Investing Sales and Marketing dollars in retention vs acquisition – How much?

Sales Person turning a knob to select customer retention strategy instead of acquisition.  

In today’s market, the path to growth for B2B SaaS companies is to continue following the two SaaS lodestars:  customer acquisition and customer retention.  The companies that successfully navigated through various market disruptions, including the recession in 2008, continued growing by diagnosing whether their acquisition and retention investments were efficient.

That means focusing on KPIs like the Magic Number to analyze overall Sales and Marketing efficiency in contributing to growth, as well as the cost of customer acquisition (CAC) and both customer retention and net dollar retention (which can mask poor customer retention rate overall) rates.  Investors will be looking even more deeply into these metrics in 2022 and beyond to protect their portfolio companies and as they diligence new investment targets. 

The Fundamental Value of the SaaS Model is that Customer Retention is Cheaper than Customer Acquisition

The cost of retaining a customer is anywhere from a tenth to a third of the cost of acquiring a new customer – or even much less for companies with a transactional, high-volume sales model. It totally depends on the business model and size of the product contract.  For the money invested in acquiring, it is equally important to ensure that you are spending enough on retention and expansion, but not too much, to monetize the initial acquisition investment.  The balance can be tricky.  

Acquiring new customers often gets all the attention – but depending on how much the land and expand model you follow, customer retention and expansion costs should be carefully calibrated.  These proportions vary depending on the business model and type of sales, as well as the stage of the company.  For these reasons, it is critical to compare your acquisition and retention costs against benchmarks that are fine-tuned to companies with very similar business models.

Comparing CAC to Customer Success Expense

In the following charts, we show benchmarks for Customer Acquisition Cost (CAC) for lower average contract value models, and how it changes as revenues increase.  In addition, we compare this to the Customer Success expense per customer, assuming that Customer Success is primarily responsible for renewals.  CAC expense includes more than the sales expense involved in the acquisition; it typically includes marketing and any other expense associated with an acquisition.

Customer Success is only one retention component and does not include the marketing associated with customer account management, or perhaps, more importantly, the product investments that are made specifically for customer retention and expansion. Our benchmark here of Customer Success expense per customer does not include all the costs of retaining, renewing, and expanding contracts with customers, but it is an important component – and an area that should be looked at in terms of calibrating costs to peers in a changing environment. 

In this next chart for B2B SaaS companies selling a relatively lower cost subscription contract, you can see that there are definitely economies of scale in both CAC and even more in Customer Success as a company goes from early stage to over $100M in recurring revenues.

 

Sales & Mktg CAC by Revenue

 

Compare the above benchmarks to those for vendors selling contracts with ACVs averaging about $110,000/year.  Here, the economies of scale don’t apply to CAC but are quite strong for Customer Success.  The cost of selling a higher-cost product to customers that can purchase high-priced products doesn’t decrease the more that you do it:   those customers have more decision-makers to convince, more complexity in the buying decision and procurement process, longer sales cycles, and typically require more expensive salespeople to close the sale. Interestingly, vendors tend to throw more resources at the sales process as they get larger, rather than fewer, as you can see with lower CAC for smaller companies than for larger selling the same contract values.

At the same time, Customer Success expenses per customer up for renewal go down significantly as a vendor increases the number of customers, even with large contract subscriptions.  Typically, higher-priced subscription products are more sticky and require less investment in the renewal process.  Some of the reasons that these types of products are more sticky are exactly the same reasons that these products cost more to sell – it took the customer so long and involved so many people in the buying decision that they are unlikely to throw out the contract and go through the whole process again with a competitor product.  For these reasons, SaaS vendors selling higher-priced subscriptions should not expect significant economies of scale in CAC as they grow. Still, they should expect cost savings on the retention side of their Sales and Marketing investment.

 

Sales & Mktg CAC by Revenue - 2

 

Key Take-Away

As budgets get tighter, the focus on profitability normalizes. In the SaaS sector, it is expected that growth will continue to trump profitability in valuations, but capital may not be as easily accessible as it was previously for growth at all costs.  SaaS companies should remember that while new customer acquisition is the primary driver of growth, existing customers are EBITDA machines. The key to success is to find ways to drive more expansion revenue from each existing customer while also reducing customer churn without going overboard on Customer Success.

SaaS companies in today’s market should benchmark efficiency KPIs for Sales and Marketing, including CAC and Customer Success to identify whether they are spending efficiently and appropriately for their business models on customer acquisition and retention against peers and market leaders.

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