The Missing “Magic Metric” for Customer Success
Philip Lay, Octopus Venture Partner, strategy advisor and managing director with The Chasm Group, continues his Land & Expand series, revealing the strategy, the role and the missing “magic metric” many companies could benefit from.
Despite considerable fanfare around the concept of customer success (CS), in most tech companies CS is still in its infancy as a strategy and an organising principle. After several years or so of field research and experience with SaaS companies, I’ve identified a critical missing metric which inhibits many companies’ ability to align with their customers’ target outcomes and thus maximise their growth.
Today it is par for the course to use bookings, Actual Cash Value, 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 Revenue Expansion (NRE) which goes beyond renewals/churn to focus explicitly on upsell/cross-sell.
But in order to maximise their success with major customers, enterprise-focused SaaS companies need to do 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.
This post will reveal the magic metric and detail a vivid, real-life example that shows the results a company can generate by adopting the right strategy, role and of course the metric itself.
Too often the C of CS stands for company success more than it actually addresses customer success. 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.
In addition, there are lots of CSMs around: Customer Success Managers, commercially incented former salespeople focused on achieving renewals and preventing churn. Conversely, there are very few CSAs: Customer Success Advisors, focused on advising customers how and when to increase their deployments for optimal results. The lack of a compelling metric allows exec teams to kid themselves that they “have customer success covered”. Typically, a CSM is (partially) assigned to any number of accounts on a reactive basis — crisis hits, they respond. But there is little to no cultivation of the opportunities throughout a large corporate customer organisation. On this basis, most SaaS companies achieve only mediocre or slow expansion whilst 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.
It’s all about 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 (Anything as a Service) adoption started. In enterprise SaaS, they don’t reflect the actual consultative and collaborative 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.
For example, 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 organisation?
To gauge your company’s success in achieving expanded adoption, engagement, and utilisation, 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 galvanising concept than mere retention.
Net Promoter Score (NPS): a complete picture?
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. This would subject 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 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 do you know who would interrupt their work to fill in even a simple questionnaire online? 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.
The “Magic Metric” for Customer Success
We need a more powerful measurement of the effectiveness of customer success. Especially 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 organisation before they become problems.
A time-to-value metric that recognises the time taken to move key customers from small initial commitments to much larger ones is the missing magic metric ambitious SaaS companies can benefit from.
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% — 15% or greater rates of attrition are perfectly normal.
One approach is to compare cohorts of major accounts or strategic accounts, representing say, 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.
I recall the experience of an e-signature SaaS company who 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 organisations, 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 watching for new opportunities, evangelising 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 this many solutions in half the time. If you were a CEO or executive in this company wouldn’t you want to achieve $6m in 18 months rather than not achieving it at all? I rest my case — until, that is, we manage to identify a more effective way of measuring the time-to-revenue and avoiding the opportunity cost of never achieving this level of customer engagement and, consequently revenue.
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. This will realise 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. These customers then have a vested interest in your survival and thrival. They influence each other in their peer-referencing conversations that take place when vendors are out of earshot.
Beyond measuring time-to-value, it is also well worth tracking (and stimulating) those customers who show the greatest potential for providing radiating references. This topic is for another day.
For more from Philip visit http://www.philiplay.com/