It’s budgeting and planning season, so I recently chatted with Beth Yehaskel, Revenue Optimization and Customer Success Architect at Winning by Design (also former Head of Customer Success at Dropbox) for the ‘nuffsaid podcast about this topic. Beth is one of those deep-thinkers who has opinions on a range of topics (which we love). And her take on budgeting conversations is no different.
In our interview, Beth shared the difference between a CS org that’s run as a profit center and one that’s run as a cost center. She also covered how CS leaders need to tie increases in retention to Lifetime Value (LTV) and the important difference between providing “customer impact” and “customer value.”
Here’s an excerpt from our conversation, edited for clarity. You can also listen to the interview on the ‘nuffsaid podcast.
CHRIS: You’ve said before “Customer Success needs to be designed as a profit center not a cost center.” Where did that philosophy come from and what does it mean?
BETH: Customer Success originally started out as a response to recurring revenue customers not sticking around. Companies realized somebody needed to work with customers to keep them happy enough to keep renewing. Consequently, a lot of companies continue to view CS and all the associated functions—CSMs, Support, etc.—as being a cost of software, or just something customers get when they buy. In these companies, the function isn’t not viewed as a source of revenue.
The exception to this might be the implementation team, especially for companies that charge for implementation services. But apart from that team, anything associated with the post-sales customer journey is often viewed as a cost center.
But here’s the thing, and more companies are realizing this: if you're really taking care of your customer base and doing the things that will bring churn down, renewals up, and most importantly expansion numbers way up, you can get to profitability far faster and cheaper than if you only focus on making improvements to getting new customers in the door.
CHRIS: What are the signs that a CS team is operating as a cost center, not a profit center?
BETH:
- Your CSMs focus on renewals, and that’s it. You don’t have a detailed customer journey that maps out everything that gets customers to their desired impact with your product.
- “CSMs aren’t salespeople”; CSMs either don’t want to sell or aren’t given the opportunity to do so. It’s easy to understand why CSMs may not want to sell—however we’re talking about “profit centers” here. CSMs are well-positioned to see upsell and expansion opportunities and should be trained and held accountable for doing so.
- When asking for budget, your narrative includes rules of thumb like “1 CSM per $2M in revenue”. So your CFO constantly looks for ways for Customer Success to be more efficient.
CHRIS: So if CS is doing a good job engaging customers, and growing & expanding customers, a company can get to profitability more quickly. How do you have that conversation with the CFO?
BETH: If you start looking at the Customer Acquisition Cost (CAC) for new revenue, it's going to cost a whole lot more to get new customers in the door than it is to grow existing customers.
Let's say that it takes 14 months for your average customer to pay off the spend that used to actually acquire them. If a customer then churns out at 12 months, you've essentially lost money with this account. Be that because it wasn't a good fit or they weren't seeing impact, whatever the reason. However, every month beyond the 14 months that you can keep that customer is going to go towards increased profitability towards your revenue.
Beyond that, if you can really spend time expanding from the base, which is a lot cheaper than getting new business in the door, and you have the advantage of hopefully articulating the value that you provide and the impact you provide to customers, then you can really see compound growth. The longer you can get that LTV going, the lifetime value of your accounts, and the more spend over time, the faster you will get to profitability.
CHRIS: What’s your advice for CS leaders who are in budgeting mode and they're about to make this pitch to their CFO? What argument to use with the CFO that CS is the right place to invest the next dollar to improve company results?
BETH: Focus on the numbers. If you're talking to a CFO, you want to be very data focused.
Let's say that you have a churn rate that's 15%. If you can make changes to the customer journey and adjust the number of accounts a CSM has and how they manage those accounts so that you can reduce that churn rate by 5% or 3% even—calling out those numbers shows a huge impact for what is relatively low cost for extra CSM headcount.
Efficiency is big as well. When I say invest in CS, I'm not just talking about adding CSMs or adding Support people. This also goes towards making sure you have the processes in place so that you have mapped out customer journeys that are appropriate for each segment, whether you have high-touch segments, low-touch segments.
What do customers need to renew to get that impact to buy more? Make sure you have that journey mapped out and all the things that need to happen for those results that you're looking for. And then just do the math on how much time it takes for those different tasks to get accomplished and how many bodies you have and how many hours you have in the week.
If you start mapping that out against the revenue associated with a reasonable reduction in churn and an increase in expansion, then you can usually start getting into some really interesting conversations with the CFO.
One final note on this: Companies focus so much on their Sales teams because they're the ones bringing new revenue in the door and of course revenue is what makes your business successful. When CS leaders can show that their teams are having an impact on revenue and they are contributing to new revenue at a lower cost than just straight Sales teams, then that’s what’s going to help a CFO shift in their thinking. That’s when the CFO will understand that Customer Success is a profit center, not a cost center.
CHRIS: Twice you've used the word “impact” as the main reason why customers churn. What do you mean by business impact and how does that differ from making sure that customers are receiving value?
BETH: It’s critical that companies understand what value and impact they can provide to customers. They should be talking about this in the Marketing and Sales cycles, but certainly all along the customer journey, too. Here’s how I define the difference between value and impact.
Value is focused on usage and adoption. It's making a difference, but it's isolated.
Impact is focused on significant business and strategic impacts to your customer account. Impact means value realized. Customers buy because they want a tool with strategic impact. They purchased for an increase in revenue or efficiency.
When I'm talking to my clients about value and impact I like to use an Instant Pot analogy. The Instant Pot is an appliance that got really popular a few years ago—it’s a pressure cooker, but it has a ton of other functions. Depending on the model, you might have 10 different buttons with a variety of different cooking methods.
When you buy it, bring it home, and pressure cook your first meal in it, you have achieved your first value. You've done something that you couldn't do or couldn't do as well before you had the Instant Pot. As you start using more and more of those buttons to make yogurt or bread or hard boiled eggs, you're moving towards full value.
The impact, however, is when you start reclaiming counter space in your kitchen, because the Instant Pot has allowed you to get rid of some appliances you no longer need. The impact means spending more time with your kids in the evening because you don't need to spend as much time cooking. That's how to think about impact versus value.
The reason people will stay with your product and keep buying more from you is if they are seeing recurring impact, not sporadic value moments. You need to make a positive difference in a customers' business, not simply their function. And if you're not doing that in a way that you can articulate and more importantly, that they can articulate, it's going to be really hard to convince them to keep spending money with you, much less spend more money with you.
The best resources for Customer Success teams this week
CAREER
Why Chief Customer Officers are Next in Line for the CEO Job
Here’s a quick read highlighting two CCOs-turned-CEOs on what they think the Chief Customer Officer can bring to the CEO role. “You’ve got to start with a belief that the reason for being in business is that customers have choice and your role in business is to meet and exceed their needs. If you don’t do that they’ll go somewhere else.”
STRATEGY
A New Way to Think About Product-Market Fit
The best Customer Success leaders play a core role in using customer data to identify whether products have product-market fit. This article adds more color to what product-market fit is: “it’s not binary; it’s a spectrum” and provides questions to consider for identifying whether you’re in the product-market fit Desert, Mountain, or Mountain Peak (and what to do about it).
COMMUNICATION
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“Being a feedback magnet is a game changer in your career trajectory for two reasons: 1. Feedback is the only way to see your blind spots… 2. Your colleagues already have feedback for you. They’re just not saying it aloud.” Ascend’s CEO Shivani Berry serves up a few word changes you can use to actually get feedback from others. Some examples: swap the word “feedback” with “advice”, and narrow the question. (“Do you have feedback for me?” isn’t targeted enough. Instead try, “How can this deliverable be 10% better?”)
PRODUCT
A Product Manager’s Remorse
Here’s the Gainsight team with another music video that’ll bring a smile to your face.
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