Helping Customers Win - Customer Success Insights

1

Customer Success Overview

Corporate customers looking for information technology solutions have a lot of options today. Further, even after adopting a software solution for the first one to two years, companies easily switch vendors if the current solution is of subpar quality or value.

Cost of development, selling, implementing, and supporting newer technology solutions has dropped significantly, boosting competition in this space. Amazon, Microsoft, Google, and other data centers worldwide have made it easier for vendors to install their software applications on the cloud (i.e. third-party hosting provider infrastructure), avoiding the need to run software on vendor’s or customer’s hardware. Without the need to buy and maintain expensive hardware, data center infrastructure, heating and cooling systems, this barrier to entry for new competitors no longer exist. Likewise, customers who originally installed software in their own data centers for privacy, security, bandwidth, and other reasons, don’t need to use their own data center or resources for any vendor solution, given improved security and privacy risk landscape in the new environment. Accordingly, the migration effort to switch from one vendor to another is much less for the customer, compared to the days in the early 2000s where customers were very protective of their data and installed every software on their own data centers.

Increased competition has resulted in continuous solicitations from vendors that are hungry to uproot existing competitive solutions. Influential customer sponsors, when they move from one employer to another, tend to bring along their favorite vendor solution, putting the existing vendor at a disadvantage. In this environment, the role of the customer success manager (CSM) has become very important. The onus to provide quality, consistency, speed, and performance is now entirely on the vendor, under the leadership of the CSM.

The supreme goal of a CSM is to make their customer successful in whatever initiative the customer has set out to do with the CSM’s product or solution. It could be for customer’s revenue boost, cost reduction, risk mitigation, or a combination of other similar prospective gains.

CSMs are responsible for ensuring that existing customer accounts are not compromised by any potential threat, irrespective of whether it is:

a) external—competition, regulatory

b) customer related—resource attrition, financial hardship, technology compatibility

c) CSMs employer related—product gaps, resource limitations, or general inefficiencies

The customer success manager therefore must be continuously apprised of developments at the customer, in addition to ensuring their software is meeting and exceeding the demands of the customer’s end users. Any sloppiness can affect the vendor’s (CSM employer) revenue and bottom-line numbers for the year.

History Behind Customer Success Manager (CSM) Role

Formerly, CSMs were called account managers and focused on annual maintenance contract renewals. In the early 2000s and before, enterprise software was sold as perpetual software licenses, where 100 percent of the software license was collected in the first year. Ongoing software support, research, and development was offered under annual maintenance contracts to customers for roughly 20 percent of the license cost.

At that time, account managers’ key responsibility, from a business development standpoint, was to primarily realize annual maintenance revenue. In such a setup, in most cases the responsibility was on the customer to make the software successful, given that 100 percent of the software costs were already paid in the first year and given that the software was installed in customers’ data centers. There were limited refund clauses, in case software didn’t turn out to be as successful as promised by the vendor.

In today’s cloud-based licensing business environment, roughly a third of the software license is collected in the first year. Further, many customers insist that the license period begins after the software is implemented. The software vendor must not only satisfactorily set up and roll out the implementation at a discounted price, but also ensure that it provides meaningful benefits throughout the life of the implementation. Given this increased responsibility, the vendor contact responsible for customer contact needs to be more mature, skilled, knowledgeable, and generally a senior person from the vendor’s organization.

Economics of Software as a Service (SaaS) Deployments

The cloud-based vendor solutions explained earlier are popularly sold lately under annual software as a service (SaaS) pricing models. The name implies that the software solution is sold as a service to be used for a defined period (as opposed to unlimited timeframe software usage rights sold under the perpetual license models in the 2000s). Pricing is still per licensed user in both cases, unless the vendor offers bulk or enterprise license. The key differentiating point between SaaS and perpetual license is the length of usage per license.

From a profit and loss standpoint, software vendors selling SaaS solutions, make little to no money in the first year, given the very low margin or under-cost implementation fees. Additionally, projects may require rework in the first year on vendors’ dime, further negatively affecting breakeven analysis. Vendors make money in the second and third year of the deployments, where support, hosting, and processing costs are minimal, and healthy license fees provide profitable returns.

Bottom-Line Value and Compensation Model of Customer Success Program

Given the SaaS business model explained in the previous section, funding for customer success team headcount and related incentives are tied to the team’s impact on a company’s reoccurring and incremental revenue drivers as outlined herewith.

Customer Retention

CSMs are expected to maintain or increase customer retention rates through their efforts. Simply put, when a customer drops usage and declines to renew an annual license contract, renewal rate is affected negatively. The higher the renewals, the better for the company, as margins from the second and third year of usage are high. After a few years of a vendor’s existence, product quality, nature of the industry, and vendor’s research and development investments, determine the percentage of customers that renew year over year. CSMs are incented to exceed this typical percentage, also referred to as a threshold, and penalized if unmet.

Key strategic customers should be identified, paid special attention to and retained at any cost. Such customers help with product definition, sales referrals, marketing promotions, and/or provide substantial revenue.

Innovation through constant research and innovation plays an important role in retaining customers, among other factors discussed in this book. Constant provision of newer features with major releases demonstrates continuous investment by the vendor. Customers find this a bonus over and above what they evaluated during the contracting phase. These investments make the license renewal conversations much easier for the customer success professional.

On a related note, CSMs are incented to pursue multiyear license arrangements to contractually obligate the customer into using the software for more than a year. This reduces reoccurring revenue risk and lowers renewal efforts from both a customer’s and vendor’s end.

The customer, on the other hand, is very aware of this business model and will agree to multiyear contracts, only if they see value in a vendor’s solutions. They will continue to invest in your solution only if they can or are making more money through the vendor’s solutions. Strategies and steps outlined in the rest of this book will help you reach these desired contractual arrangements.

Incremental License Revenue

The key difference between hardware and software businesses is the manufacturing or development cost of an additional widget or license. While there is substantial cost to manufacture an additional hardware widget, the cost to offer an added software license on top of an existing software installation is minimal to zero. Software business investors get particularly excited when additional licenses are sold, since the added license revenue almost entirely (subtracting for sales commissions) affects the company’s bottom-line. CSMs should constantly be on the lookout to sell additional licenses with minimal extra implementation or installation costs.

With that said, good work cannot be taken for granted. Companies cannot rest on their laurels. They need to continuously deliver additional value over and above previously set expectations. Vendors can do this cost effectively through multiple ways.

Company resources should look for additional uses or applications of the same capabilities. Similar to how a Swiss knife could be used as a knife, scissor, can opener, or screwdriver, a company’s product could be used by multiple user profiles for varied tasks. Through ongoing research and conversations with customers, innovative uses can be explored and shared across the customer base. Each of these use cases should be well thought through and supported by working software solutions before they can be shared with customers.

Upsell and Cross-Sell

Upsell and...