SaaS companies traditionally invest most of their time and money in Sales & Marketing, focusing all their energy on acquiring as many new customers as possible. But in doing so, are you missing out on valuable additional sources of revenue for your business?
When it comes to your customer relationships, acquisition is just the tip of the iceberg. In fact, Totango estimates that only 20-30% of your revenue comes from the initial sale, with 70-80% coming later in the customer lifecycle.
Today I’m looking at how Customer Success contributes to SaaS revenue growth - in a bigger, more impactful way than Sales and Marketing.
How Customer Success Contributes to Revenue Growth
It’s easy to understand how Sales and Marketing contributes revenue to your SaaS business: you acquire new customers, who pay to use your service. For Customer Success, it’s less direct, and largely involves preventing loss of revenue, rather than generating new customer revenue. In other words, the focus shifts away from attracting new customers, to retaining existing ones for longer.
Here are three ways Customer Success contributes to SaaS revenue growth:
1) Reducing Churn (and Increasing Customer Lifetime Value)
The reality around Customer Churn is that for every customer you lose through attrition, cancellations, or non-renewals – you have to acquire one new customer just to break even… and that’s a tough way to grow!Lincoln Murphy, Sixteen Ventures
As your company grows, the impact of churn grows in-line with your revenue growth. Essentially, the cost of replacing revenue lost through churn becomes more and more difficult to manage.
On paper, it’s simple: if you lose 1 customer, you need to acquire 1 more to break even, and 2 to grow. If you lose 100 customers, you need to acquire 100 to break even, and 101 to grow. It’s going to be much easier to acquire 2 new customers, compared with acquiring 101 new customers.
Therefore, as your company grows, revenue generated through renewals, upsells, cross-sells and account expansion becomes more and more important, allowing you to offset the impact of revenue lost through churn.
2) Reducing Customer Costs
For most SaaS businesses, the costs of acquiring a new customer are determined by two factors:
- The cost of generating a lead (a result of Marketing activities)
- The cost of converting that lead into a paying customer (a result of your Sales team’s activities – including salaries and commission).
These dual costs combine into a single revenue stream: new customers. According to the 2016 Pacific Crest SaaS Survey, in 2015 SaaS companies spent a median $1.13 to acquire each $1 of new Annualised Contract Value (ACV) from a new customer.
In contrast, selling to existing customers can generate several different revenue streams: upsells and cross-sells; expansion revenue; and contract renewals. As you might expect, it costs significantly less to sell to your existing customers compared with the cost of acquiring new ones.
But you might not expect the difference to be so stark: for upsells, the spend is $0.27 per dollar generated (down from $1.13 for new customers), for expansions it’s $0.20, and for renewals it’s only $0.13.
It’s clear to see that you get a much better return on investment when selling to an existing customer, compared with selling to a new one.
Additionally, it’s easier to sell to an existing customer: the probability of selling to a new prospect is just 5-20%, compared with 60-70% for existing customers.
3) Second Order Revenue
Upgrades and second order revenue make customer success 5x more valuable than salesJason Lemkin, SaaStr
Second order revenue – revenue that comes from successful referrals or ‘champion change’ (where one of your customers changes company, and they introduce your SaaS product to their new company, ‘championing’ its adoption for a second time) – is normally excluded from Customer Acquisition Cost (CAC) calculations because CAC is designed to measure your ability to generate new revenue from sales and marketing.
However, referral revenue is a hugely valuable driver of growth for your company. As well as being a great way to acquire new customers, it has the added benefit of requiring no additional sales and marketing spend.
The Importance of Focusing on Customer Success
When customer success is part of your SaaS business’ DNA, you will reap the benefits through increased MRR [and] decreased churnKate Harvey, Chargify
While your SaaS company will always need to acquire new customers, it’s vital that you don’t forget about your existing customers.
Improving customer acquisition by 1% (by increasing lead volume or conversion rates) can boost your bottom line by 3% (source), whereas reducing your gross churn by 1% can boost your bottom line by as much as 7%. Thus, you get a significantly higher return on investment from focusing on customer success, compared with sales and marketing activity.
Could you focus even a fraction of the time, effort and money you’re pumping into lead generation and other customer acquisition activities on improving customer retention and prioritising Customer Success?