Main illustration: Alice Yang
In the not too distant past, customer support was seen as a hassle, a cost that had to be borne but which was really just a tax on success.
If it wasn’t for those pesky customers with problems, profits would be through the roof, right?
There is no escaping the fact that supporting your customers costs money. But if you look at the broader financial models of customer support, you’ll see that support isn’t just a cost center, but a strategic investment that increases customer retention and reduces churn.
COGS and the real costs of customer support
The costs associated with providing support to your customers are known as Cost of Goods Sold, aka COGS. For traditional industries such as manufacturing, COGS are made up of the physical costs incurred in selling your product. But as SaaS businesses are treated as service businesses, COGS represent the costs of providing that service to your customers. Such as:
- Other third-party costs e.g. content delivery networks, software, etc
- Customer onboarding costs
- Support team costs (including personnel)
Hosting and other infrastructure costs are relatively fixed – each additional customer doesn’t move the needle – so support costs are the easiest way to increase or reduce COGS.
Here’s a simple way to think about COGS in the SaaS world. If you stopped signing up new customers in the morning, stopped shipping new product, but continued to serve your existing ones, what costs would be incurred in keeping the lights on? That’s COGS – it’s key to telling you if your business fundamentals are sound.
For today’s SaaS companies, COGS (and by proxy support) is a key component of profitability for SaaS companies.
There are two implications of this.
- If you want healthy financials your support team is always going to be busy. No matter how much you value your customers, you can’t cut an open-ended check for support.
- Cutting support to the bone to increase profits might look tempting in the short term, but bad support will only lead to increased churn, eroding your profits just as quickly as you increased them.
The number one reason customers quit is when they believe a company no longer cares about them
So, how can you better understand your ability to spend on support? Economies of scale, your position in the market, and your pricing should influence the way you think about spending on support. Here are few examples.
Why can Apple afford to provide much better support than Dell? It’s price. A similarly specced computer from Apple and Dell will not be priced the same and may even vary by orders of magnitude. Put simply: the more you can charge for your product, the more support you can afford to provide. But figuring out how to charge more isn’t easy. In SaaS specifically, the more you can charge while not negatively impacting your retention rate proportionally, the more you can spend on support.
Economies of scale
Imagine you are running a fictitious product management application that sells access to its product on a per seat basis. Each additional seat sold costs you almost nothing from an infrastructure perspective. Assuming you’re using third parties like Amazon Web Services and reserving instances along the way, the more seats you sell, the lower the marginal costs to host each additional seat. As hosting costs per seat decrease, you can increase your support spend per seat while maintaining the same gross profit margin.
Your place in the market
It’s a simple fact that larger, more valuable customers will churn less. It’s more expensive and difficult to land them (often with involvement from the sales team, product and engineering teams to answer/build specific requests, your CEO, etc.), but once you’ve landed them they’re much less likely to quit. Their switching costs are higher. They’ve invested more of their time, money, resources, and reputation to adopt your product.
In contrast smaller customers adopt the product quickly and cost much less to acquire. However, it’s much easier for them to quit. Their switching costs are much lower, and it’s also statistically more likely they go out of business. This natural difference in retention across markets will completely change your lifetime value (LTV) equation and dictate how much you can spend to support customers.
Said another way, an hour spent with a larger, higher-retention customer makes up a much smaller portion of that customer’s LTV than it does with a smaller customer. If you want to treat all customers as equal go ahead and do it. But be clear about the trade-offs you are making when you decide to do that.
From cost centre to profit centre
But rather than simply looking at the cost of support, consider how support can actually be a positive force on revenue. Here’s just three ways you can use customer support to grow your business.
Support to convert
If you provide support to customers on free trials you need to think about what’s a sales cost and what’s actually customer support. If you are supporting free users to convert them to paying customers then it’s a sales cost. If someone is on a trial of a $25,000 a month plan and they have a question three days in, is that actually COGS or is it a sales cost? It’s sales because if the potential customer doesn’t get what they want they are not going to buy the product. It’s not COGS because you haven’t actually sold a good yet.
Support to preserve
The number one reason customers quit is when they believe a company no longer cares about them.
Through that lens you can start to think of support as something that turns an 18-month relationship into a three-year relationship and doubles your revenues in the process. Basecamp has customers that have been with it for over a decade, since the product first launched. That’s because they’ve built a great product, but also because they’ve consistently provided great support. Support can increase LTV if it preserves the customer relationship.
Support to distinguish
Great customer support can act as a clear differentiator in your sales and marketing efforts. A good way to think of this is as follows; most car companies see reliability as something they grit their teeth about, Toyota uses it as their number one characteristic. Similarly the financial services company Discover ran a TV advertising campaign that focused on the fact that when you called its support line you would get to talk to a real person.
Customer support is usually seen as the black hole in the CEO’s wallet. That adversarial view of customers is on the wane and progressive companies consider a customer-centric culture a core value.
As we’ve seen good customer support isn’t easy. It costs time and money. But putting your customers front and center pays off in the long run – it retains customers, transforms customers into advocates for your business, and delivers a competitive advantage.