Customer Retention Cost
Customer Acquisition Cost (CAC) is one of the most-tracked SaaS metrics.
However, what many startups don’t realize is that CAC has a just-as-important counterpart in retention — the Customer Retention Cost (CRC).
In this post, we’ll take a deep dive into customer retention cost, including the definition of CRC, the difference between CRC and CAC (hint: it’s more than just a letter!), how to calculate CRC, and how to decrease your customer retention cost.
A lot to cover in one definition, but by the end of this article, you’ll realize why CRC is just as important as CAC. Let’s dive in.
What is Customer Retention Cost?
In simple terms, Customer Retention Cost (CRC) is the total cost of retaining a customer.
This includes all costs associated with customer success, customer service, customer engagement, marketing (to your existing customer base), training, professional services, and any additional teams or tools that are utilized to retain existing customers.
Customer Retention Cost (CRC) vs. Customer Acquisition Cost (CAC)
As you may have realized, the difference between CRC and CAC is the sale.
Customer Acquisition Cost (CAC) is how much money you spend in sales and marketing to acquire one new customer.
Meaning, if you have yet to sign on the dotted line with a customer, then that is related to CAC, but everything after the sale is related to CRC.
CAC typically encompasses the following:
- Design for marketing materials (ad designs, landing pages, etc.)
- Sales and marketing employee salaries
- Advertising spend
- Sales and marketing tools (CRM system, reporting tools, etc.)
- Anything else incurred as it relates to sales and marketing
For both CAC and CRC, spend too much to acquire or retain customers and you won’t be able to recoup the money, let alone make a profit. Spend too little, and you might not be maximizing your company’s growth potential. It’s a balancing act!
How To Calculate Customer Retention Cost
The biggest challenge in tracking and calculating CRC is determining which costs should be a part of customer retention.
We typically see the following within CRC:
- Staffing costs for the customer success, account management, implementation, and onboarding & training teams
- Tools and software, including if you use a customer experience or retention platform
- Customer loyalty program costs
- Training and onboarding costs
- Associated costs for marketing campaigns aimed at existing customers
There are several factors that can go into calculating CRC, however, most early-stage startups begin with calculating the average CRC per customer per year. This is calculated by dividing the total CRC by the number of active customers during the same time period.
Customer Retention Cost Formula
Total CRC / Number of active customers
Another common measurement and calculation is the CRC ratio to determine how much money is spent on customer retention as it relates to overall revenue. Retaining customers is important, but you can’t blow all your capital on retaining customers alone!
Similar to other ratio calculations, CRC Ratio is calculated by dividing the annual CRC (which can be found in the above calculation) by your Annual Recurring Revenue (ARR). If you are measuring CRC on a monthly basis, then you can use Monthly Recurring Revenue (MRR) as your denominator instead.
CRC Ratio Formula
CRC / ARR
There are also opportunities to break down CRC costs by the level of service they are receiving, including freemium, standard, and enterprise customers.
This helps to understand where the most money is being spent for current customers and if you need to increase/decrease the amount of spend as it relates to the costs that go into your CRC.
Totango has a great overview of CRC and how SaaS companies should be approaching spend in each CRC category. Check it out here.
Why Customer Retention Costs Are Important
We may have alluded to this earlier in the article, but to make it clear — measuring and tracking CRC is just as important as measuring and tracking CAC.
Why? CRC can serve as an indicator of customer satisfaction, growth, and more. A mere 5% increase in customer retention can boost profitability anywhere between 25% to 95%!
A strategic founder should not only be focusing on customer retention, but also understand the costs that go into retaining their customer base.
High customer retention costs without a large number of customers can indicate that something may be wrong with product or service delivery or that the customer should actually be investing in a higher subscription level.
Additionally, if you are tracking your CAC to understand the length of time it takes to recover the acquisition cost, doesn’t it make sense to understand how much it costs to retain that customer, too? Without this, you’ll never fully understand the total cost of a customer.
How to Decrease Your Customer Retention Cost
While research shows that it’s far more expensive to market to a new customer than retain a customer (between five and twenty-five times more expensive), it’s still important to keep your retention costs down, too.
How can you do that? It doesn’t mean ignoring your customers (as that can also negatively impact your growth!), however, there are strategic ways to keep costs down. Let’s review.
1. Make Training a Core Element of Implementation
If customers are continuously reaching out to their Customer Success Manager (CSM) about core features that they are confused about, this could be a red flag that the team needs to revisit how they are training customers to use the product or service.
Making training a key part of implementation — with documentation, demos, and product videos — means this can be far more self-service, and CSMs don’t need to invest additional time and effort to train customers on the basics of your product.
2. Invest In Relevant Tools
Many early-stage startups want to keep costs down by avoiding costly tools, however as your customer base grows, it may be time to invest in a customer success platform to help automate and streamline many of the tasks that a CSM may be handling manually.
Help desk software, chatbots, and onboarding software are all great ways to save time and allow your customer success team to focus on more pressing tasks.
This may even mean you don’t need to hire as many CSMs, which reduces your overall CRC.
3. Listen to Your Customers
Your early customers may be an untapped resource for CRC.
As you continue to build and optimize your product, share these updates with your customers. They may have helpful feedback on ways to improve the product, ultimately minimizing customer success/service issues in the future.
Invest In Your Customers & Watch Your CRC Drop
The customer may not always be right, but they should be at the forefront of strategy. Tracking and understanding CRC means you are keeping your customers top of mind even after the sale.
Happy customers = business growth.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.