Calculating the Return on Customer Retention

Preliminary results from The SaaS & Support Project’s 2010 research show that some aspects of the software industry haven’t changed much despite the accelerating shift to SaaS.  In the 1st survey for the year,  TSSP participants were asked to rate the level of importance to a range of issues.  “Managing Customer Relationships in a Cost-Effective Manner” is being  overwhelmingly rated as of “Critical” concern both by all respondents and specifically by SaaS-only companies as well.  When asked to identify how their customer support teams were chartered, nearly half across the board said that theirs were set up as cost centers, with another significant bloc of companies landing in the “Not Sure or It’s Complicated” camp.  Less than 25% of the respondents have indicated that they run their customer support teams on a Profit-center basis.  But regardless of business model and accounting status, the responses indicate that a serious problem which has plagued the industry all along is still with us. Two thirds of respondents say their need for a method for calculating the costs of providing support is either Critical or Serious.   How can a company authentically determine its return on customer retention without accurately knowing the costs?

Danger:  The “Guesstimation” of Retention Costs

Over the past 30 years, cost accounting in software companies has always been a troubling issue.  In the turmoil of the startup process, finding the “bandwidth” to do accurate collection and assessment of cost data is understandably difficult.  Unfortunately, this lack at the beginning has tended to set a pattern that perpetuates itself.  How much are we spending to acquire customers?  There is no generally established and accepted methodology for determining customer acquisition costs, nor for how often the process should be done.  As a result, few companies can accurately say how much it cost them to acquire a given customer.  The effect of fuzzy acquisition cost data is compounded by the near-total lack of any authentic methodology or process for measuring actual retention costs.  While there is enough revenue data so that successful companies have a view of their profitability, the lack of a solid cost foundation reduces effective decision-making to “guesstimation” when it comes to retention issues.

The profits-realization strategy of traditional software companies tends to obscure the lack of authentic cost data by the large bursts of profit infusions from new sales.  The connection between retention and long-term profitability is given much less emphasis.  For SaaS companies, however, the importance of customer retention is sharply increased, and the lack of effective cost accounting methodologies and intervals is a serious threat to long-term corporate viability.

Building a Foundation for Success

There have been some good articles on the variables to consider in calculating customer acquisition costs for SaaS companies, and on the importance of doing so both regularly and by customer.  Joel York’s Chaotic Flow blog has an excellent series on financial metrics for SaaS companies beginning here.  He covers the importance of and the how-to for using the major variables of the equation; I think the next step is building a methodology for calculating the costs associated with all aspects of customer service, support and success.

For many years, my standard Assessment procedure for technology firms has included a calculation for the real costs of providing support & service to a company’s customers.  Using that experience as a base, I’m now putting together an initiative to develop a standard methodology and template for SaaS companies to use in calculating their costs for the full spectrum of customer retention efforts and resources.  If you’d like to be a part of that effort, please call or email me as soon as possible.  This topic will also be discussed in The SaaS & Support Forum on LinkedIn.

“It’s what you don’t know about your customer relationships that can cause you to lose them.”

–The SaaS Customer Retention QuickStat