By Philip Lay, Senior Advisor, The Chasm Group LLC
Despite considerable fanfare around the concept of customer success, in most tech companies CS is still in its infancy as a strategy and an organizing principle. During five years or so of field research and experience with Saas companies, I’ve identified at least three critical gaps which today inhibit the effectiveness of most companies to align with their customers’ target outcomes and thus maximize their growth.
Gap #1 – Strategy: Land & Expand is a business strategy, not a sales tactic. Today most Saas companies are still organized primarily to land new logos, causing customer success to be defined and resourced tactically and reactively rather than strategically and proactively. Equally concerning is the reality that in many companies Customer Success is basically a re-labeling of customer support and/or implementation services. Thus, helping customers to achieve their target outcomes – the implied goal of customer success – is little more than rhetoric.
Gap #2 – Role: As a result of this bias toward landing new logos, there are lots of CSMs (commercially incented Customer Success Managers, who are basically farmer salespeople focused on achieving renewals and preventing churn) but very few CSAs (Customer Success Advisors, who focus on advising customers on how and when to increase their deployments for optimal results). Consequently, most Saas companies today achieve only mediocre or slow expansion while incurring higher levels of churn than they ought to. Especially with enterprise-grade customers it’s much more profitable for both sides if they invest quality resources to accelerate adoption and prevent churn before renewal becomes an issue.
Gap #3 – Metrics: Today it is par for the course to use bookings, ACV, and churn as three basic company-wide metrics. Churn is essentially a defensive measure, fine for high-volume SMB markets but not nearly as relevant to managing adoption and renewal with tens or hundreds of enterprise customers. Many companies are tracking NRR (Net Revenue Retention) too – or the same metric with a more apposite name, Net Expansion Rate (NER) which goes beyond renewals/churn to focus explicitly on upsell/cross-sell. But in order to maximize their success with major customers, enterprise-focused Saas companies need to do much more. My observation is that upsell/cross-sell goals are much less ambitious than they should be. Many if not most enterprise customers have headroom to expand their commitments by 10x and even 50x the value of the first transaction, and to do so in a relatively short space of time. This last factor points to a more meaningful metric to ensure that Customer Success is funded and resourced in proportion to its value to the business.
Undoubtedly Customer Success is becoming an increasingly crucial function in B2B Xaas companies. In some, it is evolving into a new cross-functional discipline based on a philosophy about how to serve customers effectively enough to be rewarded with more and more of their business. However, too often ‘customer success’ still means more like ‘company success’ than successful business outcomes for customers. This new discipline will eventually benefit customers as much as it benefits vendors and service providers, but there’s still quite a distance to go before this is an everyday occurrence.
So, what’s missing?
Gap #1 – Strategy: First, a coherent purpose and strategy. If it is to avoid being stigmatized as one more misnamed term in tech’s pantheon of buzzword bingo – to join other casualties such as customer (dis)service and customer relationship (mis)management – Saas company management and field teams are going to have to deliver customer success by, for example, providing professional-level guidance to executives and managers in enterprise organizations on how to address their business problems using the vendor’s technology and services, interacting where necessary with third party products and services.
I am convinced that the more successful subscription-economy companies will be those that design their organizations less in traditional sales, engineering, and PS silos, and more as fluid, collaborative cross-functional teams to perform activities that ensure the successful achievement of their customer’s target outcomes, viewed and resourced as a multi-year commitment to each significant customer’s success. For sure, service providers such as consulting and systems integration firms and digital transformation agencies will continue partnering with tech companies to provide domain expertise and project management. But if Xaas companies continue to operate based on their predominantly product-centric mindset, they will surely become marginalized.
Gap # – Missing Role: The second missing item is a key catalytic role that I have written about in prior articles and that I spend a lot of time working on with portfolio and client organizations: the CSA, or Customer Success Advisor. The ideal profile for this role is more that of a tech-savvy business consultant than a commercial account manager. Indeed, provided that the original AE responsible for the first sale to a given customer remains responsible for growing the account (a model that I favor over the blighted pre-sales/post-sales model that customers detest because of the resulting breakdown in continuity), there should be no need for a commercial CSM or a farmer-type account manager. Thus, the CSA is not the same as a quota-carrying CSM. Indeed, their entire purpose is to operate as a trusted advisor (another much-abused buzz-term) to the customer sponsor and their organization even though, as a matter of fact, they are part of the vendor organization.
In fact, CSAs are much more of a modern professional services resource, whose remit goes way beyond a focus on traditional implementation and integration by the PS organization. In performing this role, they serve the vendor’s objective of expanding customer adoption and usage of their Saas offerings in pursuit of agreed business outcomes. Effective CSAs may in some cases spend all their time walking the halls in a single customer organization for a lengthy period, or there may be several of them operating in different divisions, functions, or regions of, say, a global bank, major automotive company, large telco or utility, pharmaceutical or industrial conglomerate. In other cases a single CSA might spend a quarter of their time in four different customer organizations; and others may be part of a pool of CSAs serving tens of customers. It all depends on the dimensions of the customer’s organization and the complexity and/or scale of the problems being addressed.
For example, I recall the case of an e-signature-as-a-service company that deployed a CSA who had the business consultant profile I described above to a major strategic account which in this case was a global IT systems company. The first deal was worth just under $100k; within eighteen months, the e-signature service had been deployed as a specific solution for 180 different use cases and groups of users in many different countries, and the monetary value of the relationship had reached $6m. a year. This was largely due to the fact that the CSA had walked the halls in this account, in many different locations, on a virtually full-time basis, for all of those 18 months. Would the customer have adopted that many different applications of the e-signature service on their own? Maybe. Would they have done so in such a short period? Knowing how slowly things can happen in large organizations, I’d be very surprised.
Might they not have looked at and even chosen the offerings of a competing vendor if the first vendor wasn’t spending time with them, watching for new opportunities, evangelizing the service, helping to enable different groups of users, and keeping a keen eye on the multiple internal deployments? Probably – and of course this would put the strategic account seriously at risk of not renewing or, worse, defecting. Let’s be conservative and say that the CSA’s influence resulted in the customer adopting 180 solutions in half the time. If you were a CEO or executive in this company, wouldn’t you want to achieve $6m, in ACV in 15-18 months rather than only achieving it in three or four years, or running the risk of not achieving it at all? Opportunity management is first cousin to risk management. In technology, things change so fast that today’s favorite vendor is tomorrow’s out-of-favor failure – taking longer than necessary to realize the full value of an enterprise customer relationship is fraught with risk.
Gap #3 – Metrics: The third missing item, which the above case points to, is a magic metric that reflects accurately the value of driving accelerated growth among existing customers. Although most people agree that cultivating existing customers carries a far lower cost than landing new customers, this is not generally reflected in how company resources are invested.
Most standard Saas business metrics, such as CAC (Customer Acquisition Cost), bookings, ARR (Annual Recurring Revenue), ACV (Average Contract Value), and churn originated in the B2C and SMB world where Xaas adoption started. In enterprise Saas, they don’t reflect the actual dynamics of the business and thus fail to tell the whole story.
Inside each Saas company, there is a plethora of metrics driving the performance of each line function. But as Allison Pickens, Chief Customer Officer of customer success software vendor Gainsight, pointed out in a blog on the ‘ROI of Customer Success’, companies have no effective way of resolving the conflicts of interest resulting from each functional group having to perform to different metrics.
While marketing generates MQLs, sales pursues new logos, support manages ticket resolution time, and PS focuses on utilization, billings, and gross margin, CS is left to fight for renewal rates and upsell ARR with, as I mentioned above, insufficient and/or inexperienced resources. As Pickens goes on to point out, the CEO is left to referee the resulting conflicts. Which makes me ask: What uber-metric might the CEO and their team be able to use as a company-wide measure to determine how they should resource CS as a strategic, high-impact organization?
To gauge your company’s success in achieving expanded adoption, engagement, and utilization, I think it makes sense to track your Net Expansion Rate (NER), as some enterprise-focused vendors already do. I would argue that this name is more appropriate than its cousin, Net Revenue Retention (NRR), which only alludes to the defensive concern for retention without explicitly including growth of usage, users, and use cases. Considering that an enterprise customer who is satisfied with the products and services of their Xaas provider might expand their use by as much as 20 or even 50 times more than their initial commitment, expansion is a much more “investable” and galvanizing concept than mere retention.
Keep in mind that retention is quite distinct from defection; in the former case, a customer may simply not renew a contract because the original problem they were solving has gone away or is being solved by different means, whereas in the latter they not only cancel the contract but choose a competing provider, subjecting the losing vendor to a double-whammy that potentially puts the lost customer business out of reach for years if not for ever.
You might think that NPS (Net Promoter Score) could provide sufficient feedback to reflect the importance of customer success activities. Despite its effectiveness in consumer and SMB markets, I’m not convinced that NPS reveals a complete picture when it is used with enterprise customers. How many busy corporate executives and managers whom you know would interrupt their work to put their candid thoughts into a simple questionnaire that they are asked to fill out online? That said, NPS undoubtedly has some value, especially when it can be tailored and conducted via phone or in-person interviews. But it’s not clear to me that it is sufficient to inform strategic or operational decisions by CEOs and CCOs to resource Customer Success appropriately partly because it doesn’t measure successful outcomes for the customer’s business.
Magic Metric for Customer Success
So I think we need a more powerful measurement of the effectiveness of customer success when practiced in part as a high-impact consultative discipline in the person of the CSA. Something that indicates clearly the delta between deploying a CSA to an account versus relying on classic support resources which tend to only be activated reactively, when something goes wrong.
To be clear, part of the CSA’s value is to anticipate and head off problems in the customer organization before they become problems. In most cases, there is absolutely no reason for customers to not renew or, worse, to defect. Indeed, the effective defection rate in enterprise customers should be close to zero, in contrast with higher-volume businesses where 5%-10% or greater rates of attrition are perfectly normal.
One approach is to compare cohorts of major accounts or strategic accounts, representing 10%-25% of a company’s installed base, where a CSA is deployed vs. situations where they have yet to be deployed to any significant degree. It is here that “Time-to-10x”, or “Time-to-50x”, where “x” is the value of the first deal, becomes a key Time-to-Value metric. As Totango, another customer success software vendor, has taught us, with enterprise-level customers you should expect that they will do 95% or more of the total business they do with you after signing the first deal.
Time-to-50x may or may not become every company’s “magic metric”. But I advocate at minimum that leading companies commit to a tracking mechanism along these lines in order to ensure a persistent commitment of resources to realize the full growth potential of enterprise customer deployments as fast as is feasible and reasonable for both parties. Just as the case of the e-signature company demonstrates, 50x or even 30x are both feasible and highly desirable multiples to aim for in a 6-8 quarter timeframe, depending of course on the value of the initial deal to land the customer.
The more highly committed multi-million dollar accounts that you can develop, the more powerful and sustainable your company becomes, because these customers have a vested interest in your survival and thrival, and they influence each other in their peer-referencing conversations that take place when vendors are out of earshot.
In summary, for ambitious Saas companies I advocate a strategy that focuses on realizing the extraordinary growth potential of your enterprise customers, a role in your organization for the catalytic resource that can have the greatest impact on accelerating customer adoption and engagement, and a time-to-value metric that recognizes the impact of CSAs in halving the time it takes to take key customers from small initial commitments to much larger ones.
Beyond measuring time-to-value, it is also well worth tracking (and stimulating) those customers that show greatest potential for, and track record for, providing radiating references. This topic is for another day.