The Value of Customer Success

I’m a few months into my WordPress account, and I have to say, it’s not as user-friendly as other website services I have used. There’s a wealth of information and functionality I keep stumbling into or Google searching, which has led to a lot of trial and error (time suck)!

I’m not knocking WordPress, but merely pointing out that if I had a rep reach out to me at the start, to listen to why I am using the product and help guide me on how I can accomplish my goals with the product, then I would have a much better user experience by reducing the time spent learning how to use the product for my specific needs, and likely purchase add-on tools. How many of you experience these same frustrations with your SaaS apps? Insert Customer Success, who has the unique ability to acquire a deep understanding of the customer and product to create synergies and drive value for both parties.  

The Godfather of SaaS, Jason Lemkin, says “Customer Success is where 90% of the revenue is.” Translation, CS manages all of the retained revenue.

Because revenue is a stream of customer payments, and used as the guiding principle in valuation, we should drill down further.

Staying with the Lemkin, his article states the other 4 metrics applied when valuing a company.

  1. Total Addressable Market
  2. Retention
  3. Gross Margin
  4. Capital Efficiency

If we look at these four metrics, Customer Success is directly involved in 3 of the four metrics. Let’s take a look.

Customer retention

It goes without saying that customer retention is essential to company survival. In SaaS, customer retention is more heightened to startup survival because of the nature of the SaaS business model, where the customer acquisition cost is upfront, while customer payments are paid over-time. For most SaaS companies, it can take 12 months to earn their customer acquisition payback, and beyond 12 months to achieve profitability, so preventing churn is vital to ensure company success.

Churn is a lagging metric, which is why it’s crucial for CS to be proactive in the customer’s journey. The value of Customer Success is acquiring customer insights by the way they interact with your product in order to help the customer achieve their goals. Customers can require a lot of time, have lack of resources, change company strategies, or experience high turnover, which can all result in churn if not addressed, which is why it’s imperative for the CS team to follow the customer’s lifecycle and not just at renewal time.

Gross Margin

Gross margin is the revenue left over to pay for operating expenses, after subtracting the costs associated to the production of the service (Cost Of Goods Sold or COGS). In SaaS, the Customer Success cost is allocated into COGS, as well as hosting expenses (think AWS or Google Cloud), and 3rd party services. Gross margin is important because it measures the efficiencies in production cost from your sales.  VCs love SaaS companies for their high gross margins, which are typically 75%-90% versus eCommerce, which range from 20%-50%. For example, if two startups both have $1M in revenue with one company with an 80% gross margin and the other with 40% gross margin, the company with 80% gross margin can spend an additional $400K to invest in the business.

The CS team manages each variable in gross margin, and with each percentage improvement, allocates more dollars for the company to invest back into the business. The CS team can gain efficiencies in gross margin by retaining and upselling/expanding more customer revenue, and scaling the amount of CS reps needed to manage each account. As the CS team perfects their strategy playbook, a CS rep should be able to scale their services while increasing their managed ARR by automating high-tough service points.

Capital Efficiency

The value in SaaS companies take place in the subsequent years as the Customer Lifetime Value increases, providing capital efficiencies as the customer annuities outpace the customer acquisition cost while servicing the customers scale as revenues grow.

As an example below, a SaaS company earning $1 in revenue and 80% gross margin (with$.05 hosting allocated from R&D to COGS) generates no profit in year one because of the initial costs to acquire the customer, while earning significant profit in the subsequent year. The CS team is the engine in the SaaS economic model by retaining the customer, extending efficient annuity streams, and increasing the Customer Lifetime Value by increasing revenue, through upselling (adding new products) or expanding (adding new seats) to current customers. In spite of churn, the CS team can still grow the business by Net Negative Churn, which is when the revenue from upsell/expansion outpaces churn/downsell.