Why the CRC ratio is critical to an exit
We've investigated important SaaS metrics before (see: Want to blow up your SaaS business? Ignore C4), but today we will expand upon Customer Retention Cost, specifically by exploring the virtues of the CRC ratio.
But first, let's recap how CRC is defined
CRC = Customer Retention Cost ($). It typically includes the following components:
What is the CRC ratio?
The CRC ratio typically takes the CRC and divides it by total subscription revenue over the same time period. For example:
- Customer Retention Cost (annual) = $10M
- Total Subscription Revenue (annual) = $85M
- CRC Ratio = 11.76%
So why is the metric critical to a successful exit?
Two main reasons:
- CRC too high: the exorbitant spend could derail your path to cash flow positive resulting in: lower valuations, down rounds, or possibly a fundraising crisis.
- CRC too low: you may be underinvesting in Customer Success which will inevitably manifest itself it gut-wrenching churn across all customer segments.
How to benchmark your CRC ratio to public companies
Since GAAP has yet to catch up to the economic realities of the recurring software subscription revenue, this gets a bit tricky for one main reason: GAAP includes CRC in the reported Customer Acquisition Cost (CAC). Therefore, public benchmarks for CAC are inflated by about 20-25%.
To isolate CRC, we recommend taking 20% of the CAC. Therefore, if CAC = $5M, your extrapolated CRC would be $1M. Let's take a look at a few data points for Salesforce, Workday, ServiceNow, NetSuite and Marketo:
For these five companies we can see that the CAC ratio ranges from 0.08 (Workday) to 0.13 (Marketo). But these are mature, publicly traded companies. . .
What should you benchmark your company on?
Based on analysis of 24 private companies with strong churn fundamentals, here are a few guidelines for CAC ratio based on how long you've been in business:
- Year 1: 25%
- Year 2: 25%
- Year 3: 22%
- Year 4: 20%
- Year 5: 18%
- Year 6: 15%
- Year 7: 14%
- Year 8: 13%
- Year 9: 12%
- Year 10: 11%
You can also use this as a budgeting tool to ballpark total Customer Success spend for a given year. But remember: the money spent on retention isn't about "revenue protection". Your customers don't care about that. They care about adoption and value realization which is ultimately what drives the mechanics of churn and renewal rates.
The best leadership teams figure this out early on: investing early in Customer Success is worth its weight in gold. Yes, growth is critical and everyone likes to high-five and ring the gong when a big deal is closed. But the Customer Success program will chart the path towards realizing Customer Lifetime Value which is what the SaaS game is all about.