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How To Calculate Customer Retention Cost: The Hidden SaaS Metric

Discover what customer retention cost is, how to calculate it, retention cost examples, and how you can improve customer retention costs.

Is your current cloud cost tool giving you the cost intelligence you need?  Most tools are manual, clunky, and inexact. Discover how CloudZero takes a new  approach to organizing your cloud spend.Click here to learn more.

You may have heard that keeping an existing customer is five times cheaper than acquiring a new one. But that isn't always true. “Hidden costs” often accompany customer retention, loyalty, and increasing "share of customer". 

Could you be spending more on retaining customers than on winning new ones?

This quick guide will walk you through the meaning of Customer Retention Cost (CRC), why it's important to calculate, and how to calculate CRC. 

You’ll also learn how to cut customer retention costs without losing customers, so you can recoup your investment and increase your profit. 

Table Of Contents

What Is Customer Retention Cost?

Customer Retention Cost (CRC) is how much you spend to keep one customer buying from you for as long as possible. CRC is the cost of customer retention over a specific time.

SaaS businesses typically track crucial metrics like monthly recurring revenue (MRR), customer acquisition cost (CAC), churn, payback time, and lifetime customer value (CLV). Additionally, most companies invest heavily in reducing their churn rate. Chances are your company does this as well on the following activities. 

What Does Customer Retention Cost Include?

Customer retention costs include all of the costs to maintain and support that customer. Retention costs include:

  • Providing training/tutorials and professional services for customer success
  • Costs related to customer service, such as salaries for customer service agents, renewal team members, engineers, and executives. Some SaaS companies count customer service costs as Cost Of Goods Sold (COGS) instead of customer retention costs.
  • Various examples of customer loyalty programs  
  • Account management team’s costs
  • Programs and tools for customer engagement such as chatbots and adapting new features 
  • Customer usage of your product, software, features, etc. 

Why Is It Vital To Measure Customer Retention Cost?

Historically, companies looked at retention rates because it is easier to cross-sell or upsell to an existing customer than to a new one. Keeping a customer is good for increasing their lifetime value.

However, the shift to Software-as-a-Service (SaaS) requires businesses to keep customers for as long as possible to increase profitability. 

If you run your business on recurring or subscription revenue, nurturing, growing, and meeting the needs of existing customers are crucial to your survival and long-term success, month-by-month (renewal cycles). 

That’s not all.

  • When you measure the amount you invest in a customer over time, you can tell if you are making a sustainable return on investment. 
  • You can tell whether you are pricing your services or products enough to cover the cost of keeping a customer. Measuring CRC can give you insight into whether or not to review a specific customer's contract at renewal time.
  • Learn if specific features need to be moved to a higher SaaS pricing tier so you can encourage customers to upgrade their subscriptions, thus preserving your margins.
  • Find out how you can optimize your CRC without compromising customer experiences, retention rates, or long-term loyalty.
  • A high CRC without increasing customer retention may indicate a product-market-fit problem. The higher the retention costs, the lower the margins and profits because each subsequent sale is actually less profitable. 
  • When your customer retention rates are low, it can signify that your retention techniques are working. It might also motivate you to invest more in customer retention to improve loyalty. 
  • CRC can help identify the true Lifetime Customer Value (by comparing the cost of keeping a customer with the value they return of their lifetime).
  • It is crucial to know how much you spend on current customers to decide how to price your services, specific features, and what discounts to offer. 

Customer Acquisition Cost Vs. Customer Retention Cost: What Is The Difference?  

Customer Acquisition Cost (CAC) is the amount of money a company spends over a particular period to win a new customer, but the Customer Retention Cost (CRC) is the amount of money a company spends after signing up that customer. 

A business can use CAC to determine when it will recoup the costs of sales and marketing used to acquire a new customer. CRC is useful for determining if it makes sustainable profits from keeping all or specific customers.

So, how do you calculate CRC?

How To Calculate Customer Retention Cost

You need to add up all the sales and marketing costs of both new and existing products and services to your current customers for a set time. Depending on how much visibility you want, you can add up all the investments every month, quarter, or year.  

Here are a few helpful formulas:

  • Average CRC per customer = Total CRC of all customers / Number of active customers in that period  
  • Average lifetime CRC per customer = Average CRC per customer X average customer lifetime   

This method, however, does not show how much you spend to support a specific existing customer. Rather, it equalizes customer retention costs across the board, which is grossly inaccurate. 

That approach makes it hard to determine your most expensive or least profitable customers. In addition, it is difficult to determine what discount rate to offer a customer whose retention cost is low in relation to their revenue. 

A smarter approach is to calculate CRC on a case-by-case basis. 

You can use cost per customer to determine if you are making enough from each customer to keep them. A cost intelligence platform can help you measure cost per customer allowing you to make informed decisions on contract renewals, pricing tiers, and go-to-market strategies.

CloudZero aligns cloud costs to key business metrics, such as cost per  customer or product feature. Our Cost Per Customer report allows teams to see  how individual customers drive their cloud spend and how much specific  customers cost their business. With cloud cost intelligence, companies can make  informed engineering, business, and pricing that ensure profitability.Click  here to learn more.

That leads us to the next question most organizations ask. 

Will CRC Decrease Over The Lifetime Of A Customer?

With time, a customer's CRC may decrease as their confidence in your product or service develops, theoretically requiring less input from you to keep their business. However, we don't recommend factoring in reducing CRC over time. Here are a few reasons why: 

  • To keep your customers coming back, you must continuously improve your customer experience and competitiveness. 
  • Investing in releasing new features often and continuously improving the customer experience encourages upsells and cross-sells (more revenue from existing customers). 
  • New decision-makers and influencers may join a customer's ranks, and you might need to encourage them to renew their business with you. 

Trying to reduce customer retention costs at any cost can damage your customer relationships. You could instead optimize your CRC to protect your margins and profit. Below are some tips.    

How To Improve Customer Retention Rate

How do you retain customers at the lowest cost? And, how do you cut customer retention costs without losing customers? Try these tips:

  • Request regular feedback from your customers regarding how they use your service or product. Use this feedback to improve your product’s market fit continuously. 
  • Provide easy-to-understand onboarding materials and training to reduce the need for recurrent training.
  • Automate your customer success processes where possible.
  • Create a customer-centric pricing tier based on cost per customer. Charge a customer according to the cost of supporting their needs. You can then segment these customers into sustainable pricing tiers to improve your margins and profit. 

Calculate How Much You Spend To Support A Specific Customer With CloudZero

CloudZero's cost intelligence platform helps SaaS companies discover the actual costs of supporting a particular customer. 

Unlike calculating average CRC, you can use cost per customer to determine how much you should charge a specific customer to recover your retention expenses. 

You can also use CloudZero’s cost per customer metric to set profitable SaaS pricing. Schedule a demo today to see CloudZero in action.     

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