Last year was a tough year for Customer Success for the SaaS space. The end of ZIRP signaled that the cost of capital was going to spike upward. This rapid change in available capital changes the calculus for many companies to start accelerating a path to generating cash flow from operations. The path companies want is to win new business. Growth cures all as they say.
But the reality is that customer acquisition costs have trended upward for consecutive quarters. The other path to positive cash flow is to start cutting. The first place people cut is to trim the fat.
✂️ Software.
✂️ Leases.
✂️ Contractors.
🛋 Searching for change under the couch cushion.
All taking a hit in a big way.
Once you get through the fat you're now cutting into bone. That is what 2023 was for SaaS. Cutting to the bone.
So what happened to Customer Success?
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3 fundamental changes
#1. Operational Efficiency is the new sexy
Startups were coached to stretch cash runway to 2025. Later they were told they might have to extend even beyond that. If you looked at the metric “ARR per CSM” that metric likely spiked across the board. I often joke that renew became the new new.
If you're in CS Operational these metrics are now getting a ton of attention:
ARR per CSM
CS Cost as a % of Billings
GRR/NRR (per segment, product, geo, etc)
Next 1-6 months renewal base already renewed ( reps working ahead?)
Billings backlog: what % of AR and invoice backlog is split Billings?
SaaS companies, in an effort to get lean-and-mean, intentionally retooled CS to rely on automation, knowledge bases and community to pick up the slack. The aspired to metric of $1M per CSM is probably a thing of the past.
As of last year, Gainsight CEO Nick Mehta wrote “The median (50%) quartile for total ARR was $1.4M while the top (75%) quartile was $4.2M” (across a survey of 17,034 CSMs).
Expect this number to climb.
P.S. the number of accounts a CSM can manage across touch motions:
#2. CS isn't about the customer anymore, it's about upsells and cross sells
The telltale sign of the CS function becoming an extension of the sales organization is whether or not your CSMs are compensated on Net Recurring Revenue alone. Take care of the customer and rest will be taken care of is old news. It's all about flashing commercials and offers to get the customer to spend more.
Damn the consequences!
As a revenue operations leader I can't tell you how insensitive it can be for my CSM to push something new into me when I haven't yet received full value for what I already purchased. “Reading the room” gives way to “my way or the highway”.
If it's not upsells, then it's also about price increases.
I remember working with a VP of Customer Success who was so confident of our ability to drive a minimum 10% growth just based on increasing pricing to our customer base. I retorted, but would you expect churn to spike and/or CSAT to drop?
His response? We've done this every year since I took over.
Raising prices like that either means you stink at capturing value yourself with low ball pricing OR regular price increases are part of your business strategy. In this case I think it was both true.
Buyers want to feel like they're getting a good deal. They don't need to feel like they're pulling one over you but they do have to feel it's a win for them.
Just look at some of the price increases that have been recorded for stated prices:
🆙 Webflow basic plan 16.5%
🆙 Hubspot 12%
🆙 Slack 10%
🆙 Pardot 9%
🆙 JIRA 5%
Raising prices is not uncommon but the pressure to continually grow could place some teams in a position of having to drive more growth from the customer base in the absence of new customers.
Grow, grow, grow!
In fact, what you see are CS teams focusing on NRR over GRR. For those paying attention, that's Net Recurring Revenue and Gross Recurring Revenue. You can still drive growth from NRR even if GRR isn't performing. Here's a look at what things should look like:
Example #1: company has GRR of 90%. Fantastic! 20% of customers who stayed expand by 15% by increasing their usage. NRR would then be 110.7% (90% + 20% x 90% x 115%). This would place the company in the upper quartile of startups!
Example #2: company has a GRR of 70%. Depending on segment this might be awful or at the lower bound of acceptable. If the surviving companies expanded by 15% then you would need 55.9% of the surviving customer base to get to the same 115% NRR figure. Meaning, you would have a target of 5 out of every 9 customers to expand. That's a lot of pressure selling for a team that is generally supposed to focus on driving customer value.
The obvious answer is to take care of GRR as a first order of operations, then NRR!
This is one of the reasons why I think that like Revenue Operations gets a bad rap for being Sales Operations in disguise, the CRO also has a reputation for being a glorified sales leader. When CS reports to the CRO it could lead to a myopic view that NRR is the Holy Grail to measure all things customer related.
Pressure from slowing growth. Pressure to maintain slipping NRR and slipping renewal rates. A focus on NRR over GRR. Price increases across the board, often handled poorly. And the worst root cause IMHO? Having CS report to sales. This turns CS into an extension of the sales function — not a success function.
As Jason Lemkin once wrote:
The rise of the CRO is here to stay. Everyone wants to be a CRO now. But if that means Customer Success is now just a glorified upsell function — count me out.
#3. The Lack of Outcomes in 2023
When your CSM is focused on the upsell, how focused are they really on taking care of my core needs? According to the American Customer Satisfaction Index, CSAT scores have been dropping since 2018. But in 2023 you'll notice that year-on-year scores have started to rebound. Perhaps CS teams have learned their lesson.
CROs desire to drive topline growth. NRR becomes a weapon used metric for CS. But when you look at NRR there are several ways to do so.
Price increases
Upselling volume
Cross selling products or services
Expiration of discounts
When you strip our price increases, NRR looks worse. It's not crazy to think that when customer teams focus on driving sales, CSAT takes a hit. How many times I have I enjoyed working with a company to later complain that the same company's service has declined?
I've complained about ZoomInfo.
I've complained about SalesLoft.
Maybe I'm just a complainer! 😅 But at the time I swore my needs weren't being met.
What's the business case for CS to ask for additional headcount? If NRR is sagging, is the solution to throw more headcount at it? If CSAT rebounded then is the solution to scale up the CS team?
So where do we go from here?
I believe we will see Customer Siccess rebooted.
The first place major change will be to continue investing in AI and automation. Investing in tools that can catalog and auto suggest articles on the company's existing knowledge base is the first thing I would do.
Second, I would load up the ARR per CSM. But the only way to do that is to do a proper activity accounting of the average account by segment. What does it take to fully support an Enterprise customer? A Mid Market customer? Once you know that, then invest in a project management solution, or build one in-house, to identify how many concurrent accounts can you assign to one CSM. Knowing this you will be able to learn what the floor ARR will be per CSM.
As you can see I'm a believer that automation and AI will continue to push the envelope for larger CSM books of business.
Ultimately what this means is that the pendulum will swing once again. Where customers once enjoyed excellent customer service, I believe that customers will find themselves increasingly talking to more bots or having self serve articles sent to them. Inevitably that may change but I predict we will see worse customer support.
SaaStr put it succinctly,
The age of efficiency has led many to acccept certain subtoptimal outcomes so long as the cash flow remains positive
Three tactics to drive growth without increasing prices
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