Category: customer success
Posts
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How much can a customer success manager manage? I’d heard the wisdom of $1-2M in ARR per year and around 80 accounts. But I hadn’t come across any data. Last summer, Gainsight posted the results of their survey on the topic. The truth is most CSMs manage between $2-5M in ARR and somewhere between 10-500 accounts. But it varies by segment.
The charts above display Gainsight’s data. I’ve reformatted them to compare segments side-by-side.
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When you’re selling a SaaS product to a potential customer, you have to convince them switching is worth the effort. And once you’ve sold the product, you have to do the opposite: convince the customer that switching to anything else isn’t worth it.
In chemistry, there’s a notion of an activation energy. A Swedish scientist Svante Arrhenius coined the term to describe the minimum amount of energy required to start a chemical reaction.
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There many ways of measuring a SaaS company’s efficiency: magic number, payback period on cost of customer acquisition, lifetime value to cost customer acquisition ratio, quick ratio. These metrics primarily focus on measuring efficiency in customer acquisition. But, a software company’s true efficiency also have to include the cost to service contracts. A SaaS company’s revenues are a collection of annuities, contracts that pay fees on an ongoing basis. And the goal of a subscription businesses is more than to acquire those streams, but to nurture and sustain them.
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As a SaaS startup grows, recurring revenue begins to fuel the company. Not too far into the future, the existing customer base begins to contribute more of the startup’s revenue than new customers and bookings. Each startup will observe this revenue composition transition at a different point in its evolution because it’s a function of growth rate and churn rate. This evolution demands a focus on retention, upsell and cross-sell.
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Financial discipline is a hallmark of great companies. It’s what enables businesses to build exceptional go to market models, weather difficult times, and ultimately succeed. Sometimes, financial discipline in startups is imposed by financial markets, like in 2008 when the total amount of venture capital investment plummeted after Lehman imploded. Other times, financial discipline is imposed by founders and management teams. The tweet above is from Lew Cirne, founder and CEO of New Relic, a $1.
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Compensation structures are one of the most interesting questions facing customer success organizations in software startups. How should customer success leaders structure their team’s compensation in order to align the objectives of individual customer success managers with those of the larger business?
At the Customer Success Summit, Boaz Maor, VP of Customer Success at Mashery presented his rubric for answering this question. I have copied his table below.
Management ObjectiveExamplesWeight Product AdoptionConsistency of feature usage, the fraction of active seats10% Program Expansion New use of other product features and services; new department using product15% Value to CustomerIs the customer measuring ROI from our product?
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As I prepared the S-1 analysis for ServiceNow, the third largest public SaaS company in the world, I came across a section in their latest annual report called Key Factors Affecting Our Performance in which the company describes the two ways they evaluate churn. One is common, but another is unusual. Below I’ve quoted their definitions.
Upsell rate. To grow our business it is important for us to generate additional sales from existing customers, which we refer to as our upsell rate.
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At Gainsight’s Pulse Conference on Customer Success, Mike McKee of Rapid7 spoke about the structure of his customer success team. He projected a slide, which I’ve copied in the image above, that depicts the way Rapid7 sells a contract, deploys its software, engenders adoption and expands accounts. It’s the best visualization I’ve seen to describe the sales and customer success process and the inter-team collaboration required to be successful.
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At the Gainsight Pulse conference yesterday, I moderated a panel with Boaz Maor, VP of customer success at Mashery and Mike McKee, SVP of customer success and services at Rapid7. During the panel, both men described their path to building substantial customer success organizations at their respective companies. Boaz’s team numbers 60 people, and Mike’s exceeds 160.
YearAdoptionRetentionExpansion 201420%70%10% 201535%55%10% Over the course of the panel, we discussed the ways to recruit, structure, and manage vibrant customer success teams.
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Every SaaS company should be focused on mitigating churn because greater retention enables a business to grow far more rapidly, to reduce the cost of customer acquisition, and to slash the amount of capital required for the business to grow.
But there’s one additional reason to focus on churn: predictability. The more dollar churn a business creates, the less predictable its performance - and vice versa.
Let’s paint the picture for a hypothetical startup which generated $2M in revenue last year and forecasts growing to $5M this year for 150% annual growth.
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Each quarter, Zendesk releases a Customer Satisfaction Benchmark to help companies build more effective customer support teams. The Q4 2014 differs from the previous in an important way. Instead of comparing companies in the same industry, for example, Education, Zendesk clustered companies with similar customer support characteristics, including ticket volumes, product support complexity and a few others, which revealed some important conclusions.
Zendesk found four clusters of support organizations listed below in increasing order of sophistication:
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Thanks to Bill Macaitis, current CMO at Slack and former CMO of Zendesk, who inspired and co-authored this post
When discussing customer success for SaaS startups, the conversation focuses mostly on retaining customers and reducing churn. These are two fantastic benefits with meaningful return-on-investment. But great customer success organizations can meaningfully impact another critical part of the customer lifecycle, customer acquisition, by catalyzing evangelists to refer new customers.
Let’s examine a hypothetical SaaS company that acquires 1,000 customers though sales and marketing.
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It’s hard to overstate how powerful negative churn is for a SaaS company. Both New Relic and Zendesk have grown to billion-dollar-plus publicly traded businesses by achieving fantastic negative churn figures: 114% and 120% respectively. in other words, each year existing customers pay these businesses 14 and 20% more than last year.
The recent 2014 SaaS benchmark survey aggregated by Pacific Crest and Matrix indicates that expansion revenue accounts for between 8-26% of total annual bookings, increasing as the company scales.
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Negative churn is an incredibly attractive characteristic of a SaaS company because it means that customer accounts are like high-yield savings accounts. Every month, more money comes in, without much effort. This is a powerful effect and can fuel SaaS companies to huge success, as we saw in New Relic’s S-1.
The concept of negative churn is a bit amorphous so let’s illustrate the impact on a startup. The chart above plots the revenue growth of a hypothetical SaaS company for a year.
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At some point, most startups will begin to measure their customers’ happiness. Customer satisfaction is an important predictor of loyalty and can foster fantastically efficient word-of-mouth growth. Many companies employ Net Promoter Score to quantify customer satisfaction. NPS measures the fraction of a customer base which are promoters and detractors of a company’s product. I’ve been told that NPS scores greater than 50 are impressive, but this is simply a rule of thumb.
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When I started in the venture business and met software companies, I never heard the words customer success during pitches or throughout diligence or in board meetings. A few years later, customer success has become equal in importance to sales and marketing and engineering and product within SaaS companies. The steady increasing drumbeat of the Customer Success mantra is reflected in Google search traffic, whose volumes have tripled since 2009 .
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Customer Success is a relatively new discipline in the Software-as-a-Service world. Consequently, there are many unanswered questions about how best to build and manage great Customer Success teams for SaaS companies. Because the financial impact of a great CS team is compounded monthly and can meaningfully increase the growth and decrease the cash needs of SaaS startups, it’s critical for CS leaders to get it right.
Last night, I attended a dinner with many heads of Customer Success from prominent valley SaaS companies.
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Yesterday, I spoke on a panel at the Gainsight Pulse conference with Aaron Ross, the author of Predictable Revenue, Jason Lemkin of Storm Ventures who authors SaaStr, and Brian Stafford, a customer success expert from McKinsey. It was great fun to be on the panel and discuss how customer success is transforming SaaS companies by increasing revenue growth, decreasing capital needs, building better products and consequently retaining more customers. I’ve embedded my slides below.
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One of the key metrics that I don’t think gets enough notice when reviewing the health of a SaaS business is revenue-at-risk or RaR. For SaaS businesses with quarterly or annual contracts, each month some subset of the customer base’s contracts must be renewed. The RaR is the sum of the revenue from these customers in a given month or quarter. RaR is a useful measure because it captures the company’s opportunity to minimize lost customer revenue.
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Churn is one of the most important metrics for businesses. Churn dictates customer lifetime, lifetime value (CLV), customer acquisition spend and customer success spending. In short, churn is pivotal number to evaluate a startup’s business, both for founders/management teams and investors.
Unfortunately, accurately measuring churn rates/lifetime value is more complex than I initially thought. I was researching the topic after Ryan Shank asked me how best to calculate an average customer’s lifetime value.
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Credit: National Geographic
I was lucky enough to spend some time with Monica Adractas, a former McKinsey partner who is now Churn Czar at Box. She and I chatted about the challenges in managing churn and her view on how to handle it. I thought she had some terrific insights and a clear understanding of the methods to reduce churn from her experiences. These are my notes from that conversation:
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Every SaaS business suffers from churn. If churn isn’t managed properly, the lost revenue from churned customers offsets new revenue and the business flat-lines or suffers negative revenue growth. I’ve seen startups employ three patterns for offsetting churn: acquiring new customers faster, upselling existing customers to buy more software, or structuring pricing to grow with customers.
Each strategy requires different levels of investment but achieves similar results. These strategies are often deployed in addition to a customer success team, which require their own investment.
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It’s an important question and one that arises most often as a SaaS startup scales. Churn, masked by growth, becomes a limiting factor of growth. How much should the business invest in managing churn? Our SaaS benchmarks from earlier this week tell us the average public SaaS company has a 3% monthly revenue churn or a 2 year lifetime and a sales efficiency of 0.8, which implies a 5 quarter pay back period on cost-of-sales and cost-to-serve.
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If a typical SaaS business loses about 2 to 3% of their customers each month to churn, the business must grow by at least 27% to 43% annually to maintain the same revenue.
The idea written as an equation: Revenue Growth = Customers x Avg. Contract Value x (Growth Rate - Churn Rate)
At the beginning of a SaaS startups' life, when the company generates $1M in annual revenue, churn in absolute dollar terms is small, about $300k for the year.
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The three words roll off the tongue: monthly recurring revenue (MRR). What’s not to love about subscription models? Negative working capital, predictable revenue growth and an average of 13x market cap to annual revenue in the public markets, with some darlings reaching 50x multiples. The list goes on. But the words recurring revenue belies one small detail. These recurring customers must renew their subscriptions, at which point another three word phrase is uttered: revenue-at-risk, the amount of MRR that might be lost to customers who choose not to re-enlist.