Nobody knows the ROI of their CSMs
By: David Apple
Tags: SaaS, Retention Strategies, Notion, Customer Success, Typeform

Intro

What’s the Return On Investment (ROI) of your Mom?

What’s the ROI of spending time with your family, friends, or kids?

What’s the ROI of that delicious glass of whiskey after a long day of work?

Nobody knows how to calculate these things, yet we all invest time and money in them. Similarly, SaaS leaders know that hiring Customer Success Managers (CSMs) is something that they need to do in order to build a successful and sustainable SaaS business, but measuring exactly how that happens has eluded many.

Dan Steinman from Gainsight is right when he says that “the natural tendency for customers is towards churn.” In order to retain our customers, we need to dedicate resources to help them extract value out of our product. If we fail, our customers will churn. If we succeed, the benefit goes beyond retaining revenue: successful customers spread positive word of mouth which makes it easier to attract more customers.

The question is not whether or not a CSM is a valuable asset to a SaaS business, but rather: how valuable are they? What is their ROI? How many CSMs should you hire?

After 7+ years running customer success and sales teams at great companies like Notion, Typeform, and Zingtree and meeting a lot of fellow Customer Success SaaS leaders, I’m still convinced that nobody in SaaS today knows the actual ROI of their CSMs, and nobody truly knows what ratio of CSM to customers is optimal for their business.

In this article I explain why, and I propose a different approach to thinking about the optimal CSM headcount to help you build a more effective Customer Success organization.

The simple ROI equation

To calculate the simple ROI of an employee, you must know 3 things:

What’s the fully-loaded cost of that employee? What’s the baseline status without that employee? What’s the impact that can be directly attributed to that employee?

If you’re looking at the ROI of an outbound salesperson, that calculation is pretty straightforward:

The fully loaded cost of an outbound salesperson is: Cost = salary + overhead + tooling + expenses The “baseline” status is the revenue from their leads prior to speaking with them (typically $0). The “impact” is the revenue generated from the deals they close

So the simple ROI of an outbound sales rep =

(Revenue generated — baseline ) / (Fully loaded cost)

For a CSM, the fully loaded cost is also straightforward to calculate, but we will now go over why nobody truly knows the baseline of a CSM, and nobody truly knows how to calculate their attributable impact.

The lack of a reliable baseline

Assuming the impact of a CSM is measured as an improvement in Net Retention, the baseline used for the ROI calculation should be your company’s Net Retention rate without that CSM. This baseline cannot be calculated reliably for 2 reasons:

there is no reliable control group “before vs. after” measurement of retention rates will yield incorrect conclusions

Let’s take a closer look at these two issues to really dig into the “why” and to help you avoid some common pitfalls.

No reliable control group

In order to calculate a reliable baseline, you’d need to run an A/B test where you have a control group of very similar customers that don’t get access to a CSM. The control group would need to be large enough for the analysis to be statistically significant.

Most SaaS companies assign CSMs only to their top tier customers, so they might be tempted to use the net retention rate of their lower tier customers (who don’t have access to a CSM) as their baseline. As explained by Patrick Campbell from Proftwell in the chart below, the customer churn rate differs drastically based on the Average Revenue Per Account (ARPA).

As such, the churn rate from a lower tier plan cannot serve as a reliable baseline for your higher tier customers.

To reinforce this point: at Typeform, customers on our higher tier plan had a customer churn rate close to 0% (with or without a CSM), whereas customers on our lower tier plan had a customer churn rate of around 5%. If I had used the 5% churn rate as the baseline for my CSM team, I would have grossly exaggerated the impact, and therefore the ROI, of my CSM team.

The “before we had CSMs, our Net Retention was X” error

You may have heard some Customer Success leaders boast “our net retention rate improved by 50% over the past 3–4 years thanks to the Customer Success team.” It is true that many companies’ net retention rates improve over time, but claiming that it’s “thanks to the Customer Success team” is a dangerous oversimplification.

Once you have product-market fit your retention curve will usually look something like the chart below where retention flattens out after a few months.

As time goes by, the customers that have good retention rates will represent a larger and larger percentage of your overall customer base (since they stick around) whereas the customers with a high churn rate will progressively represent a smaller and smaller percentage of your overall customer base (as they churn out).

The chart below illustrates this point. Each color in the chart represents a new cohort of customers who behave according to the retention curve above. Over time, the customers who retain from earlier cohorts will represent a larger and larger proportion of your overall customer-base.

Due to this phenomenon alone, your net retention will continuously improve over time. You therefore cannot attribute an improvement of net retention over time solely to your CSMs because a large part may be due to the inertia of your business becoming more mature.

Another interesting effect of this phenomenon is that the strongest leading indicator to your monthly churn rate can be the quantity of new customers your company brings in the previous month. For example, at Typeform the strongest leading indicator of our monthly churn rate was the quantity of new business we brought in over the 3 previous months. This is because our 30- 60- and 90-day churn rates were relatively high. So if we generated a lot of new business over the previous 90 days, that also implied that we brought in a lot of customers who were going to churn.

Another consideration is that as your company matures, your marketing team will become better at attracting customers with higher Lifetime Values (LTV) and better retention rates. In parallel, your product team will fix bugs and build more features that will also improve retention. As such, even if you see improvements in the shape of the retention curve over time, it’s not possible to directly attribute those improvements directly to the CSM team. In fact, at product-driven companies with large customer bases like Typeform, Notion, and Zingtree, visible changes to the retention curve tend to be driven by product improvements.

We’ve now covered the fact that it’s not easy to create a baseline to measure the ROI of your CSMs. Now let’s look at how we measure the impact from a CSM, and how that can be skewed in a way that misinforms strategic decisions.

We can’t reliably measure the impact of a CSM

It’s hard to deny the fact that your CSMs have an impact, but it’s even harder to reliably quantify the impact from your CSMs. This is mainly due to the fact that:

A portion of their impact is intangible. Many factors outside of a CSM’s control affect their metrics.

Intangible impact

Beyond net retention, a CSM generates 3 other intangible contributions to the financial performance of any SaaS business: increasing the value of the top-tier plans, closing the loop with product, and generating new leads through word of mouth. Let’s quickly dive into each one to inform our thinking on ROI:

Increasing the value of top-tier plans

One of the benefits that justifies the high price of many enterprise plans is offering a dedicated CSM. Enterprise customers expect it and are often willing to pay extra for it. If you didn’t have CSMs, how many fewer deals would you close, and how much would your Average Sales Price (ASP) drop for your top-tier plans?

Closing the loop with Product

To be effective, CSMs must understand customers’ underlying desired business outcome from using your product. CSMs know what features are generating the most value, the biggest product pain points, and the most impactful feature requests. Serving as the internal voice of the customer by closing the loop with product is one of the most valuable activities a CSM team can perform, yet it is not possible to attribute a monetary value to these efforts.

Note: this is a great article written by Angela Guedes about customer research and closing the loop with product.

Positive word of mouth

According to this Forbes article, you risk losing 22% of your new business if a prospect comes across a single negative review about your company. If there are 4 or more negative reviews, you can lose 70% of your new business. In short: online reviews and word of mouth can make or break you business. By building relationships and making customers successful, CSMs contribute a lot to generating positive word of mouth. If you didn’t have CSMs, how much word-of-mouth evangelism would you miss out on? How many (more) negative reviews would be out there? How much would that reduce new business?

The benefits listed above are very hard to accurately measure, yet they are very important and ideally should be accounted for in any ROI calculation of your CSMs.

Factors beyond our control

Many factors beyond a CSM’s control impact net retention. The most obvious factors are the overall health of the economy, changes in the competitive landscape, and changes in your product (improvements and/or bugs and downtimes).

For example, if your competition drastically improves their offering, and in the same month your product experiences an unexpected downtime… yet your Net Retention stays flat… is that because your CSMs did a great job? Without them, would Net Retention have dropped by 20%? Or would it have stayed flat irrespective of all of their hard work? It’s impossible to know but reasonable to assume, right?

While CSMs have a clear, visible, and sometimes tangible impact, quantifying their ROI remains a fool’s errand. While ROI is often the way we justify headcount, in the next section we’ll explore some alternatives.

What about just using an ARR/CSM benchmark?

I think that ARR/CSM rule-of-thumb benchmarks should be banned.

A common SaaS axiom states that a company should have roughly $2M of ARR per CSM. But claiming that any ARR/CSM ratio is “the standard” fails to take into account the following factors which should influence your own unique optimal ARR / CSM ratio:

Your Average Revenue Per Account (ARPA) — If your ARPA is low, $2M of ARR might represent more customers than a CSM can reasonably manage (and vice-versa if your ARPA is very high).

— If your ARPA is low, $2M of ARR might represent more customers than a CSM can reasonably manage (and vice-versa if your ARPA is very high). The complexity of your product — If your product is intuitive, your customers need less hands-on assistance than with a more complex product.

— If your product is intuitive, your customers need less hands-on assistance than with a more complex product. The maturity of your in-app onboarding — Onboarding is often considered to be the most critical stage of the customer journey to impact adoption and retention. If your in-app onboarding is still relatively immature, it will not be optimized or tailored to your top personas, and you therefore need to invest more hands-on time per customer. As your company matures, your in-app onboarding will improve, and your CSMs might not need to be as hand’s on during that stage of the customer journey.

— Onboarding is often considered to be the most critical stage of the customer journey to impact adoption and retention. If your in-app onboarding is still relatively immature, it will not be optimized or tailored to your top personas, and you therefore need to invest more hands-on time per customer. As your company matures, your in-app onboarding will improve, and your CSMs might not need to be as hand’s on during that stage of the customer journey. The maturity of your company — Onboarding is usually the stage of the customer journey that is most resource-intensive. As your company matures, customers in the onboarding stage of the customer journey will represent a smaller percentage of your overall customer base (as you’ll have more and more customers in the post-onboarding stages). Each CSM can therefore handle more customers because they’ll be in the less resource-intensive stages of the customer journey.

— Onboarding is usually the stage of the customer journey that is most resource-intensive. As your company matures, customers in the onboarding stage of the customer journey will represent a smaller percentage of your overall customer base (as you’ll have more and more customers in the post-onboarding stages). Each CSM can therefore handle more customers because they’ll be in the less resource-intensive stages of the customer journey. The seniority of your CSM team — More senior CSMs tend to be better at setting and sticking to boundaries with customers. They tend to be more efficient with their time, and are able to solve customer problems/requests faster thanks to their experience. A senior CSM should therefore be able to handle a larger and/or more valuable portfolio of customers than a junior CSM.

— More senior CSMs tend to be better at setting and sticking to boundaries with customers. They tend to be more efficient with their time, and are able to solve customer problems/requests faster thanks to their experience. A senior CSM should therefore be able to handle a larger and/or more valuable portfolio of customers than a junior CSM. The cost of your CSM — Your optimal ARR / CSM ratio should be optimizing CSM impact vs. CSM cost. The cost of your CSM team is therefore a big part of the equation. A CSM will cost about double in San Francisco vs. Barcelona. This should be accounted for when optimizing your ARR / CSM ratio.

Use all of the above to think about how your unique circumstances might impact your ideal ARR/CSM ratio. That said, rather than using a theoretical number, I’d encourage you to read on and think about the thought-experiment described below.

Note: in the early days you shouldn’t be overly focused on the unit economics, but rather over-invest in more hands-on time with customers to learn from them and close the loop with product. Cash-flow permitting, the unit economics should be a focus further down the line as you scale.

So how many CSMs should I hire?

The main problem which comes from getting the ROI or the ARR/CSM assumptions wrong, is that you might end up with either more, or less, CSMs than would be optimal for your business.

Now that you are familiar with some of the pitfalls to avoid when thinking about the ROI of your CSMs, you have the opportunity to build a more effective CSM team than most SaaS companies out there.

Start with the extremes

When brainstorming this issue with Cristina Georgoulakis, Operating Partner at 776, she suggested taking a design-centric approach to problem-solving by “starting with the extremes”:

Let’s assume your company has 10,000 enterprise customers each paying the same amount per month. One extreme would be to have one CSM covering all 10,000 customers. The opposite extreme could be to have 10,000 CSMs dedicated to only one customer each.

If you have one CSM covering all 10,000 customers, your retention MRR and your expansion MRR would be lower than if you had an army of 10,000 CSMs. With 10,000 CSMs your costs would be unsustainably high.

In the extreme scenario with 10,000 CSMs, at some point, adding more CSMs will no longer improve your net retention rate since your CSMs will each be able to optimally manage their small portfolio of customers within a normal work week. Similarly, on the opposite extreme, at some point removing CSMs will stop hurting your Net Retention rate because your CSMs will not be able to make a meaningful impact on their overwhelmingly large portfolio of customers.

Both scenarios are clearly not desirable, but these extremes on opposite sides of the spectrum imply that there is an optimal point somewhere in between. How can we go about finding that optimal point?

Approaches to optimizing headcount

In theory

In an ideal world, the way you would go about this is through experimentation. You would give some of your CSMs 50% more accounts than the rest, and other CSMs 50% fewer accounts than the rest. Over a period of time, you would compare the net revenue retention of their portfolio of customers against the “control group” of CSMs (who continue to manage the pre-existing portfolio size).

You would then analyze the unit-economics of each account. By giving 50% more accounts to certain CSMs, the cost to serve each of those account will go down by 33%, which represents $X. In parallel, the average net retention for each customer will go down by $Y. The results will tell you if you’re currently too CSM-heavy, or too CSM-light. In theory, so long as $X is larger than $Y, you can continue to iterate and add more accounts to the portfolios of each CSM.

Unless you have an entire army of CSMs, this is not an experiment which would yield statistically significant results. So how can we think about our optimal CSM headcount?

In practice: 2 recommended approaches

Below are two practical approaches I have used to address the question of CSM headcount. I’d recommend doing both :)

Practical approach #1: brainstorm impact of large changes in CSM portfolio size

Organize a brainstorm with your CSM team to go through two scenarios:

1) giving one of your CSMs 50% fewer accounts

2) giving one of your CSMs 50% more accounts.

If you give one CSM 50% fewer accounts, what would they do with that additional time you just freed up for them? What other opportunities would they have to delight your customers and have an even larger positive impact on the retention, expansion, and word of mouth for their 50% smaller portfolio of customers?

If you give one CSM 50% more accounts, and you want to avoid them burning out, you need to reduce the amount of time invested into each customer. In this case, explore the following 3 questions with your team:

1) Which customer interactions would you choose to stop doing? Think about anything that you don’t think is having a big impact for your customers.

2) Which customer touchpoints would you keep, but enforce stricter boundaries to reduce the time invested into that touchpoint? An example could be to continue to offer personalized onboarding/training sessions, but with a boundary of no more than one training session per 50 users (which can be recorded and used for their new hires).

3) What other non-customer-facing tasks are your CSMs involved in that they could stop doing? Analyze your calendar, and think about the things you could cut out in favor of spending more time with your customers (e.g. unproductive recurring meetings).

Based on those two brainstorms, experiment with some changes to your playbook. Try removing some touchpoints, try putting stricter boundaries on others, and/or try to add some new touchpoints to delight your customers. This should be an iterative process. A customer playbook will never be perfect. You should plan to iterate on the playbook through these brainstorms 2 to 4 times per year. In each brainstorm you should validate the decisions made during the previous brainstorm, and reassess your playbooks going forward taking into account changes in your targeted customer profiles, in your product, in the market, or in your company goals.

As you remove touchpoints, you should be able to give each CSM an incrementally larger portfolio (and vice-versa if you add touchpoints).

Practical approach #2: use a data-driven model to calculate CSM time invested in each account

Discussions about CSM headcount always break down to answering the question: “how much time should a CSM invest in each of our accounts?”. The more time a CSM is expected to invest in each account, the more CSMs are needed to manage a portfolio of accounts.

Estimating the amount of time a CSM spends with each customer based on the customer tier will allow you to estimate the total time spent with each customer and extrapolate how many accounts a CSM can effectively handle. Below are 4 steps to obtain this insight.

Step 1: estimate the time a CSM invests in each stage of the customer journey

Below is a hypothetical example of the time required to properly onboard a new customer based on whether they are “High-Touch” or “Low-Touch”.

Based on the playbooks above, it takes an average of 10 hours of a CSMs time to onboard a “High-Touch” customer, and 2.5 hours for a “Low-Touch” customer.

Doing this for each stage of the customer journey, you could get to something like this:

On average, a CSM will spend 25 hours working with High-Touch customers in their first year as a customer.

In years 2+ the Onboarding and Adoption stages are (likely) not required. On average a CSM will spend 14 hrs with High-Touch customers from year 2 onwards.

Using similar assumptions as above for Low-Touch accounts, we might have:

Low-Touch account, Year 1: 5.5 hrs of a CSM’s time

Low-Touch account, Years 2+: 2 hrs of a CSM’s time

Step 2: calculate the customer-facing capacity of your CSMs

The amount of customer-facing time your CSMs have available will vary based on the stage of your company and the amount of CSMs you have. In the early days, your CSMs have to manage customers while also building out all of your processes/playbooks/tooling, etc. As you get more CSMs and your playbooks mature, on average your CSMs can spend less time on projects and more time customer-facing. Below is a sample calculation:

Total hours in a year (8 hrs/day excluding weekends) = 2,080 hrs/yr

Time spent in company, team, and 1:1 meetings: 20% = 416 hrs/yr

Time spent on projects, documentation, processes, tooling: 30% = 624 hrs/yr

Holidays, vacation, sick days, etc.: 30 days /yr = 240hrs/yr

Total customer-facing time per CSM: 2,080–416–624–240 = 800 hrs/yr

Step 3: calculate your CSM capacity

Based on the numbers from Steps 1 & 2 above, the capacity for your CSMs would be:

CSM capacity for new high-touch accounts: 800/25 = 32 accounts/CSM

CSM capacity for existing high-touch accounts: 800/14 = 57 accounts/CSM

CSM capacity for new low-touch accounts: 800/5.5 = 145 accounts/CSM

CSM capacity for existing low-touch accounts: 800/2 = 400 accounts/CSM

As the numbers show, it’s important to account for the amount of new accounts in a CSM’s portfolio vs. existing accounts. For example, if the Sales forecast is that each CSM will get 10 new accounts a year, then the capacity for a High-Touch CSM would be:

CSM time required for 10 new high-touch accounts: 10 x 25 = 250 hrs

Remaining CSM customer-facing capacity = 800–250 = 550 hrs

Capacity for existing high-touch accounts: 550/14 hrs = 39 accounts

Based on the hypothetical data above, a High-Touch CSM would have capacity for 49 accounts in their portfolio: 10 new accounts + 39 existing accounts.

Step 4: have a practical & strategic conversation with your CEO

From steps 1, 2, and 3 above, you now have the data to be able to explain the tradeoff of additional headcount vs. degraded customer experience with your CEO.

Your headcount requests, and subsequent conversations, can now be based on the actual time spent per account and the anticipated number of accounts you and your team have to manage. If you get pushback about your headcount request, rather than having a theoretical argument about headcount numbers and ARR/CSM ratios, you can have a strategic conversation about which customer-facing touchpoint(s) you should shorten/remove in order to realistically handle the same number of accounts with less headcount.

Note: your goal in this conversation should not be to get more headcount. As a great Customer Success professional you care deeply about your customers, and as a result you might lean towards over-investing in each customers’ experience. The reality is also that a business needs to make money, so an optimal customer experience must be balanced with profitability. As such, your goal from this conversation should be (1) to help your CEO understand the tradeoffs of headcount cost vs degraded customer experience to make a well-informed decision together, and (2) to protect your CSMs by managing expectations of time spent per account if you do not get the headcount you requested.

Conclusion

“Not everything that can be counted counts; and not everything that counts can be counted”

- Albert Einstein

To calculate the ROI of a CSM we need to know the baseline status, and we need to be able to measure their impact. In practice, we can’t reliably quantify either of those, yet we know that CSMs are key to the sustainable success of SaaS companies.

The fact that you cannot rely on an ROI calculation is not an excuse not to have a CSM team, nor is it an excuse to hire an oversized army of CSMs. It means that you must be thoughtful about growing your team and constantly adjusting your playbook to the evolving reality of your SaaS business.

Note: big thanks to Camille Ricketts (Notion), Jeff Gardner (Api.Video), Sancar Sahin (Oliva), Huw Slater (TravelPerk), Aliza Apple (McKinsey), Jessie Moor (Revolut), and Cristina Georgoulakis (776) for their valuable feedback which helped shape this blog post.