How do the different elements of your CS department affect your income statement?

  • 5 October 2016
  • 2 replies

Userlevel 5
How do the different elements of your CS department affect your income statement?

A quote from Andy, VP of Customer Experience, at Version One:  
Outcomes management seems like it would fall into COGS. With a 15% investment on recurring ARR that seems like your CSMs would put pressure on your Gross Product Margin %. The costs for your CS Sales Rep are clearly an Operating Expense. That should give you great margins on upsell, which feels right to me.  I.e. we believe that investing in customer success provides a lower product margin, but that lower margin is offset by protection of the renewal rate and more predictable LTV. Additionally, it generates Upsell revenue very efficiently. Basically what I’m saying is companies that invest in Customer Success should have a lower Gross Product Margin % during the transition period, but if the investment pays off then CAC will be lowered by more efficient Upsell and second order revenue

2 replies

We try to aggressively take CS activities that are inherently operational and move them to the Support and Operations team that exists within the CS organization.  These activities range for from traditional support to onboarding individual incremental users, or other technical support activities such as integrations.  This we view as COGS. We move these activities to a location where we can achieve the lowest cost for the required level of process quality.  This allows the CSMs to focus their efforts on activities that result in renewals and expansion.  These costs we view as CRC (renewals) or CEC (up-sell cross-sell).  CAC is often > than ACV.  This is actually not true for us but I believe industry standard for SaaS companies is about $1.18 CAC for $1 of ACV.  As such we view our job in part to drive CEC and CRC down to offset CAC. And no, we do not have solid method for differentiating CRC and CEC 🙂 We simply know both exist.  Open to ideas...
Thomas,  thanks for your response and the mention of the metrics. I am inferring from your approach that outcomes management should largely be viewed as an operating expense, not COGS. I agree with that. Agreed on the difficultly of breaking out CEC from CRC too.

Are you currently focused on creating advocates? I would view that activity as CAC expense. I'm curious if you've worked through that and how you handled it.

I'm surprised that no one else piled on as I believe this is an important topic to managing Customer Success economics.