Customer Success: COGS or Sales & Marketing expense?

At SaaS companies, Customer Success is a critical function that plays a significant role in retaining customers and driving revenue growth. The SaaS business model relies on customers purchasing software on a recurring basis, and Customer Success focuses on ensuring that these customers activate on and effectively use the software, remain engaged and satisfied with the product, and derive value from it. 

The customer success function in SaaS typically involves a range of activities, including onboarding, training, support, adoption, and renewal. These activities are designed to help customers achieve their desired outcomes with the software and identify and address any issues or challenges they may encounter along the way.

A common question arises for finance teams at companies with Customer Success teams: should companies categorize Customer Success under Cost of Goods Sold (COGS) or a Sales and Marketing expense (S&M)?

First, let's define what COGS and S&M are. COGS refers to the direct costs associated with producing and delivering a product or service sold by a company, including the cost of materials and labor to create the product or service. S&M, on the other hand, refers to the costs associated with promoting and selling a product or service, such as advertising, sales commissions, and marketing materials.

So where does Customer Success fit in? 

Some argue that Customer Success should be categorized under COGS because it directly relates to delivering a product or service that meets the customer's needs. In other words, if a company is successfully providing excellent customer support and ensures their customers are achieving their desired outcomes, it will lead to repeat business and ultimately drive revenue growth. Therefore, Customer Success is a cost of delivering the product or service. 

At early-stage companies, Customer Success often fills in the gaps between where the product stands and what the customer expects from the product. Customer Success teams tend to be more technical and sometimes must create technical workarounds to solve product gaps. At such companies, Customer Success can be categorized as COGS because they are critical to delivering the product the customer has purchased.

On the other hand, Customer Success could be categorized as S&M because it is ultimately a function that drives revenue growth. By ensuring customer satisfaction and loyalty, a company can improve customer retention rates and increase sales through upselling and cross-selling. Therefore, Customer Success is a cost associated with promoting and selling the product or service. 

At more mature companies where the product has progressed to the extent that product gaps are negligible, the focus of Customer Success teams typically shifts towards customer behavior management and value delivery. The expertise of these teams lies in their interpersonal skills, which help identify and monetize the value that the product is delivering and secure renewals. They’re nurturing long-term relationships and closing expansion and upsell deals. Customer Success is much more akin to a sales function in this situation.

So, which is it? There is no one-size-fits-all answer. It ultimately depends on the specific business and its needs and goals. Some businesses may find that categorizing Customer Success under COGS makes more sense, while others may find it belongs under S&M. 

For venture-backed startups, it may be more advantageous for the Customer Success function to fall under S&M rather than COGS. This is because COGS affects the company's gross margin, which is a metric that investors pay attention to. However, it’s important to keep in mind that if Customer Success is categorized as COGS, the impact on gross margin in turn affects the calculation of Customer Lifetime Value. Similarly, if your Customer Acquisition Cost (CAC) calculation includes all Sales and Marketing expenses, categorizing Customer Success as S&M could result in a high CAC that should be adjusted accordingly.

Ultimately, the most important thing is that SaaS businesses understand the importance of Customer Success and invest in it accordingly, regardless of where it is categorized. Customer Success is a critical component of any successful SaaS business, and it is essential to prioritize it accordingly.