A tricky question I get asked all the time from those running Customer Success organizations is “How do you determine the ROI of a Customer Success team?” In some ways it’s an unfair question because the R stands for “Return” and implies a revenue or profit connection.
Many Customer Success teams are not directly responsible for any revenue or bookings, and therefore “return” can be difficult to track in a traditional way. The goal is helping customers find value from their purchase and then retaining them by earning their loyalty. It takes some applied resources to accomplish that goal, but measuring the direct contribution can be challenging.
I have tried many different methods to quantify Customer Success ROI. One way was to measure the number, and value, of customers that were unhappy and were “saved”. That is certainly part of what Customer Success teams do but the problem is in defining what it means to save a customer. Who decides that this particular customer would have churned? I have also tried a time-based approach – every hour that Customer Success spends with a customer is an hour someone else in another function would have had to spend to make the customer happy in one way or another.
This is probably mostly true but it doesn’t really capture the true impact. One other approach would be to hitch your wagon to some kind of customer satisfaction score. It’s not at all unreasonable, but I have two problems with this approach – 1) customer satisfaction isn’t always synonymous with maximizing customer value, and 2) if you are going to be measured by customer satisfaction, why not use the ultimate measure of satisfaction – customer retention?
At a high level at least, you can measure your retention rates against your Customer Success investment. The best formula I’ve found for measuring this is not really an ROI calculation. It’s a “cost of renewals” model whose trend is far more important than the absolute numbers. In it’s simplest form, take your total renewal revenue for any given time period and divide that by the total costs of your Customer Success team (I would also add in the Renewals team if they are dedicated only to renewals).
So, if your successful renewals for October added up to $1M and the monthly cost for your Customer Success team was $100K, your cost per $K of renewals for October is $100. Is $100 a good number or a bad number? I don’t think I know the answer to that question. But I do know that, if the 12-month moving average on that metric is $85 a year from now, that’s good. And if it’s $110, that’s heading in the wrong direction. We all know that we’re going to be asked to do more with less next year than we are doing this year. That’s just how business operates.
In the era of Recurring Revenue Management, we need to measure our success against that recurring revenue stream, not on a “headcount per X customers” model like we used to. This model also forces us, appropriately so, to manage those low-dollar-value customers much differently than the high-dollar-value customers. “Managed vs. Unmanaged Customers” is a subject for yet another post on another day.
I like this formula because it is simple and meaningful and ties Customer Success to bookings/revenue, which is very important. I find this formula valuable because it provides clear visibility of the value of Customer Success.
Automation is the key to improving productivity and effectiveness (if you choose the right tool). This is exactly why JBara exists, to help you manage all of your customers to the retention rate you desire, with the leanest staff you can. I call it “Just In Time Customer Success” and I’m happy to show it to you and discuss it with you.