Here's something basic for any SaaS company: do you have one source of truth for your customer number? Or is there one number in the CRM, one in the billing and invoice system, another in the recurring revenue system? And another in your marketing materials — or several different numbers in various marketing materials? Does everyone in management agree on how to define customers?
Why It Matters
If a SaaS vendor can't count the number of customers it has in a consistent way, then their Unit Economics won’t be correct. Metrics like Customer Acquisition Cost (CAC), Customer Retention rate and related KPIs like CLV/CAC rate or months to recover CAC, etc. will be incorrect.
Here’s an example:
Total cost of customer acquisition: $100,000
Total number of new customers: 100
CAC = $1000
But if your customer count is off by 20% and is really 80 customers, then CAC is $1250 — 25% higher than originally calculated.
Now multiply this by many more customers and here's a few KPIs that will be affected.
CAC: We don't know if our CAC is going up or down and whether we are getting more efficient or not.
Close rates, MQL to close KPIs: Funnel velocity is important to track, but if the customer count is off, none of those analytics will be correct.
Customer Retention and Customer Lifetime Value: These are critical metrics to understand your unit economics.
It’s hard to manage and improve productivity if the numbers aren’t accurate. And investors particularly don’t trust numbers that change or are different from what they calculate.
Where You Stand Depends On Where You Sit
Some companies look to Sales to define the number of customers. Sales typically tracks customers and accounts in the CRM based on their account management structures. Or SalesOps is pulling the number of unique customers out of the CRM and providing that to the rest of the company. Sales, however, tends to have a sales-centric perspective on “what is a customer” based on sales process, strategy, territory management and sales organization. McDonalds could be one customer or 40,000 franchisees in an extreme example. IBM US and IBM Europe (or IBM France, Germany and UK) could be any number of customers. Sales will decide based on territory and account management which may not be the best from a whole company perspective.
Some companies will look to Accounting to define the number of companies. Accounting or bookkeeping will typically pull the number out of the billing or invoicing system or a back-end financial system, which may also not be the right source. One invoice account might represent several companies, or several invoice accounts may represent one company using different products or on different contracts.
Typically, Finance is the one neutral organization in the company with the ability to establish a consistent definition which meets various operational requirements. Finance, or in larger companies an Ops group if they sit outside Finance, is usually the one organization best positioned to define unique customers consistently.
So, how do you address these inconsistencies across different business groups and agree on a single source of truth for your customer number?
Step One: Agree on the definition of a customer
Consistency is more important than the details. For some vendors, each franchise is a unique customer and for some vendors, each brand is the customer. Decide what is a unique customer and how the number will be calculated.
One path to avoid is to define customers by the number of contracts which could be for several different products sold to the same company, upsells, etc.
Another important issue relates to defining timeframes. When does a customer start being a customer? When a prototype is sold? Then your Net Dollar Retention Rate may look abnormally high in the early days, only to drop dramatically after the full contract is contracted.
At what point do you calculate the start of being a customer? At booking or subscription start date or payment date? When Sales commissions are earned? These may all be the same for all customers, but if not, it is important to decide.
Step Two: Review customer definitions with a cross functional team
Make sure to have a cross-functional review of what constitutes a unique customer. Include Sales, Marketing, Customer Success, Finance and Accounting, Ops and/or IT. As a company grows, as business models evolve, the definition of customers will evolve, but make sure to include any function that touches customers or customer systems. And make sure everyone internally knows what the definition is and any changes.
Step Three: Make sure all systems reflect the current definition
How many meetings have I sat in where there is a dispute about the numbers and when it is diagnosed to come from a faulty count in a system, someone says, but we agreed that such and such was the definition last year. Unfortunately, that person didn’t get the updated definition and now the systems have been chugging along recording incorrect information and we have to go back and fix the data. So Step Two and Step Three weren’t followed here. The more business systems a company has, the more ways to define customers.
Step Four: Don’t change the definition more than once a year at the most!
When you set the definition, you should be able to come up with a customer definition that works for at least one year, if not more. Constant changes lead to human error, system error, bad data, etc. Unless you go through a radical transformation of your business, you can live with the same way of counting customers for at least one year. Otherwise, trend analyses and historical data will be confusing and distorted.
Customer counts are basic for every SaaS vendor, but even the highest performance companies (which tend to be the most metrics savvy and data-driven) make sure that their customer counts are accurate and consistent. Every SaaS executive should test whether their company is showing consistent customer numbers. If you need help, and would like to benchmark your customer numbers, and all the related KPIs that come from the customer number, we are happy to help. We’ve helped the leading SaaS companies for nearly 20 years.
Let us know if we can help your company, especially as we start to prepare for 2024 planning. You can’t plan if you don’t have accurate numbers and accurate benchmarks. Contact us today.
