Customer Success: How Innovative Companies Are Reducing Churn and Growing Recurring Revenue - by Nick Mehta, Lincoln Murphy, and Maria Martinez
Date read: 2020-06-17How strongly I recommend it: 8/10
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Provides the history, justification, and values needed to implement a Customer Success organization within your company. Mainly focused on SaaS companies, it also applies to B2B and B2C non-SaaS companies. Includes the 10 laws of customer success and compares the service levels between high-touch, low-touch, and tech-touch.
Contents:
THE 10 LAWS OF CUSTOMER SUCCESS
- LAW 1: SELL TO THE RIGHT CUSTOMER
- LAW 2: THE NATURAL TENDENCY FOR CUSTOMERS & VENDORS IS TO DRIFT APART
- LAW 3: CUSTOMERS EXPECT YOU TO MAKE THEM WILDLY SUCCESSFUL
- LAW 4: RELENTLESSLY MONITOR & MANAGE CUSTOMER HEALTH
- LAW 5: YOU CAN NO LONGER BUILD LOYALTY THROUGH PERSONAL RELATIONSHIPS
- LAW 6: PRODUCT IS YOUR ONLY SCALABLE DIFFERENTIATOR
- LAW 7: OBSESSIVELY IMPROVE TIME-TO-VALUE
- LAW 8: DEEPLY UNDERSTAND YOUR CUSTOMER METRICS
- LAW 9: DRIVE CUSTOMER SUCCESS THROUGH HARD METRICS
- LAW 10: IT'S A TOP-DOWN, COMPANY-WIDE COMMITMENT
My Notes
Yes, you can show glowing growth rates for new customer acquisition, and that's a very good thing. But the allure and value of a recurring revenue business such as Salesforce is in growing the overall value of the installed base.
The general consensus is that there are two kinds of loyalty—attitudinal loyalty and behavioral loyalty. These are sometimes referred to as emotional loyalty and intellectual loyalty.
The premise is that there are customers who are loyal because they have to be (behavioral/intellectual), and then there are customers who are loyal because they love a particular brand or product (attitudinal/emotional).
As a vendor or brand, the latter is highly preferable for a variety of reasons: willingness to pay a higher price, less vulnerable to competition, more likely to advocate for “their” brand, and so forth.
Customer success manager simple role definition: individuals that help customers get the most value out of your products.
“In traditional businesses, the customer relationship ends with the purchase. But in a subscription business, the customer relationship begins with the purchase.”
It was this reality that led to the birth of the term shelfware. That was just a cheeky way to describe software that wasn't being used by the customer. That still happens today by the way. SaaS did not solve the adoption problem by any means. It just matters a lot more now than it did back then.
ARR stands for annual recurring revenue. It's also often referred to as ACV, or annual contract value. By either acronym, it is simply the annualized amount that customers are paying on a recurring basis for the software.
Many companies look at these same numbers monthly instead of annually and that's referred to as MRR.
LTV is the total dollars a customer spends (or is expected to spend) with a vendor during their relationship and is another key metric for a SaaS company.
In most cases, it takes 24 months or more of subscription revenue just to recover the cost of acquisition and onboarding. If customers are on annual subscriptions, as is often the case, they need to renew their contract with a vendor at least twice in order for the vendor to break even and start making a profit. Churn greatly exacerbates this challenge. And the urgency is even higher because most churn happens in the first couple of years because of the complexity of onboarding and adoption.
At its essence, customer success is the organization that focuses on the customer experience with the goal of maximizing retention and LTV.
There are three basic benefits that come from executing customer success well:
- Reduce/manage churn.
- Drive increased contract value for existing customers.
- Improve the customer experience and customer satisfaction.
Someone has to decide what the key metrics are by which success will be determined:
- Gross renewals
- Net retention
- Adoption
- Customer health
- Churn
- Upsell
- Downsell
- Net Promoter Score (NPS)
- Health checks
- Quarterly Business Reviews (QBRs)
- Proactive outreach
- Education/training
- Health scoring
- Risk assessment
- Risk mitigation processes
- Customer Success
- Financial = Revenue-driver
- Action = Proactive
- Metrics = Success-oriented
- Model = Analytics-focused
- Goal = Predictive
- Customer Support
- Financial = Cost center
- Action = Reactive
- Metrics = Efficiency-oriented
- Model = People-intensive
- Goal = Responsive
Customer success is an organization that drives revenue in two ways:
- Renewals (or avoidance of churn)
- Upsells
Customer success teams use data and analytics to determine which customers should be acted on, either because they appear to be at risk or because there appears to be an upsell opportunity or because there's a regularly scheduled event such as a QBR.
It's a great thing to improve your responsiveness, especially when it comes to customers. They appreciate it, and it makes for a better overall experience for both parties. But predictability takes this one step further—figuring out who to talk to before they need to call you.
When you turn your focus as a company toward customer success, especially if you are a recurring revenue business, some of that power will move to the person who owns retention. Over time, as your installed base becomes far more valuable than new business bookings, the power shift will continue accordingly.
One definition of customer success that I've heard is delivering on the sales promise.
“In a recurring revenue business, there's no such thing as post-sales. Every single activity is a pre-sales activity.”
One of the jobs of a great CSM is to always be asking the question, “Why does this customer need my help right now? What could we do or what should we have done differently upstream so I would not be needed for this task?”
The application of expensive resources in a high-touch model usually has a very simple retention goal—100.00 percent.
Customer success for low-touch customers can operate in a similar way, thus the stealing of the phrase just-in-time (JIT). JIT customer success means providing exactly what the customer needs at exactly the right time. Not a minute before or a minute after. These customers are not valuable enough for you to store inventory for them.
You'll find that the best way to determine CSM ratios is not by number of customers but by contract value (ARR). All customers are not created equal, so a $2 million per year customer can't be counted the same as a $20,000 per year customer.
It's important to also have a scalable mechanism in place to capture the customer profile so you're able to track and assess the ideal customers, including important metrics such as resource allocation, CAC ratio, net churn, and customer LTV. Various SaaS tools such as Salesforce, Marketo, Gainsight, and Clarizen have the ability to leverage the open application programming interface (API) architecture of these systems to connect them for seamless data flow, so it's possible to capture customer-fit criteria early in the go-to-market cycle and track these data throughout the revenue funnel.
In a recurring revenue business the concept of partial churn is also valuable to understand. That is simply the loss of contract dollars in a situation in which the customer does not leave you. Partial churn can come from a product churning, unused licenses being returned, or customers negotiating a deeper discount because of challenges they encountered working with you or a perception of receiving lower value than they originally expected.
The bottom line is that you must put proactive procedures in place to monitor the health of your customers. The more you understand your customers, their business needs, and the ways they are using your product, the better off you will be when it comes time for them to renew their contract or decide whether you continue to be their vendor of choice. Whenever possible, proactive outreach from your customer success management team, or intervention through your tech-touch channels such as e-mail, webinars, or community, can make a big difference in your long-term relationships and overall customer health.
Delivering wild success requires you to understand three fundamental things: How is your customer measuring success? In other words, what is the customer's unit of measure (time saved, incremental revenue, reduced cost, specific financial impact of increased quality), and what results does the customer need to declare victory? Is the customer achieving that value (or at least on a realistic path to achieving it)? What has the customer's experience been with you along the way?
In a recent customer meeting, a forward-thinking chief information officer (CIO) expressed to me his concern with many software vendors: “None of them challenge us. They come in, install the software, and then move on. I'd like to understand what we're currently doing that we should be doing differently. We're not just paying for a product—we want expertise as well.”
A good tool to use to help drive customer direction beyond first value is an effectiveness model—demonstrating value and progress (http://blog.nellofranco.com/2013/07/09/demonstrating-value-and-progress-to-your-customers/)—that you can use to set objectives and timelines to help your customers better achieve their business objectives via your partnership.
You can determine customer health anecdotally or scientifically. Ultimately, it will probably be a combination of both, but you need to tackle it in some way. Every company is different, so there's no one way to do this, but here's a list of possible customer health components that could be used to determine overall health:
Product adoption: How often do customers use the solution? Are they using your stickiest features? How many people are using it? Do executives use it? Is it used in board meetings, executive meetings, departmental meetings, and the like?
Customer support: How often does the customer call? How long is the average case open (how many Priority 1 cases vs. Priority 2 or 3, etc.)? Good, healthy customers usually call or use support with some regularity. This is a good indicator of customer health.
Survey scores: Marketing engagement: What happens when you send the customer a marketing e-mail? Does it bounce? Does the customer unsubscribe? Does the customer open, click through, or download? What happens is revealing, no matter the outcome.
Marketing participation: Do your customers provide references for you? Case studies? Speak at your conferences? Healthy customers do.
Contract growth: A customer's investment in your technology and services is a clear indicator of loyalty. If after five years a customer's contract is the same size as at the outset (or smaller), the customer is probably not as healthy as one whose contract has doubled.
Self-sufficiency: Customers who don't need you to help them use your product more effectively are usually healthier than those who rely on you to drive them forward.
Executive relationship: How good your personal relationship is with each customer, together with how high up the chain they go, can be a very important component of customer health.
Once accounts are established by segment, you can more easily decide how many accounts each of your CSMs can manage appropriately. Depending on the complexity of your solution and the customer's willingness to spend, the range for the number of high-touch accounts managed by an individual CSM can vary from 5 to 15 accounts, whereas your low-touch CSMs might be able to manage from 20 to 50 accounts or even many more.
High Touch Multiple in-person meetings during a quarter (depending on each customer's initiatives) QBR meetings Creation of a blueprint success plan One-to-one meeting(s) with your executive staff.
Your goal should be to interact with your customers on at least a monthly basis via your macro-communication strategy (company and product newsletters, regional user groups, annual customer user conference, etc.). The macro-communication strategy should be focused on all your customers (content might vary by segment), but the medium of delivery is the same for all.
To build and foster strong customer relationships and loyalty, you need to create a feedback loop. This strategy can be delivered through surveys, an electronic suggestion box, customer focus groups, one-to-one meetings, or a customer advisory board. You can employ one or all of these mechanisms, but the bottom line is that your customers need ways to voice their opinions on your product strategy, quality, customer support, enablement programs, company vision—or just to provide general feedback.
To strengthen your customer relationships and to build loyalty in this new era of recurring revenue businesses, follow three basic principles with your communication efforts: (1) communicate often, (2) set clear expectations, and (3) be as transparent as possible.
CSMs often work 12-hour days, fielding every question under the sun from clients as well as internal colleagues even when it has nothing to do with the CSM's responsibilities. They are the one-stop shop for dealing with customer challenges and questions all day, every day. Even when CSMs are talking to happy customers, it is usually about driving value by getting them to try out a new feature, encouraging more people to use the product, measuring the ROI, and more.
Focus on making the product intuitive. If your customer discussions are constantly about functionality and how to use existing features, you're missing out on the opportunity to drive value-added activities. If a person has to spend a lot of time to figure out the product, it will be less sticky and people will not want to use it. To start, take cues from how people are used to interacting with their favorite apps in their everyday lives.
Product advisory councils (PACs) and communities of practice (COPs) for functional business process areas are useful programs a client experience team can utilize to drive continuous improvement in all functions, improve the customer experience, and influence product design directly.
CSMs are on the front lines in this situation and know more about how your product is being used or is wishing to be used than anyone else in your company. It's healthy to think of them as field product managers to embrace this truth. The value of all that knowledge is realized only if it transfers from the CSMs to the Product Managers (PM).
What's the secret to ensuring that the customer sees value as quickly as possible after buying your solution? Work with the customer to establish concrete success measures. Implement iteratively for early value, achieving the simplest measure first and focusing on the others later. Adjust in real time, springing into action the very moment you realize expected value is at risk.
Also, confirm constantly. Don't make the mistake of assuming that just because the business sponsor defined metrics during the sales cycle and the customer's project team validated those metrics, they will remain the ones that matter: List the measures at the top of every status report and call attention to them during every check-in call: “Just checking in—these are still the measures that we care about for this phase, right?” At multiple points during the onboarding, connect directly with the business sponsor to validate the measures.
Your company will need to build out its order process to capture the necessary data at the level of granularity in which your company wants to be able to report on churn and retention (customer, contract, etc.). This includes capturing order type (new, add-on, renewal), upgrade/downgrade amounts on the renewal (recommended to track actual new product add-ons separately), reasons for downgrade at the stock-keeping unit (SKU) level, and reasons for cancellation.
The first steps are to define and gain agreement on the attributes of your happiest and healthiest customers and, then, define the attributes for your at-risk customers. These attributes could include use patterns, number of support cases, NPS, tenure, contract growth, or departure of key contacts or sponsors.
Customer success operations can help operationalize your company's customer success programs cross-functionally; it's not realistic to expect your customer-facing resources to have the bandwidth or the skill set to project-manage these programs successfully. In addition, customer success operations should help manage the underlying systems that help automate processes and provide the insight and visibility your company needs to keep customers for life.
Broadly speaking, you can think of three categories of metrics to explore: (1) customer behavior, (2) CSM activity, and (3) business outcomes.
Examples of CSM activity metrics may include: Frequency of various types of interactions with customers (QBRs, e-mail updates, phone calls) Support ticket volume handled by CSMs (rather than your support team) Timeliness of risk identification Effectiveness of risk mitigation efforts.
Examples of business outcome metrics may include:
- Gross retention
- Net retention
- Expansion
- Logo retention
- Customer satisfaction
- NPS
Empower the customer success team: In the same vein, if you've created a team to drive success with your customers, take measures to support it. Some things to consider: Make sure the title for the customer success executive is on par with the sales leader. Keep your CSM in the loop when a customer escalates to the management team. Let the CSM be the hero with customers if possible (e.g., ideally the CSM will tell the customer that you agreed to their contract change or road map request). Make it clear to the rest of the organization that the CSM represents the client's views.
Professional Services Primary Measurement: Utilization - Out of all of the hours available to be billed, how many hours were billed?
Training Primary Measurement: Number of Products Delivered - Whether it generates dollars or not, “# of products delivered” is probably the right measurement for a training team. Alternatively, you could measure this from the customer's viewpoint and use a metric like “# of customers/users trained”.
Customer Support Primary Measurement: Efficiency - The way that you measure a cost center is by efficiency metrics like “number of tickets closed per day per rep” or “total number of calls handled,” metrics that tell you whether you're squeezing the most out of your investment.
Implementation or Onboarding Primary Measurement: Time-to-Value
Customer Success Primary Measurement: Retention A good sales rep will initiate and build the relationship with the CSMs knowing the value they will provide in the process. In many ways, the installed base sales rep will see the CSMs in the same way a new business sales rep sees and utilizes his sales consultant—as necessary to help close deals.
The new world will sound more like one of these:
"We have 17 customers whose usage of our key features is down by more than 20 percent over the past six months and who either did not respond or gave us a negative score on our last survey. Let's contact every one of them, starting with the four that are up for renewal this quarter or are still in their first year with us. Let's also prioritize Acme because they have a 50 percent contract step-up scheduled for nine months from now. This week's priorities are the seven customers who have P1 or P2 support cases that have been open more than 10 days and who are more than 30 days past due on their most recent invoice. We have five customers where our executive sponsor moved on to another job or where our user champion unsubscribed after our last marketing e-mail. Let's talk to them as soon as possible. We have over 30,000 customers who have not even tried the new collaboration feature in our last release. Let's get an e-mail out to them inviting them to view the on-demand training video and come to next week's webinar on this topic."
"Hey John, it's Dan, your account manager. I just wanted to thank you for attending our webinar last week and personally follow up to see if you needed any more information or guidance on that topic. I also noticed that you've opened up three support tickets in the past two weeks regarding reporting. Let me know if you want me to review any of the reports you are working on."
The ability to track the important activities is the same as with a CRM—the activities themselves are the only variable: Calls made Meetings completed Actions triggered Actions closed (by category) QBRs completed Other milestones completed Renewals/upsell results Customer health score Customer satisfaction score E-mails sent/opened/clicked-on Account plans created/updated.