Chapter 7

How to calculate the value of a customer success team

This is a chapter from The Startup CEO’s Guide to Customer Success and Onboarding.

Common misconceptions:

🚫 the correlation between the output of customer success and impact on my company revenue is difficult to determine.

🚫 the revenue from growing an account isn't as impactful as the initial revenue from the sale.

Your customers need to use your product or service to get value from it; we can all agree there. That's how you keep them around and set them up to grow their business with you over time. Doing so results in more revenue for your business.

If they don't see that value, they churn. That results in less revenue for your business.

In chapter 4, we discussed the impact you can expect on your business when you invest in a customer success strategy. At the highest level, a well-executed customer success strategy can result in…

  1. reduced customer churn
  2. increased customer spend
  3. improved customer satisfaction

Having an impact on the above results in increasing each customer's lifetime value (or CLV). CLV is the total value in revenue your company can expect from a customer during their partnership with your business. This is the direct correlation between revenue and where customer success can have an impact.

As you onboard customers and support them through their lifecycle, you can expect to see improvements in the lifetime value of each customer.

It won't happen overnight, but with each incremental optimization you make to your customer success approach, you can start to understand the impact.

To draw the correlation, let's unpack CLV, how it's calculated, and set the stage with some examples.

Customer lifetime value (CLV)

You'll need this basic information to calculate your CLV:

  1. the revenue each customer brings to your business (annually)
  2. the age of your customer (measured in years)
  3. the cost to acquire each customer (sales + marketing costs)

For the most part, the customer acquisition cost (or CAC) is not going to change for a specific customer once they are working with you. So the longer a customer is retained, the more time you have to make up that initial cost. (Note: It might change over time for new customers as you adjust your sales and marketing strategies so you'll want to calculate that accordingly.)

The revenue spent and age, however, aren't as set in stone. And they are the pieces you can control. A customer success strategy and team will help increase the revenue and age. The lack of a strategy results in both decreasing, ultimately resulting in churn.

Said differently, your customer success team has the ability to directly impact your customer lifetime value. If they are able to keep customers around long enough to grow their business, they help increase the CLV. The sooner that growth happens, the bigger the impact on the lifetime value.

Lifetime value example

Knowing we have a chance to impact the revenue and age components of CLV, let's look at a numerical example of the potential impact a customer success team can have.

customer lifetime value = (annual revenue x age in years) - customer acquisition cost

Let's say you have a customer that spends $150/month ($1,800/year) and has been a customer for 2 years. 2 years ago, your sales and marketing efforts to acquire a customer were $800.

As it stands, the CLV for that customer is $2,800 ($1,800 x 2) - $800 = $2,800

Let's say that same customer added a service or upgraded their account during their 1st year business review. They decided so because their customer success manager was able to show them the value of the service or feature they upgraded to. Now they are paying $200/month ($2,400/year).

The CLV at year 2 for that customer is now $3,400 (because the upgrade happened at year 1, not day 1)

  • year 1 CLV = $1,000 ($1,800 x 1) - $800 = $1,000
  • year 2 CLV = $2,400 ($2,400 x 1) - $0 = $2,400

That is an increase of ~21% for that customer's CLV compared to the original $2,800 at year 2.

The bigger picture

The earlier in the lifecycle that this growth in revenue happens, the more impactful the effect on your customer lifetime value. We'll touch on this and how onboarding plays a role in Chapter 8.

For now, let's simply break down 5 years of lifetime value for a customer who spends $150, $200, or $250 per month ($1,800, $2,400, or $3,000 per year respectively).

CLV - 5 year table

An easy increase to spot above is the $6,400 CLV at year 3 versus year 4 for a customer spending $200/month versus $150/month, respectively. That is 1 year of saved costs for you as a business to get that customer to that CLV 1 year earlier.

The takeaway here is slight increases in monthly spend can result in big increases in lifetime value. Each interaction with your customer success team is a chance to help customers see more value from your product or service, giving you more chances to increase that CLV.

Customer retention cost (CRC)

Speaking of being able to save costs for 1 year, much like your cost to acquire customers, there is also a cost to retain them. That cost is basically the cost of your customer success efforts (the team salaries, marketing costs, office costs, etc.).

customer retention cost = annual cost of CS team / number of active customers

For example, if you have 100 customers and your current customer success efforts cost you $80,000 a year, you're average cost to retain a customer is $800 ($80,000 / 100)

Keeping an eye on both CLV and CRC will help you determine just how much value your customer success team is providing.

You ideally want the value each customer brings you to be higher than the cost to retain them. When you are able to show this, you can confidently view your customer success organization as a profit center that drives your revenue up. The easiest way to make this math work is by keeping customers around longer so you can get the most value over time.

In conclusion…

Developing a customer success strategy gives you the ability to impact two key components for a customer's lifetime value: the amount they spend with you and for how long.

Your customer success team, especially during the early stages of the journey, can influence how quickly your customers realize the value they came to you for. This results in customers churning less often, growing their business with you, and sticking around longer - all of which result in growing that CLV.

Of course, this doesn't happen magically overnight, but the time and effort will pay off as you reduce churn, helping you increase revenue.

More revenue gives you a chance to hire more customer success managers, specialize your teams, and take your strategy to the next level. All while exponentially growing the lifetime value of your customers. A true win-win.

This customer lifetime value calculator lets you demonstrate the impact of pulling revenue growth forward in the lifecycle by investing in customer success and onboarding earlier in each customer's journey.

Download the entire CEO's Guide to Customer Success

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