According to career and recruitment specialists GlassDoor.com, the average salary of a customer success manager (CSM) in the San Francisco area is around $85,000.
That’s a fair chunk of change. And it certainly raises a question:
When is the right time for you to hire a customer success manager?
To answer this, there are a few things to consider, not least of all how much money a CSM can realistically pull in for your SaaS.
But before we look at some research-based mathematical examples of how to calculate whether or not that high five-figure investment is right for you, let’s look at some more preliminary factors.
What does a customer success manager do?
A CSM does have a self-explanatory role. They help your customers use your product successfully.
The specifics of the role differ from product to product. But tasks include connecting with customers, speaking with their engineers to understand what they need your product to do for them, and generally helping ensure users get exactly what they need.
A successful customer who stays with you. That means more income for your business and improved SaaS metrics across the board, hopefully enough to justify their salary.
But, can you help every customer find success with your product?
To find out, we need to break down your users into two groups, both of which represent money left on the table.
1. Users who abandon your product after opting into your trial signup, but before they become paying customers
2. Users who churn after they finish the trial and become paying customers
Let’s start with the first group.
Realistic improvements on pre-signup abandonment
Right now, you know how many trial signups you lose each month. To know if there’s room for improvement, we’re going to lean on some research conducted by Totango.
The idea of the project was to find out the average percentage of users who abandon a product after trial signup without becoming paying customers.
Products were split into three categories – credit card required, credit card not required and a separate category for products considered to be the best in their class.
Naturally, which calculation you use depends on which classification is most suitable for you. But, as you can see from the image above, it’s likely you’ll secure more trial signups if you don’t have a credit card acting as a barrier to entry for website visitors.
We’ll use a credit card not required SaaS as our example here, so let’s look at the math.
Time to figure out the numbers
Imagine a theoretical SaaS business.
Each month, our SaaS generates 500 new trials, each new user brimming with potential. The average lifetime value (LTV) of the customer is $7,500.
Let’s say that the company currently sees around 9% of free trial users sign up to become full paying customers. That means it can realistically expect around 6% room for improvement, not including the additional improvements should that SaaS company works its way towards being considered “best in class”.
So, there’s 6% improvement on the table and 500 monthly signups. How many new potential customers does that leave per month?
(monthly signups) 500 x (abandonment) 0.06 = (potential customers lost each month) 30
(customers to be gained) 30 x (average LTV) $7,500 = (potential revenue) $225,000
As you can see, our example SaaS has a lot of potential cash for a CSM to tap into.
That’s a lot of money, and you may have less monthly signups than this or your average LTV might be lower than $7,500.
But modify the figures for your SaaS and you’ll be half-way to a conclusion as to whether hiring a customer success manager is for you or not.
Before we calculate the numbers for the second group of users mentioned above, let’s first look at the reasons why they’re important.
Realistic improvements on post-signup churn
In a survey conducted by Preact, it was revealed that the top cause of churn is poor user onboarding which accounts for around 23%. That’s 23% of your lost customers a CSM can potentially help you out with.
The second largest reason was important because it’s due to the product under-performing (20% of churn).
It doesn’t matter how good a success manager is, if your product sucks or is still in relatively early stages of development, it’s not worth you hiring a CSM.
Instead, you need to focus on the product and get everything running awesome. We’ll look at more how to determine your present situation and what to do about it in just a moment.
The Preact survey determined the third most common reason for churn was poor relationship building which accounts for about 12%.
That means two of the top three reasons for churn total 35% of lost users that a CSM could tap into. However, you’ll never get churn rate down to 0%, so what’s reasonable to expect?
As discussed by Lincoln Murphy on his blog, sixteenventures.com, extensive research and experience has shown him that the target churn rate of a SaaS should be between 5% and 7%. For our example, we’ll use the higher of these two numbers as the target.
Time for a little more math.
Let’s figure out a few more numbers
For this example, we’ll stick with the same numbers from our imaginary example SaaS.
The company has around 600 paying users, and the LTV is $7,500. Prior to a customer success manager being hired, the monthly churn rate is 18%.
That means we know we’ve got around 11% of possible improvements.
If we improve our churn rate by 11%, how many more of those 600 users would stick around?
(paying users) 600 x (churn rate improvement) 0.11 = (potential customers lost each month) 66
Right, we’re losing 66 more customers each month than we would if we had an ideal target churn rate of 7%.
In total, that means we’re losing:
(customers lost a month) 66 x (average LTV) $7,500 = (lost revenue) $495,000
Okay, that’s a lot of money. If your customer success manager could save all of it, she or he would easily justify the salary.
But remember, not all of those customers are churning because of things a customer success manager can actually help with. After all, an under-performing product is the second most common reason for churn and there are more reasons besides.
If around 23% of users churn because of poor onboarding and 12% of users churn because of poor relationship building, we’ve got 35% room for improvement with a CSM.
(lost revenue) $495,000 x (potential from CSM) 0.35 = (achievable return) $173,250
Now we’ve got some real numbers to work with. Hiring someone to manage your customer success in this situation could almost double their salary. That’s a pretty good start.
Again, you must tweak these figures based on your own business. But if you’ve got a positive starting point like in the above example, you know it’s at least worth looking into.
Let’s look at one last way in which having someone to manage customer success could generate more revenue.
Customer success & account manager
Most SaaS products these days have different pricing options and many offer a premium version of the product.
And, with CMS’s building strong relationships with your users and helping them find success (usually through either making customers money or saving them money) they’re perfectly positioned to up-sell.
Offering some kind of performance-based compensation is a great incentive to make that happen.
There are many ways you can do this, but three examples include:
- If each CSM owns $1,000,000 in account current value (ACV) and can increase its value to 110% in the second year, they get a bonus.
- CMS’s must hit X successfully onboarded customers to release Y% bonus. For each user who stays for Z months, additional bonuses are awarded.
- Every X months, each team or individual who reaches Y successful onboards or upsells is compensated Z% of their salary.
Just like with a sales commission system, all bonuses given out this way are based on a percentage of what your customer success managers generate or protect each year for your company.
So with more users onboard and more users up-sold successfully, you’ve got another method of answering the question of whether or not to hire a CSM in the first place.
What to do if you’re not ready yet…
If you work out the sums above and find you’re not ready for a success manager, what steps can you take to get that lost revenue flowing in the right direction?
This article written for onstartups.com makes an excellent suggestion and we can attest to the fact that it works. The idea is that it’s important not to invest in user onboarding flows too early.
Before you’ve clearly defined and proven your product’s value proposition with qualitative research and can back it up with the quantitative data (i.e. you’ve got lots of paying customers using it) what you really need is information.
Your developer’s time is a scarce resource. So there’s no point spending money on either a CSM or onboarding flows if have to change the product every few days while the dev’s tweak and improve your product into something that really delivers value to your users.
So what should you do instead? You temporarily become a CSM yourself.
What this means is you should:
- Contact every new signup, discover their needs and help them set up your product successfully so they get the value from it
- Stay in communication with existing customers to find out what they like and what they don’t like
- Contact people via email after 30 to 60 days of them not logging in and ask them why they left
If all this sounds time-consuming, that’s because it is. And you’ll need to read up on a thing or two about what the role of a customer success manager entails.
But the truth is, if you work with an early stage SaaS company, you’ll be struggling for dev time and you’ll be low on exactly the kind of qualitative information about your product required to get it where it needs to be.
Does that mean putting in a few extra hours? Hell, yes it does. But it will infinitely improve your product and help you find your place in the market.
Once you’ve done that, and once you’ve refined the awesome value you offer in the first place, building onboarding flows to guide people towards that value will become infinitely easier. And so will your CSM’s job.
A little further research
As mentioned, an average of 20% of users churn due to an under-performing product. But how many of your users churn due to an underperforming product?
Emailing customers 30 to 60 days after they abandon is a good way to get some answers. But there’s more you can do to gather the kind of qualitative data you need.
There are a number of great tools you can use such as Qualroo or Survey Monkey, but a simple phone call works wonders, too. If you use Intercom.io or similar tools with in-app messages, they’re another great way to contact people that typically have a much higher open rate than email.
As usual, A/B test the copy you use to increase your response rate.
If you find that a lackluster product is the key reason people are leaving, you know you can revisit the idea of a CSM later.
Because you know that you must focus your resources on improving your product to the point where it’s irresistibly awesome.
Tweak the numbers in our theoretical SaaS examples to numbers from your own and find out whether or not it’s financially worth you considering a CSM.
There’s a good chance that you’re not based in San Francisco, and though the US national average salary is still quite high at $77,000, it may be lower where you’re based. Wherever that is, check out GlassDoor.com to get an idea of your starting point.
If your product is performing well, you’re getting good trial signups and your churn rate is still high, having a customer success manager will pay serious dividends relatively quickly and even more so in the long term.