SaaS/Cloud company management teams have always recognized the economic necessity of spending a certain amount of money to acquire a customer. Customer Acquisition Cost (CAC) is a standard part of the business plan. What is not so readily acknowledged is that spending money to retain customers is also a necessary aspect of the new business model. It’s unfortunately very common for SaaS/Cloud CxOs to think in the first two or three years of their new startup’s life that “We’re in our land-grab phase right now, and don’t have time or resources to worry about tracking or dealing with churn. Growth is the goal, and increasing the market share has to take all of our energy. We’ll address churn later when we have more money to work with.”
Sound familiar? The long-term cost of that stance can be very painful. Churn is a cumulative beast. The customer revenue you lost last year is also gone this year and next; it’s compound interest in reverse. According to SaaS Capital, a financial company with an unusual approach to company funding, “a SaaS company with a 95% customer retention rate can have a valuation that’s more than twice as much as a company with just 80% customer retention after 5 years of operation.” This financial reality is the foundation of the case for building an effective Customer Success Management team for your SaaS company. It’s time to put Customer Retention Costs (CRC) into your company plans and performance metrics suite, and manage accordingly. Since successful customers are more likely to keep renewing their subscriptions, CSM is about money — a lot of your money.
A Tale of Two Companies
Churn is a cumulative beast. The customer revenue you lost last year is also gone this year and next; it’s compound interest in reverse.
Let’s consider the example of two SaaS companies, each adding customers at the steady rate of 10 per month, with each of their customers paying $1K per month. The customer acquisition cost (CAC) is assumed to be $12K each, or the cost of 12 months’ subscription. One company takes churn very seriously from the beginning, and maintains a 95% retention rate. The other company only manages an 80% retention rate.
Five years later, the 95% company has acquired 600 customers and only lost 30. Their run rate is $6.3 million, and the estimated valuation of the business is $28.7 million. Things do not look so good for the 80% company. They acquired the same number of customers, but lost 120. Their run rate is $4.5 million, and the estimated value of their company is only $13.7 million — a difference of about $15 million in valuation plus the difference in revenues over those five years.
The bottom line? It is never too early to start seriously tracking and addressing customer retention. If you haven’t established a dedicated team that is authentically accountable for owning and maintaining your customer relationships, it’s definitely time to make that a high priority.
SaaS Capital’s Todd Gardner and I did a webinar together on the real effects of customer retention on SaaS company valuation. To listen to the webinar recording, use the link below:
No Churn – Keep Customers and Improve Your SaaS Company Valuation
Listen to the Webinar recording .