We will continue to be working this evolving topic for finance members of the SaaS benchmarking community because the way that companies allocate Customer Success affects critical financials like gross margins as well as key SaaS performance benchmarks like Customer Lifetime Value. OPEXEngine is dedicated to helping SaaS companies measure and benchmark their performance all along the way from start-up to half a billion and more.
In a survey we did a few months ago of about 50 B-2-B SaaS companies, almost 90% of participants said they had a Customer Success team:
Does your company have a Customer Success team?
Almost all the “Nos” were hybrid public software companies and one very early stage SaaS vendor.
Success continues to be tricky for Finance departments as it is almost evenly split between being seen as a Cost of Revenue and a Sales expense, while almost 30% of companies split Customer Success expenses between categories:
Do you allocate costs between expense categories?
Here’s how companies responded to the question “In which of the following expense categories does the team cost get categorized?”
Driving deeper customer engagement versus selling
A key issue in determining how to allocate Customer Success cost is whether your company’s Customer Success organization is tied directly to closing contracts or not.
Some management teams believe that it should be divorced from revenue targets, renewals and upselling of customers. In this perspective, it is all about making the customer successful and driving deeper adoption of your products and services. It is believed that by taking away the pressure to close or even promote business, the team will be more effective in their mission. Actual renewals and upselling is handed off to another team, usually in Sales. When commissions are not included in these compensation plans, it is easy to put the entire Customer Success expense in Cost of Revenue.
Another school of thought is that this is a Sales function, and the organization is managed with sales targets and commissions and/or bonuses tied to bookings. Customer Success employees are hired as relationship managers, usually within a typical sales organization and focused on working with existing customers. The selling may be a softsell, but if these executives have revenue targets and commissions, no matter where in the company they sit, it is sales expense.
Are Customer Success executives eligible for revenue-based commissions?
Determining where to put your company’s Customer Success expense
Remember that if your expense sits in COGs, it will affect your gross margins and flow through to your calculation of Customer Lifetime Value (CLV) and any other metrics using gross margin. In addition, if you use all of your sales and marketing in your calculation of Customer Acquisition Cost (CAC), and Customer Success is included, your CAC will be too high and should be taken out. If it is only working with existing customers, it isn’t expense associated with the acquisition of new customers.
All companies should review their allocation policies with their accountants and auditors. There is no one correct or consistent answer to where it should sit and how this expense should be allocated. The answer depends largely on how your team is managed, with what goals, and how they are compensated. Business models and best practices continue to evolve. In addition, we see SaaS companies following different patterns as they grow and go through different stages.
Contact us if you have any questions or would like more information on how to benchmark your SaaS company expenses and performance against peers.