 percent of churn is\r\n attributable to poor customer experience (Forum Corporate Research<\/a>)\r\n<\/p>\r\n

\r\n It\u2019s not a new revelation that customer loyalty is a table stake for sustainable growth. We all know that loyal customers are more profitable and yield a\r\n higher lifetime value. It\u2019s common sense to invest in understanding what drives loyalty, value and the triggers of repeat purchases.\r\n<\/p>\r\n

\r\n Yet, most companies don\u2019t understand what it takes to build loyalty. That often results in an investment strategy that works against the very thing they\r\n are trying to achieve \u2013 for SaaS\/Cloud companies, that is making sure that 90 percent of customers renew. SaaS\/Cloud companies routinely over invest in new\r\n customer acquisition at the expense of loyalty.\r\n<\/p>\r\n

\r\n Why? Because companies do not really understand or accurately measure the real costs of customer retention.\r\n<\/p>\r\n

\r\n Kaiser Mulla-Feroze<\/a>, Chief Marketing Officer of Totango<\/a>, a customer success and user engagement vendor for cloud applications, together\r\n with Bruce Cleveland<\/a> of InterWest Partners<\/a>, have\r\n defined and operationalized a customer retention cost (CRC) metric<\/a> that\r\n shines the light on what the real costs are to keep the right customers loyal.\r\n<\/p>\r\n

\r\n \u201cWorking with a large number of SaaS companies, we saw the urgent need for a new set of metrics that reflects the operational realities and demands of a\r\n subscription business,\u201d shared Mulla-Feroze. \u201cWe developed the CRC metric to help SaaS companies measure their performance, calibrate their financial\r\n health, and steer their investment decisions. As against traditional financial indicators, the CRC metric combined with CAC goes to the essence of running\r\n a subscription business.\u201d\r\n<\/p>\r\n

\r\n The CRC metric<\/a> is surprisingly straightforward and includes all the expenses\r\n a company incurs in retaining and nurturing its customer base. The first step is to calculate the CRC.\r\n<\/p>\r\n\r\n\r\n\r\n\r\n\r\n
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\r\n The second step is to calculate the average cost of retaining each customer segment.\r\n<\/p>\r\n\r\n\r\n\r\n\r\n
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\r\n The third step calculates the CRC Ratio. That answers the question of how much an organization should spend to retain every dollar of revenue from the\r\n customer base, taking into account the costs and revenue associated with professional services.\r\n<\/p>\r\n\r\n\r\n
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\r\n The power of Totango\u2019s CRC metric<\/a> lies not just in the simplicity of the\r\n equation, but also in its actionable benchmarking framework that guides how to invest in customer success.\r\n<\/p>\r\n

\r\n \u201cI\u2019ve spent most of my career as a CFO in recurring revenue businesses. We succeed or fail based on whether we can economically acquire and retain\r\n customers. A lot of great CAC metrics have been developed over the years, but good metrics on the cost of retaining customers have been missing,\u201d shared\r\n Mark Klebanoff, Chief Financial Officer of PayScale<\/a>, a real-time and market-enabled compensation data company. \u201cI\r\n love the thinking that has gone into the development of the CRC framework. It fills a void in how we measure, evaluate, and benchmark SaaS companies.\u201d\r\n<\/p>\r\n

\r\n SaaS companies have implemented CAC, customer acquisition costs, metrics and guidelines. Those guidelines recommend a CAC ratio of 1 or less; the reality\r\n is that most SaaS companies actually operate at a CAC ratio 1.5 or higher. Meaning the cost to acquire new customers is 150 to 200 percent of first year\r\n revenue and that translates into significant operating losses.\r\n<\/p>\r\n

\r\n A better question to ask: “What are the right acquisition and retention investment levels needed to yield a sustainable, profitable and growing business?”\r\n<\/p>\r\n

\r\n The answer lies in a mindset shift away from optimizing for top-line growth. A balanced investment in both CAC and CRC should be equal to 30 percent of\r\n revenue with a target 20 percent gross margin. The actual split between CAC and CRC is heavily influenced by three factors.\r\n<\/p>\r\n

\r\n1. Your staffing model<\/strong>\r\n<\/p>\r\n

\r\nRevenue per Customer Success Manager (CSM) is how most organizations think about staffing. With Jason Limekin\u2019s popular quoted figure of $2M revenue per\r\n CSM, many organizations believe they can optimize CSM revenue by increasing the account-to-CSM ratio. The viability of that depends on the average deal\r\n size and complexity of your business which is comprised of the degree of \u2018touch\u2019 your product requires, the maturity of your category, and the size of your organization.\r\n<\/p>\r\n

\r\nRules of Thumb<\/em>: Totango recommends that highly complex and medium- to high-price-point businesses are best served with a low account-to-CSM ratio with\r\n one CSM assigned for every $1M in ARR (30% of ARR). Each CSM, on average, manages between a handful to less than 50 customers. Conversely, low complexity\r\n best practices are one CSM for every $4M in ARR (7.5% of ARR) with each CSM managing between 200 and 400 accounts.\r\n<\/p>\r\n

\r\n2. Customer success systems and productivity tools<\/strong>\r\n<\/p>\r\n

\r\nInformation, knowledge and value-centered customer engagement are key to customer loyalty. The rise of systems and tools to support CSMs and other\r\n functional teams doesn\u2019t come without a cost which needs to be included in the CRC calculation. Think of these investments as a per-CSM or per-employee\r\n cost. Customer success monitoring systems typically track events or activities and are based on big data and predictive analytics that calculate health\r\n scores and produce early warning alerts of churn and up-\/cross-sell opportunities.\r\n<\/p>\r\n

\r\nRules of Thumb<\/em>: Totango found that successful companies spend about one percent of the CSM team cost on customer success productivity tools which works out to be approximately 0.1 to 0.3 percent of revenue. Customer monitoring systems costs on average about 0.5 to 1 percent of revenue.\r\n<\/p>\r\n

\r\n3. Customer programs<\/strong>\r\n<\/p>\r\n

\r\nBest practice is to include customer nurturing and retention programs under the scope of the customer success organization. These programs focus on best\r\n practice development and executing campaigns that drive product usage, education and customer engagement.\r\n<\/p>\r\n

\r\nRules of Thumb<\/em>: Totango recommends that companies spend 1 to 2 percent of revenue on customer success programs.\r\n<\/p>\r\n

\r\n \u201cI look forward to incorporating CRC principles<\/a> into how we run our business and guide our investment choices for the future. It brings much-needed focus to the operational levers that drive the success of SaaS,\u201d states \r\nJeremy King<\/a>, VP Finance and Operations of \r\n InsightSquared<\/a>.\r\n<\/p>\r\n

\r\n Calculating and benchmarking CRC is a big step forward in understanding the real cost of customer loyalty and how to optimize the investment to yield\r\n sustainable growth and profits.\r\n<\/p>","protected":false},"excerpt":{"rendered":"We\u2019ve all heard the statistics: It cost 5 times as much to acquire a customer than to keep one (Forrester), reduce churn by 5 percent and increase profits up to 125 percent (Leading on the Edge of Chaos), and that 70 percent of churn is attributable to poor customer experience (Forum Corporate Research) It\u2019s not […]","protected":false},"author":6966,"featured_media":121976,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[82,328,95,14,94],"tags":[340],"_links":{"self":[{"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/posts\/170225"}],"collection":[{"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/users\/6966"}],"replies":[{"embeddable":true,"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/comments?post=170225"}],"version-history":[{"count":0,"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/posts\/170225\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/media\/121976"}],"wp:attachment":[{"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/media?parent=170225"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/categories?post=170225"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/customerthink.com\/wp-json\/wp\/v2\/tags?post=170225"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}