The following is an excerpt from Bill Cushard’s article “The Business Model Innovation of Customer Success”.
We are thinking about Customer Success all wrong. We think it’s a function. A department. A post-sales team. The enlightened among us think CS is a philosophy or even an organizational design principle. That’s better, but still not quite right. I mean, what am I supposed to do with “Customer Success is a philosophy?” I have no idea. After spending two and a half years running a SaaS business as a general manager with P&L ownership, I have come to this realization in my thinking: CS is a business model innovation.
To understand what I mean by business model innovation, we must first define business model. According to Alex Osterwalder, “a business model describes the rationale of how an organization creates, delivers, and captures value.”
Notice the three parts of this definition: create, deliver, and capture value. All three are required in order for a business model to work. A mistake I see Customer Success teams make is focusing solely on “delivers,” ignoring “creates,” and “captures.” When a Customer Success team over-indexes on delivering value, the primary purpose becomes retaining customers, which seems like a noble pursuit until you examine the behaviors of a retention mindset.
The downside of a retention mindset
Retaining customers is defensive. The mindset is, “If we are going to retain this customer, we have to get them to log in more or get them to use the software more or build a better relationship with the champion or get them to understand the value they are currently realizing. We must compel or persuade customers to act in ways we want them to act.” When a customer renews, we are relieved that we got the renewal at the same price as the last contract. We celebrate it.
I know what you are thinking, “Bill, that is a good thing. We saved/retained/turned around that customer by delivering value. What’s the problem?”
I see two [business model] problems.
- You didn’t create new value.
- You didn’t capture a portion of that new value.
Here’s another way to look at it. A CEO came to me for advice on how to get her team to focus on net revenue retention (NRR) and said to me, “You know, I see my teams celebrate all these renewals, but I don’t see the value of the contracts going up. All of our costs are going up, including the raises everyone wants, but the prices we charge customers are not. This is not gonna work.”
This is what happens when a software subscription business focuses primarily on delivering value and retaining customers. There is no “what’s next.” No forward-thinking about how to continuously help customers grow.
The upside of business model thinking
Software companies that understand their business model get all of their teams rowing in the same direction by getting everyone involved in all three parts of the business model:
- Create value
- Deliver value
- Capture value
The “what’s next” mindset is built into the system (your business model). There is no need to upsell or for account managers to sweep in to “close the deal” or argue about who should own the renewal or waste energy on debates about whether people can sell AND be a trusted advisor. You will understand how this is possible as you read further.
A well-designed business model answers the question, “What’s next?” It creates a flywheel effect of the following:
Step 1: Create “something” that solves a problem
Step 2: Deliver that “something” to a customer
Step 3: Capture 10% to 15% of the value of that “something” with reasonable pricing
Step 4: Repeat this process with existing customers. FOREVER.
Steps one through three are simple in the sense that most software companies already do this. The founder noticed a problem in the world, built a product to solve it, and found customers willing to pay for that solution. Step four is where the magic happens, where the flywheel can start turning, and where many software companies mis-understand their business model.
A well-designed business model answers the question, “What’s next?”
When you get to step four, I assume you have already delivered on the one main value proposition that new customers bought your product to address in the first place; and that the product has been designed to address.
Step four is about “What’s next?” More precisely: “What is the next value proposition you intend to help a customer achieve; and if we do help a customer achieve that next value proposition, how much of that next, new value will we capture?”
Pause and think about that for a moment, and while you do, let me ask those two questions differently.
- What value proposition can we deliver next?
- What offering (that we must create) can a customer buy in order to achieve that next value proposition?
To over simplify what is happening here. If we operated our Customer Success in accordance with the business model innovation, at each renewal cycle (ideally before) we would identify the next value proposition that we are positioned to help the customer achieve. Better yet, the customer would identify the next value they want to achieve. We create an offering (or select an existing one) that will help the customer achieve this next value, and we charge a price such that a customer is willing to pay because of the value they will realize. “If we do this, we will save $100, I’d love to pay you $10 to do that. Where do I sign?”
So the flywheel of the business model innovation (step four from above) is:
- Create value
- Deliver value
- Capture value
- Create next value
- Deliver next value
- Capture next value
- Create next next value
- Deliver next next value
- Capture next next value
- Repeat. Forever.
It is similar to what Rav Dhaliwal calls the continuous sale. What Dave Jackson calls the next best value. If you look through the lens of business model innovation, you transcend debates about who owns the renewal, the customer relationship, and a quota. The business model is designed more like an algorithm and less like a customer journey with owners and silos and hand-offs and confused customers, “Who are you again? My account manager? Then what’s my customer success manager for? Wait, I should call my technical account manager for that? When do I call support? Oh, I should have put in a ticket instead of calling you? Sorry. I’ll try to get it right next time.”
All of this noise and friction becomes unnecessary.
Business model innovation is a Customer Success algorithm
The business model innovation of CS is an algorithm with the following rules:
IF a customer wants to realize this value proposition, THEN they need to buy that offering.
IF a customer wants to realize the next value proposition, THEN they need to buy the next offering.
Your job is to work with multiple teams in your company and write as many IF/THEN statements as you can, such that you can help your customers.
We called it “first” value for a reason
We, CS teams, just need to take one more step in our evolution. We are concerned with helping customers achieve value. One of our most important charters is to help customers achieve “first value” and help customers accelerate “time to first value.” All I am suggesting is that we don’t forget that we inserted the word “first” for a reason; because we know there is more value that we can create, deliver, and capture.
My call to action to you is this. Write down a list of value propositions that you could help your customers achieve over time. Then, prioritize that list using the model above, answering the question, “What’s the next value proposition I can help customers realize? And what is the next one after that?” Then write down the list of offerings you have (or need to create) in order to help your customers achieve those value propositions; and capture some of it.
The best resources for Customer Success teams this week
Risk Calculus and Social Norms
Here’s Ed Batista with a useful reminder as teams consider making in-person events virtual, or not: “We can legitimize others’ definitions of “risk” and “safety” and the resulting social norms that may differ than our own. I’m not suggesting that we should participate in activities that feel unsafe, or tolerate safety measures that feel oppressive. But we don’t need to stigmatize others’ choices and make them “wrong” in order to pursue the path that feels right to us.”
Customer Success: Defined for 2022
Lincoln Murphy has revamped his “Customer Success definitions” to reflect some changes in thinking. Consider how his definitions of Customer Success, CSMs, and Appropriate Experience match how your teams’.
5 Takeaways From OpenView's Podcast
Here’s a roundup from OpenView’s team on the top 5 things they learned on their show, BUILD. They’ve had some great guests on the show including HubSpot CEO Yamini Rangan. One takeaway: “It’s easier to say that you’re customer-centric than to actually be customer-centric. Most companies delegate this to user research, annual surveys or maybe the founder’s gut. It’s not enough.”
Discovering the New “North Star” KPIs for Customer Growth
TSIA’s Jack Johnson makes the case for shifting your focus from Gross Renewal Rate to Net Revenue Retention (+ see his advice on how to create incentives around renewal goals), and explains how Resolution Rate helps build a sustainable renewal engine.
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