Yesterday, at the Boston SaaS Finance Meet-Up for the SaaS and Software benchmarking community, we discussed some of the issues with determining customer count for B-2-B SaaS companies. Last week, the same question came up at our San Francisco SaaS Finance Meet-Up as well, so it is clearly an issue. Many companies, especially those selling into the enterprise, struggle with counting whether a large organization is one customer or many. Some B2B SaaS vendors also sell to franchise organizations, and while the billing may go through one entity, the sales effort is undertaken at each local entity with hundreds of “customers.” In the same way, some large corporations may use one procurement system, yet there are many different business units purchasing through the same system but representing very different sales efforts. Is there a consistent way to define all these complex situations?
There Can Be Two Different Customer Counts
I’ve believed for a long time that companies may have two customer counts, one for the Sales organization and one that is used for company reporting. These two customer counts serve different purposes and are often calculated differently. The Sales definition of “customer” is guaranteed to change. If the company always uses the Sales’ definition, then key company performance metrics will be affected by definitional changes, not necessarily because unit economics changed.
The sales customer count typically comes out of the CRM and is usually the total of sales accounts with closed deals. The difficulty with using this number is that what constitutes an account is defined by the current sales structure and territories. Account definition is a tricky thing and used by sales leadership to manage resources and better marshal sales people to win customers and reduce friction/encourage cooperation among sales people in the process.
The methodology of defining sales accounts will change as the company scales and as territories and the sales organization evolves. In early days, GE might be one account with one sales person assigned. As the company grows, GE is now 20 different accounts with numerous sales people selling into the various business units, and geographies of GE. Large corporations usually pose many different opportunities to sell into them and build customer relationships to encourage more buying. Again, the purpose of the customer count from the Sales perspective is primarily to manage the sales organization.
Customer Count the Basis for Unit Economics
The customer count used by Finance serves a different purpose. This customer count is used to calculate a host of key metrics like CAC, CLV, logo retention rates and more. Fundamentally, the customer count drives the unit economics of a SaaS company which is a key determinant of company value. Artificial changes in the definition of a customer based on changes in the sales organization shouldn’t change management’s understanding of its unit economics, but it can happen.
To give an absurd example of using the sales customer count when calculating CAC, if GE goes from being one customer to 20 customers in the course of one year, and sales and marketing expense were to remain the same, then you would now divide the same numerator (Sales & Marketing expense) by 19 more customers in the denominator. If you count the large enterprise as one customer, then you are dividing a large sales and marketing effort by one customer to see the cost of acquiring that customer as compared to dividing it by many customers. Depending on how many customers you count, CAC will be high or low. Similarly, when tracking retention, if the definition of “customer” changes the number of customers, then the resulting calculation will give you a different result.
Counting Accounts in the Billing System
So how does Finance come up with a good definition of individual customers? Some companies base the customer count on the billing system and look at the number of individual accounts in the billing system. However, depending on the customer base, that may not be representative since very large enterprises may have one billing account number, but many sales accounts that bill to the same place. It might be more representative to count all the accounts within the enterprise that make decisions to use or not use your product. In effect, when dealing with large enterprises, you may want to define the “customer” as each of the parts of the enterprise with decision and buying power.
Questions to Ask in Defining a “Customer Account” Within a Large Enterprise or Franchise
- Is it an account with decision-making and buying power, ie., an individual budget, like an independent business unit with a separate P&L?
- Does the account require a separate sales effort to sell, support and renew, ie., it isn’t just another order placed onto an existing contract even if it is purchased through the same entity?
- Customer count, for the purposes of unit economics, should be defined by Finance with the goal of understanding the costs associated with and value of each customer to the company. This may be somewhat different than the number of accounts in the CRM or billing system.
- For the purposes of management reporting, the customer definition should be understood and agreed upon by internal stake-holders so that the implications of management reporting is easily understood by all.
- The customer definition, as used by Finance for management reporting, should be changed rarely and thoughtfully, again with the goal of better understanding unit economics and not just because the definition in the CRM or billing system was changed.It is important to make sure that the customer count, for management purposes, isn’t distorted artificially by the CRM or billing system.
There is no absolute or perfect, “one size fits all” definition of a customer. What is important is to find the right definition for the purposes of analyzing unit economics and customer metrics that can be applied consistently.
This is an ongoing discussion and we welcome thoughts. We work with companies every day in helping them define their metrics in standard and consistent ways so that they can compare them to peers and market leaders.