The nuance and complexity of retention costs

The “Growth at All Costs” era has come to an end. In similar fashion, so has “Retention at all Costs.”

This week, we’re tackling a tricky metric: Cost to Retain. As SaaS company boards continue to sharpen their focus on efficiency (a.k.a., profitability), it’s becoming essential to understand what it truly costs to keep customers.

Full credit for this post goes to our friends Ray Rike and Dave Kellogg who expounded upon Cost to Retain in their SaaS Metrics Brothers podcast episode last week. Highly encourage the listen to better understand the concept and inherent tradeoffs.

But hopefully this primer will grease the skids for you.

So let’s jump in…

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SaaS companies are under more pressure than ever to tighten operations, and there’s a new question coming from boards to SaaS operating executives: Just how much is it costing you to keep the customers you already have?

Customer Acquisition Cost (CAC) has long helped us understand the cost of bringing in new business. CAC is a fixture in boardroom discussions. There is broad consensus on how to calculate it using figures from the Income Statement and a plethora of benchmarks around it.

Similar to CAC, boards are now beginning to look for common ways to calculate and benchmark Cost to Retain (CTR); CTR is a key metric for tracking how efficiently you keep the customers you’ve already won.

But there’s a catch: unlike CAC, there’s no single, straightforward way to calculate CTR. You can’t just pull it from your P&L; getting a clear number requires smart cost allocations across various functions, and getting it right calls for a framework, not just a formula.

Here’s a starting point for calculating Cost to Retain Ratio:

• Total Retention Costs: All the expenses linked to keeping customers on board and reducing churn.
• Total ARR to be Retained: The annual recurring revenue you’re trying to keep.

The math is simple, but figuring out which costs to include requires judgment calls across multiple areas of a SaaS business. Let’s break down the main ones.

Professional Services

Onboarding, training, and implementation are drivers of customer success and directly impact retention. But how much of these costs should count toward CTR?

If you run professional services at break-even or at a loss, the net costs are an investment in customer success and likely make sense to include in your CTR.

Customer Success Costs Focused on Retention (Not Expansion)

Most Customer Success teams’ primary mandate is gross retention through adoption, engagement, and value measurement. As of late, they often carry additional responsibility for expansion.

CTR focuses only on gross retention (retention not including any expansion). Therefore, you need to pull out CS costs that are dedicated to retention versus growth. Since CS teams often wear both hats, drawing these lines isn’t easy, but choosing a ratio (e.g., 80% retention and 20% expansion) and maintaining consistent CS cost allocation is important.

Product Development and Engineering Costs

Your product team does more than innovate features for new customers and new markets; it also shores up retention by delivering stability, bug fixes, and minor product enhancements for existing customers.

But, splitting R&D costs between retention and net new growth gets tricky to say the least. Some companies opt to allocate a portion of R&D to retention, especially if a product is in the “sustain” phase of its lifecycle. If there’s a dedicated tier 3 support or sustaining engineering team, it’s common to include these costs, like customer support, in the cost of retention.

Marketing Costs

Customer marketing — newsletters, webinars, user events, etc. — plays a role in retention, even if most marketing budgets go to new customer acquisition.

The challenge is that many marketing activities serve double-duty. A user conference, for instance, supports retention while also generating new leads. For CTR, it might make sense to stick with activities and costs that are clearly retention-focused marketing activities (e.g., user groups) and leave out broader initiatives like the user conference.

Customer Support Costs

Customer Support is often the unsung hero of gross retention, handling the day-to-day issues that can make or break customer renewal decisions.

For CTR, it’s usually straightforward to include customer support costs, given that support’s primary mission is to remove obstacles for existing customers.

Retention Is a Team Effort

The exercise of calculating Cost to Retain makes one thing crystal clear. And it’s something we talk about here in this newsletter ad nauseam…

Retention is not, and cannot be, the responsibility of any single team in SaaS.

You can see how challenging it can be to isolate retention costs by team. Unlike CAC, CTR isn’t a single data point you can simply pull from the P&L. We need a framework to decided which costs to include for each function and determine what keeping our customers really costs.

And the exercise shines a light on the cross-functional choreography of customer success, services, support, product, engineering, and marketing required for a SaaS business to work.

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