2 minute read / Dec 18, 2014 / customer success /
How Customer Success Meaningfully Reduces Cost of Customer Acquisition
Thanks to Bill Macaitis, current CMO at Slack and former CMO of Zendesk, who inspired and co-authored this post
When discussing customer success for SaaS startups, the conversation focuses mostly on retaining customers and reducing churn. These are two fantastic benefits with meaningful return-on-investment. But great customer success organizations can meaningfully impact another critical part of the customer lifecycle, customer acquisition, by catalyzing evangelists to refer new customers.
Let’s examine a hypothetical SaaS company that acquires 1,000 customers though sales and marketing. Assume a standard 15 month payback period implying a CAC of $1250 per customer or $1.5M in aggregate. Each customer pays $1k annually to use the product. If customer success can convert 1 in 10 of those customers to evangelists, each of whom refers only one other customer that year, the company’s CAC drops by a third.
|Impact on Growth by Customer Success for Hypothetical SaaS Company|
|Referrals per Evangelist||5||5||5||5|
|MRR Sales Efficiency*||1||1.5||2||2.5|
I’ve modeled four different scenarios above and varied the fraction of the customer base that the customer success team converts to evangelists. According to SATMetrix, the company behind the Net Promoter Score, typical B2B companies have about 10-20% NPS on average, so I’ve used those figures as the base case. The best-in-class companies achieve 60 NPS scores.
Let’s examine the third scenario in a bit more detail. 20% of customers become evangelists and each refer 5 customers. The effective cost to acquire a customer falls by more than 50%, the monthly recurring revenue (MRR) increases by 100%, and the MRR sales efficiency also doubles. In short, the impact of a great customer success team on every major SaaS metric can be dramatic.
This growth effect compounds over time if the customer success team can continue to find and cultivate evangelists. The swelling ranks of promoters will become an increasingly meaningful and cost-effective growth engine for the business.
While the math works out very neatly, the challenge with this idea lies in accounting for referral properly. There are no water-tight mechanisms for attributing the source of a particular customer. Some companies ask evangelists to use links or codes to track referrals. Customer signup surveys asking new customers how they heard about the product is another effective mechanism. But these mechanisms won’t capture the entirety of referrals. Additionally, the rewards from such an effort may take a while to materialize. As a result, patience is important when building and managing a CS team.