Synopsis: Customer success is a broken promise in 95% of tech companies. CEOs, CROs and sales teams are generally preoccupied with chasing new logos, and scarce CSMs scramble to minimize churn and secure upsells. Frequently, they have no idea about their customer’s business objectives or success criteria. In a downturn like today’s Covid-19 crisis, the risks of cancelled contracts and lost relationships is heightened, just when winning new logos is harder to pull off. This is exactly the time when executives and their customer-facing staff must engage more fully with their major customers – and really help them achieve their desired business outcomes.
“Don’t celebrate closing a sale, celebrate opening a relationship.”
– Patricia Fripp, speaker, author and entrepreneur
“Customer success is simply ensuring that your customers achieve their desired outcome through their interactions with your company. That’s it.”
– Lincoln Murphy, growth consultant, Sixteen Ventures
“Every company’s greatest assets are its customers, because without customers there is no company.”
– Michael Leboeuf, business author & former professor, University of New Orleans
For many if not most enterprise SaaS companies, customer success is still a new game, and one they are playing with a weak hand. Resources are thinly spread, and customer success teams lack skills or know-how in enterprise customer engagement. Most tellingly, post-sales teams lack domain expertise in the actual business problems and don’t yet have reliable service partners who can pick up the slack. Yet any marketing expert will tell you that it costs much more to land a new customer than to get additional business from an existing one. My field research tells me that the difference can be as little as 3x and as much as 10x or even 15x in terms of opportunity cost and direct cost of (new) customer acquisition.
How Can You Tell if Your Company is Lagging in the “Expand” part of Land & Expand?
I think there are a number of quick litmus tests CEOs and boards can apply to know where they stand in terms of effectiveness at expanding customer relationships – these are a few:
- NPS score for the latest year is markedly lower than competitors’ scores.
- Churn is as high as, say, 12% or even 20%+ per annum – and no one knows why.
- Key customers keep questioning whether or not to renew their contract.
- Sales team can’t explain why customer X or customer Y signed up in the first place.
- Company is lagging competitors in managing to grow key accounts.
- Too few of your major customers are acting as radiating references for new business.
Either way, churn above, say, 5% per annum is unforgivable in the enterprise SaaS game – even though many companies experience churn of 12% or more per annum, and seem to think it’s reasonable. The problem is, as everyone knows, that high rates of churn make it very hard to sustain a suitable growth rate in a subscription-based business.
Whose ‘Success’ Are We Talking About Anyway?
Despite the ongoing transition from the perpetual license, on-premise business model to the cloud/subscription model, most enterprise SaaS companies today are organized and resourced primarily to provide only reactive implementation and support services to their customers. The stated intentions might be more noble, but the actual actions speak loudest. Everywhere I look, customer success is primarily a commercial function, and even then the resources are thin on the ground. This, despite the efforts of customer success companies like Gainsight, Totango and others to educate the tech market and automate key aspects of enterprise customer engagement. I’ve concluded that since we are still in the first decade of customer success being treated as a priority, most SaaS companies are still at stage 1 of their maturity in this game. So, customers who expect to be the center of attention and main beneficiary of “customer success” activities have another think coming.
For the vast majority of SaaS companies today, customer success is more about their own success in renewing contracts or up-selling customers, with little or no thought given to whether their customer is actually achieving the business results that motivated their decision to sign up. While renewals, up-sells and cross-sells may be an indicator that a customer is achieving success in using the product or service, this is not necessarily a reliable guide. Customers often renew while the jury is still out on the success of their investment, because they are still in the early days of their deployment. Others feel compelled to keep investing because they have developed some kind of dependency on things eventually working out, or because they lack options. This is particularly true when they’ve signed up with the dominant player in a given category. Examples include Oracle, SAP or Adobe, that have largely acquired their way into SaaS, and pure-play SaaS players like Salesforce (which has also made tons of acquisitions), Slack, Hubspot, Twilio, DropBox, Zendesk, and others.
Interestingly, many of these companies have had periods of managing customer success quite effectively. But they tend to fluctuate wildly in their commitment of suitable resources to existing customers. It’s always puzzling to me why even very successful SaaS companies blow hot and cold on this issue because, as everyone knows, “an enterprise customer in the hand is worth five in the bush” (yes, I’ve rather corrupted the original saying about birdies in the hand, but hopefully you get the point). I can only conclude that it’s due to the cultural problem in tech of being fascinated by bright shiny objects (such as a new customer) rather than by attending to the needs and preferences of existing customers.
Cause and Effect – How Pre-Sale Tactics Cause Post-Sale Issues
The problem usually starts upstream, before the customer signs on the dotted line for the first contract. In their product-centric mindset, sales teams spend most of their time with IT types, focused on proving that their technology fulfills all the technical requirements. While expending enormous energy to differentiate their product’s capabilities against those of their closest competitors, they are relatively incurious about their prospect’s higher-order business problems and success criteria. In practically any other industry, this behavior would be considered unprofessional. But in tech, it’s still the norm.
Furthermore, after the sale is completed, many vendors still consider their customer success job to be done when the product or service is installed and “turned on”. Furthermore, they see upsells and cross-sells as simply a new commercial transaction rather than an indicator of successful ROI for their customer. This misalignment is clearly signaled by how the vendor organizes and resources its Customer Success function – almost invariably with commercially incented CSMs whose main motivation, inevitably, is to make their renewal or upsell/cross-sell quota, and then leave.
These basic weaknesses in the overall customer engagement process represent critical points of failure. While this is a problem during up-markets, it can become fatal during downturns like the one we are experiencing, when corporate organizations are under severe pressure to question current investments and expenses.
Measuring the Wrong Things Causes Companies to Chase Revenue at All Costs
“It costs 7 times more to attract a new customer than to retain an existing one.”
– Common wisdom
While B2C companies measure the cost of acquiring customers (CAC) quite diligently, most B2B SaaS companies, especially those that are more focused on enterprise organizations than small business customers, tend not to measure their real CAC very closely. If they did, I can bet that they would train much more of their resources on expanding existing customer relationships than they do today.
Another part of the problem becomes clearer when you see the revenue-related metrics that most B2B SaaS companies use, probably influenced (not necessarily for good reason) by the precedents set in the B2C world. Most management teams prioritize ACV (Annual Contract Value of individual customer deals), ARR (Annual Recurring Revenue for the whole business) and Churn to gauge their overall success. In fact, CEOs and Boards obsess over these three metrics.
Combining the organizational error of keeping pre-sales teams separate from post-sales teams (a leftover from the bad old days of the perpetual license business model), and incenting pre-sales teams to chase new logos rather than rewarding them for expanding existing relationships, CEOs and leadership teams persist in chasing the most expensive form of revenue in order to conquer new scalps.
While during easier times the realities of CAC for new logos vs existing customers can lay hidden from view, once the CFO starts looking under the covers it becomes clear how costly the fixation on winning new logos can prove to be. Thankfully it is during downturns that sound financial management gets real attention.
Three Key Metrics for Successful SaaS Companies – Existing Customers Are Your Best Prospects!
The three metrics that I believe really demonstrate the profitability and long-term sustainability of an enterprise SaaS business are TCV (Total Contract Value, including one-time fees), CLTV (Customer Lifetime Value – measures the total revenues generated by each individual customer relationship over its ‘lifetime’ of, say, 5-10 years), and NER (Net Expansion Rate, measured on an annual or other basis), also known as NRR (Net Recurring Revenue), across the business. NER (or NRR) incorporates churn as a minus against the pluses of upsells, cross-sells, and new business ARR.
Most B2B SaaS companies have NERs of slightly above or below 100% per annum, mostly because of some combination of average growth and high churn rates. Successful companies should expect to achieve NER of around 140% year over year, assuming growth at say 50% p.a. and churn at 10% (still rather high). Quite a difference between best-in-class and the rest!
To my mind these three metrics deserve to be prioritized over ARR and ACV. And, as I indicated earlier, churn – undoubtedly a key metric in high-volume businesses, but not enterprise software – needs to be very low or virtually negligible in a well-managed enterprise SaaS business.
Note: CAC can be considered here in order to gauge the profitability of the business, provided that management and sales teams are willing to measure the real direct and ‘opportunity’ costs related to winning each deal, which is not a trivial exercise.
A Key ‘Land & Expand’ Metric – “Time-to-20x”
With respect to maximizing returns from investment in expanding each significant customer relationship, enlightened self-interest is the key. To the degree that, over time, any SaaS vendor should be able to help each major customer solve bigger problems in different parts of their organization, it stands to reason that the customer will increase their TCV commitments, thus accumulating greater CLTV. By adding value to customers, over time the SaaS company receives greater value – win/win.
One way of driving the right behaviors of sales and customer success teams to be in service to the success of your customers is to separate your top 10%-20% of major customers as a distinct cohort. Then, in an account planning exercise that incorporates input from key stakeholders in your customer’s organization:
- Identify the business problems that they agree they need to address,
- Map these to your company’s product and service capabilities,
- Develop a plan to address these issues in an agreed sequence and timeframe,
- Agree the resources that each side will deploy – financial resources as well as people.
From this exercise, develop an account plan that exploits all of the expansion parameters – increased usage, greater number of users, new use cases, new divisions or regions to be involved, or new functionality/capabilities deployed. This will provide the basis for the increased investment by each customer as they expand their overall usage of your products and services, which can often become 5x or even as much as 50x in relation to the first contract based on the business problems that they need to address.
For example, in a cohort of 10 major customers, you take the value of the initial contract with each – say, $250k in TCV – and develop a two-year account expansion plan to generate $3m in TCV. This would represent an increase of 12x within eight quarters. Leading SaaS companies as well as young startups are perfectly capable of achieving this type of multiple with selected customers. In fact, I’ve seen many cases of 50x increases in this timeframe. But this requires a degree of professional account management, something which not ever company practices.
Crucial Role to Add – Customer Success Advisor
“Approach each customer with the idea of helping him or her to solve a problem or achieve a goal, not of selling a product or service.”
– Brian Tracy, speaker and author
As I’ve written about in prior blogs, leading enterprise SaaS companies such as Docusign, ServiceNow or Splunk have deployed the equivalent of ‘customer success advisors’ (CSAs) – business-savvy consultants who are worth their weight in gold – to walk the halls and keep on the lookout for expansion opportunities – new groups of users, new use cases, new divisions or regional offices, etc.
For some reason, most tech companies have been reluctant to hire or contract this type of force-multiplier in their ranks, in part because “customer success” is nothing more than a renaming of their professional services and/or customer support functions. Besides this reason, product-centric CEOs are unsure of how to hire and manage a team of CSAs; they also question the relatively high direct cost of employing or contracting these highly skilled individuals, no matter how productive their contribution is, or how cost-effective they really are. In truth, each productive CSA pays for themselves several times over in accelerating and expanding customer commitments to using the vendor’s products and services.
Covid-19 Crisis – A Blessing in Disguise
No one in their right mind dreams of experiencing a severe downturn in business activity, much less a pandemic. But as we all get used to living with the current crisis, one thing that most entrepreneurs and executives have more of is time: time to pay attention to the Important But Not Urgent priorities that get sidelined in busier times. So what should people in different roles do differently today, to fulfill their Customer Success promises?
What Can CEOs, CROs, and Sales Teams Do to Make Customer Success Work for Customers?
“Get closer than ever to your customers. So close that you can tell them what they need well before they realize it themselves.”
– Steve Jobs
- STOP prioritizing new logos over existing customers – you’re missing your main growth opportunity and incurring unnecessary costs of customer acquisition at a time when new customers are harder to close.
- START meeting with key customer execs every week to track customer success milestones and review new expansion opportunities – and adjust your metrics accordingly.
- INCREASE your sponsorship of an effective customer advisory board (CAB).
CRO and VP Sales
- STOP chasing deals at all costs – all dollars are not equal, as exemplified when for example a deal goes bad and becomes a sink for company resources.
- START requiring that sales teams develop an agreed business case with the customer before deploying technical and other resources to close deals.
- INCREASE your focus on account development plans for every strategic customer, to be reviewed/refined quarterly or even more frequently.
- STOP treating opportunities as (purely) immediate sales transactions.
- START treating customers as long-term relationships – and develop coherent account plans accordingly.
- INCREASE your focus on understanding your customers’ strategic and tactical business priorities.
Back to the Customer Success conundrum.
My hope is that CEOs, sales and customer success teams use the current downturn to explore the real potential of their major customer relationships for the long haul. Once a contract has been signed, get your customer success advisors (CSAs) to work with their counterparts in the customer’s organization to ensure successful outcomes for both sides. And keep your CSAs engaged to stay on the lookout for new problems to solve.