Customer Success’s Financial Foundation
The Debate: There are a lot of perspectives on what customer success is and when it began. As for when… Some people say that what we call customer success today has existed for decades. Others say that it was 15 years ago at Siebel, or at Vantage 20 years ago. So who is right? The answer is… all of them, because customer success is constantly evolving. On the other hand, to understand what customer success is or why it exists, you need to look to the numbers, the financial numbers.
The Inflection Point: Although customer success is constantly evolving, the evolution has had inflection points, one of which is foundational to every SaaS company. That inflection point is tied to an event in the spring of 2005. The event was a Salesforce executive offsite. During that offsite, a year after their IPO, David “Doomsday” Dempsey, announced that Salesforce’s churn was 8% a month or about 63% per year!
Customers for Life: To address this problem Salesforce created its “Customers for Life” program. Sure the name didn’t even include “Customer Success” but its focus did, and as we will see, keeping customers was instrumental in driving their stock price from approximately $1B at IPO to over $120B today. How instrumental? Enough that in an Inc. article by Matt Given, he stated that churn was: “The One Word That Saved Salesforce From Certain Doom”.
The Financial Foundation: The “one word that saved Salesforce from certain doom” may seem like a bold statement, but by looking at these financials you get a sense for just how pivotal it was. To understand this, we need to go back to the “Doomsday” event of 2005.
When you look at the amount of money Salesforce historically spent to acquire a new customer, the story unfolds.
The blue line in the figure to the right shows Salesforce’s Customer Acquisition Cost ratio (CAC ratio). This number is the amount spent to acquire a dollar of new revenue. When Dempsey announced the churn numbers, SFDC was spending about $1.20 for a dollar of new revenue. Not surprisingly, the following year, the number dipped as their focus shifted to keeping customers. Notice, however, what happened in 2007 when “customers for life” had started to have a huge impact on churn. The ability to retain customers enabled them to become extremely aggressive in their acquisition of new ones. In 2010 their CAC ratio was over $2.50! At the same time, by looking at the green line showing their Market Cap (valuation) you can see how investors responded. Their stock price went exponential. This meteoric rise was one of the big factors that made customer success a focal point for SaaS companies, and it was all about superior customer lifetime value (LTV).
In this series of posts about the financial side of customer success, we will discuss lots of critical financial metrics that customer success executives need to understand. As you will see, these financial metrics are all ultimately tied to LTV, because LTV is the reason customer success exists, as we know it today.