Customer Retention Cost

Typically, acquiring new customers is at least 5x costlier for a company than retaining existing ones. And depending on your industry, this can be significantly higher. At a time when customer retention is of supreme importance to SaaS businesses, the better you understand your CRC, the more effective you’ll be when investing in this side of operations.

Calculating CRC: Formula + Example

To calculate your customer retention cost, add the total expenses related to retaining customers and divide it by the number of active customers.

Customer Retention Cost = Total Retention Cost / Number of Active Customers

For example, say you invested $125,000 last month in customer retention initiatives, from support training to marketing, and had 250 active customers. In that case, here’s how you’d calculate the customer retention cost:

CRC = 125,000/250 = $500 per customer for that period

While this formula doesn’t give you the exact cost of keeping specific customers, it provides an average estimate. If you’d like to calculate the lifetime retention cost of a customer, the average annual retention cost by the average number of years you expect to keep a customer.

What’s Included in Customer Retention Costs?

It’s important to make sure your CRC calculation is fully burdened. You need to include all costs associated with retaining customers, but figuring out which expenses should be counted can be challenging.

To simplify this task, consider any job function or project that supports existing customers. These costs can include marketing to current users, training and support, and even the development of new products that cultivate customer loyalty.

Examples include:

• Salaries and benefits of employees belonging to the customer success, technical support, account management, implementation, onboarding, and training teams
• Cost of related tools and software, such as customer experience or retention platforms
• Expenses related to customer loyalty programs, if any
• Customer engagement activities, such as targeted marketing campaigns toward existing customers
• Costs surrounding training and onboarding sessions
• Discounts or incentives aimed at subscription renewals
• Money spent to gather customer feedback through surveys

Any expenses that contribute to your company’s efforts to foster strong relationships with customers, increase renewal rate, and enhance overall customer satisfaction should be considered retention costs.

Customer Retention Cost vs. Customer Acquisition Cost

Both customer acquisition cost (CAC) and retention cost are essential metrics that help a business understand the complete picture of customer-related expenses.

Your investments in customer retention are meant to keep customers engaged, satisfied, and loyal to the brand, ultimately maximizing their lifetime value and contribution to the company’s monthly recurring revenue (MRR).

Customer acquisition cost, however, represents the costs associated with obtaining new customers. CAC includes all the expenses incurred in marketing, sales, and advertising to attract and convert prospects into paying customers.

Customer acquisition cost is a crucial indicator of the effectiveness of a company’s marketing and acquisition strategies. Customer acquisition in B2B SaaS can be expensive due to longer sales cycles, targeted marketing efforts, and personalized onboarding processes.

Some basic differences between the two include:

• Customer retention is about nurturing and maintaining customer relationships, whereas customer acquisition is about converting prospects into customers
• Assessing customer retention cost can help you make decisions to maximize customer lifetime value, while assessing customer acquisition cost can help you determine how to minimize the cost of gaining new customers
• Marketing to a new customer (acquisition cost) is typically more expensive than marketing to existing customers (retention cost)

5 Ways To Decrease Customer Retention Costs

While there’s technically no specific benchmark for a good or average CRC, you generally want your costs to be as low as possible while maintaining the highest possible retention rates.

The idea that retaining customers is more efficient than acquiring new ones is only as true as your ability to maintain reasonable customer retention costs. Even a stellar gross dollar retention of 90+% can technically be inefficient if you’re over-spending on the cost to drive that retention.

If you’re looking at your current retention metrics and thinking that you could get more efficient on the customer success, support, and onboarding side of the business, these are five ways to improve.

1. Improve the Onboarding Experience

Your customers’ onboarding experience can significantly influence how much you spend toward customer success.

Here’s why: A good onboarding process reduces the need for extensive customer support during product usage’s initial (and later) stages. When customers clearly understand a software’s functions, they’re less likely to face issues, resulting in lower support costs.

You can try various methods to improve your onboarding experience, including:

• Analyze the user behavior and mark the points where they drop off
• A/B test multiple onboarding flows to determine which works best
• Personalize the onboarding experience with user segmentation
• Streamline your onboarding experience to match business goals

A smooth and successful onboarding experience creates a positive perception of the company and its product among customers, creating more opportunities for revenue generation (upsell) while reducing churn.

2. Invest in Automation to Support Self-Guided Walkthroughs

A strong product tour can simplify customer onboarding, increase product adoption, and increase customer retention.

Too much information can be jarring when a customer starts with new software. A good product tour will walk the customer through the essentials to help them get the most out of the software. If done well, self-guided product walkthroughs can reduce onboarding time and save you resources currently put into the onboarding, support, and training processes, as customers have the tools to set themselves up for success with your software.

There are a couple of steps you can take to optimize your product tours:

• Identify when users stop or leave the product tour and see if you can make improvements
• Pay attention to product reviews and feedback from current customers, power users, as well as past users, and tailor the content of the walkthrough accordingly
• Use clear language without jargon and present information that’s most helpful to the user
• Since self-guided tours can be demanding on users with low attention spans, try to make the walkthrough engaging, approachable, and visual

The goals of self-guided walkthroughs are to reduce the need for a large support staff, as well as lower the dependency of customers on support teams. Moreover, self-guided tours can quickly direct new customers to key features, reaching the first strike or the “aha” moment faster, making them more likely to stick with the software.

3. Optimize Your Product Experience

A well-optimized product experience meets customers’ needs effectively. Users satisfied with the software are more likely to continue using it.

When you optimize your product experience to reduce friction points, customers won’t face frustrations that might push them to churn. You’ll be able to proactively identify and resolve issues that may arise and minimize such problems in the future through continuous product improvements.

• Frequently monitor your software for issues, fix bugs, and implement new features aligned with customer expectations as they evolve
• Optimize your product for performance, such as speed, response times, and reliability
• Ensure your software has an accessible, user-friendly interface

Although optimizing your product experience may involve some upfront costs, you’ll incur them on the product side of the business rather than seeing them as part of your retention cost calculations. In the short-term, your efforts will pay off in the form of customer satisfaction. In the long-term, you’ll see retention costs decrease as more accounts renew.

4. Refine Your Pricing Strategy

Give your customers a reason to stay with you with a SaaS pricing strategy that keeps them happy. For instance, you can reward your loyal customers with special discounts when they hit the one-year mark or offer incentives to existing customers to upgrade their plan to a premium subscription, depending on your offerings.

Whichever pricing strategy you choose, make sure you’re transparent, communicative, and, if possible, flexible to suit different customer needs.

Finally, regularly review and reassess your pricing strategy as the product evolves, markets shift, and consumers’ usage patterns change.

5. Improve Support Resources and Customer Success Workflows

Customer support is central to a customer’s experience with software. A customer’s interaction with your support team, along with the ease at which their issue is resolved, often decides if they’ll stick with you long-term.

Retention costs decrease when customers have access to reliable support resources and experience smooth, hassle-free interaction with a quick resolution. Additionally, word-of-mouth referrals and positive customer feedback can lower acquisition costs, as satisfied customers are likely to recommend the product to others.

Here are a few tips to improve your customer success workflow:

• Define clear customer success goals and frequently monitor your customer success metrics to make improvements as needed
• Ensure a helpful and easy onboarding process that’s intuitive to customers
• Segment customers based on their needs and usage patterns and tailor workflows to address their unique requirements
• Gather frequent customer feedback to learn how you’re doing
• Proactively address frequent issues to minimize occurrences in the future
• Educate and empower your customers with helpful content, webinars, podcasts, product tours, and more to help them get the most out of the software

Offering comprehensive support resources and tailoring your customer success workflows to customer needs will help you ensure customer satisfaction, reduce churn, and ultimately lower customer retention costs.

Gain Visibility Into All Your Financial Metrics and Improve Them With Mosaic

The more visibility you have into your financial metrics, you’re better equipped to impact the company’s operational performance.

Customer retention cost is one metric, albeit an important one, that FP&A teams should focus on to make better investment decisions that improve your company’s bottom line. But there’s so much more you need to look at for a complete picture of your business’s financial health to make informed decisions.

Mosaic makes metrics simple. With Metric Builder, you can access real-time data and tailor every metric to drive your business to new heights. Merge financial and operational datasets to discover new opportunities, mitigate risks, capitalize on previous wins, and reveal new insights.

Metric Builder is a no-code tool that lets you pull financial and operational data from any integrated source, play out different scenarios and predict each outcome — in just a few simple clicks. Tidelife’s CFO, Brian Weisberg, experienced its benefits firsthand:

Request a demo to learn how to make your metrics work for you. Reduce customer retention costs, among others, and drive operational excellence throughout your company.