This quick follow up to yesterday’s post is driven by some questions I received on financial metrics to monitor for Customer Success teams. Payback period and CLV and great high-level metrics, but they really only take into account the classic costs of Sales and Marketing spend and hope your CLV/CAC ratio is high enough to get you profitable. For today’s Customer Success focused organizations, you really need to take into account Customer Retention Costs (“CRC”) as well.
For newly acquired customers (year 1 cohort), we can think of this as cost per recurring gross profit dollar (“CRGPD”). This metric takes into account CAC, CRC and Dollar Revenue Retention (“DRR”) to really get a better idea of the combined efficiency of your Sales, Marketing and Customer Success teams.
First off, let’s find our DRR. This number simply looks at how many dollars you retained from the initial customers from month 1 to month 12.
Now, we need to calculate our CRGPD:
I can feel your eyes starting to glaze over… Let’s take this as a real world example.
Suppose your company has a CAC of $2,500, annual contract value of $7,000, GM of 80%, CRC of $1200 and a monthly churn rate of 5%.
First let’s look at our metrics from yesterday,
Our payback period is .45 years or roughly 5.4 months. Awesome.
Our estimated CLV is $9,333 and our CLV/CAC ratio is 3.73. Rockin.
Now let’s take a look at CRGPD.
CRGPD = $1.04. Oops.
This means that in the first year, you are spending $1.04 to retain $1 of revenue. What started out as a good looking model may end up bleeding you dry over time. Your first priority should be in reducing your churn rate and/or CAC and/or CRC in order to get your CRGPD below $1. From there, you can look at longer-term strategies for year 2 (and 3 and 4+) CRGPD.
Hope this didn’t make your eyes cross. Feel free to hit me up with any questions.