Customer Retention Costs

What is the customer retention cost?

CRC is a financial metric that helps you calculate how much you need to invest to ensure a customer will use your SaaS solution for the long term.

For SaaS companies, customer retention generates a steady stream of revenue. Tracking CRC is a great way to manage budgets, make smarter investments, and measure customer success more effectively.

What’s included in customer retention costs?

Determining what's included under CRC as a customer retention expense can get tricky. To calculate the CRC accurately, you'll want to include all customer retention expenses.

Key components to include in your CRC are:

• Customer-facing teams: Include the salaries and benefits you pay customer success managers, account managers, support reps, and training teams as they resolve customer issues that could lead to churn.
• Retention tools and platforms: The cost of software you use for keeping customers happy, such as customer experience platforms, survey tools, engagement software, onboarding tools, and even churn prediction software.
• Loyalty and retention programs: All expenses made to run and market loyalty programs, referral bonuses, and renewal incentives that help retain customers.
• Customer marketing campaigns: Cost of nurturing existing relationships through email drip campaigns, webinar invitations, upsell nudges, or tailored content.
• Onboarding and training costs: Directly attributable personalized training, onboarding documentation, and tutorials that help your customers use your solution effectively and reduce churn.
• Discounts and renewal incentives: The monetary offer or incentives you provide to retain a customer, such as a discounted renewal rate or an extra month of service.
• Customer feedback efforts: The price of gathering feedback from customers through net promoter score (NPS) surveys, customer satisfaction research, and user interviews. These help you improve your product and customer engagement.

Cost of customer acquisition vs retention

Customer acquisition costs (CAC) for your SaaS company are typically higher than the amount you spend to retain them (CRC). Here's a brief comparison of the cost of customer acquisition vs. retention to highlighting their key differences:

Customer acquisition costs (CAC):

• Represent the cost of attracting and acquiring new customers
• Can be high for B2B SaaS with long sales cycles
• Incurred up front, prior to winning the customer
• Generate new revenue and increase your customer base
• Includes marketing campaigns, advertising, promotions, sales salaries, and onboarding expenses

Customer retention costs (CRC):

• Represent the cost of retaining existing customers
• Are lower than customer acquisition costs 
• Are ongoing and start after the winning the customer
• Reduce churn, increase customer lifetime value (LTV), and boost your MRR
• Include loyalty programs, customer-specific offers, engagement and retention campaigns, and customer success

How to calculate customer retention cost

As you can see from the formula below, calculating customer retention cost is pretty straightforward:

In this formula:

• Total retention spend simply includes all expenses on salaries and tools used by customer success, support, and marketing teams.
• The number of active customers refers to users actively using or subscribed to your service during the reporting period.

It's important to note that you can get very granular with your CRC calculations, segmenting your customers by cohorts based on different characteristics, such as when they became a customer or by the type/size of plan they have. While complex, this is especially useful if you're implementing the bowtie sales funnel for SaaS, which recognizes customer retention as a critical component of potential growth for SaaS businesses.

We'll keep it simple here with an example of calculating the quarterly CRC for a SaaS company.

Our example company spent the following on customer retention over the last quarter:

• Customer success team salaries - $150,000
• Support software subscriptions - $50,000
• Loyalty discounts - $50,000

The total retention spend for the quarter is $250,000.

During the same quarter, the company had 5,000 active customers.

Here's how we can use this information to calculate the company's CRC using the above formula:

CRC = $250,000 / 5,000 = $50 per customer

Note that the basic CRC formula assumes it costs the SaaS company the same to retain every customer, but that's not true in a real-world scenario. Your enterprise clients usually need more resources, like dedicated account managers and premium support, while smaller customers tend to rely on help centers and automated tools.

As you see, retention costs differ for each customer segment. Ideally, you should track how much it costs to keep a customer during their entire time with your company for the most accurate CRC calculation. 

Here's a formula you can use to calculate lifetime customer retention cost:

Lifetime CRC = Average monthly CRC × Average customer lifespan (in months)‍

This provides a clearer understanding of long-term profitability and enables you to benchmark your CRC against customer lifetime value (LTV). If your lifetime CRC is high but LTV is even higher, it indicates a healthy relationship. If your CRC is close to LTV, that's a red flag.

Here is an example of calculating lifetime customer retention cost (CRC) per customer

The company in our example has:

• Quarterly CRC of the company is $50 per customer
• Average customer lifetime of around 2 years = 8 quarters

Here's how this information helps us calculate the company's lifetime CRC per customer:

$50 × 8 = $400 per customer

Accurately calculating lifetime CRC requires up-to-date data on churn rates and customer retention time. If you want to dig deeper, you can also track cohorts, segment by plan size, or examine retention curves.

Why measure customer retention costs?

Retention costs are scattered across departments and functions, making them easy to miss, and SaaS leaders who track CRC can easily evaluate their retention strategies to ensure their investments align with growth goals.

Here's why measuring CRC is helpful:

• Measure ROI and fine-tune your retention efforts: CRC evaluates the ROI of retention efforts like loyalty programs by comparing them to metrics like CLV or MRR. If, in case, high CRC doesn't reduce churn, it's time to shift to smarter strategies like better onboarding.
• Make smarter choices about pricing and profitability: SaaS finance leaders should deeply assess how retention efforts affect margins. They can then use these insights to build pricing models that cover retention costs to stay profitable. For clients with high CRC, premium pricing helps cover costs while maintaining service quality.
• Calculate the real customer lifetime value: Including CRC in your CLV calculations helps unlock a deeper understanding of customer profitability. You can use the insights to focus on high-value segments and cut costs on low-margin accounts.
• Identify ways to save costs: Analyzing CRC reveals inefficiencies, such as oversized support teams or ineffective tools. For example, CFOs can identify and replace cost-intensive areas, such as manual support for low-tier customers, with self-serve solutions.