a new business model for the customer success era
Things have changed
Customer expectations are higher than ever and their loyalty is fading. Because they can choose from dozens of vendors in every market segment and have all the power. There has never been more competition in SaaS than today. Consequently the costs of customer acquisition are growing constantly and did so between 60-75% in the past few years.
And yet, most SaaS companies have not adapted to the new reality. They still run the old growth playbook. Acquiring new customer is still the top priority of most SaaS companies. The weakest growth lever that will only continue to deteriorate. And no amount of venture capital will change that fact.
There is a better way to grow
The Customer-Value-Led-Growth business model is born from a fundamentally different mindset. High-volume low-quality sales to maximize the number of logos is replaced by targeted quality acquisitions.
Customers with high growth potential will enter a dedicated success program designed to continously grow their value. And in return they will buy more from you and grow their lifetime value. A customer can only be acquired once but you can make them pay 5x their initial ACV for twice as long.
It’s a perfect win-win situation – if your customers grow, you grow. As a result, the Customer-Value-Led-Growth business model will allow you to grow cheaper, faster and further.
Part I: Customer succes as a company-wide Initiative
In the “traditional” Acqusition-Led-Growth SaaS business model the operational teams are not aligned. They each chase their individual goals that may even be contradicting. As a consequence, one team will set up another one for failure. And that’s obviously a big problem.
A typical marketing goal is to create a huge number of leads. But in order to achieve their goal it’s only natural that they will sacrifice quality for quantity. According to Sirius Decisions 98% of marketing qualified leads never turn into a sale.
How likely will the sales team meet their quota? It’s almost impossible unless they sign-up bad-fit customers on purpose to reach their goal. Eventually the dedicated customer success team will inherit customers with no sufficient success potential.
Which is complete waste of resources as they are fighting battles they can’t win. And often taking the blame for churn. High churn rates are a strategic problem.
In the Customer-Value-Led business model all teams and their members will be aligned to a single mission and goals. The various silos will cease to exist and will be replaced by one single company-wide customer success team.
I don’t want to sugarcoat it. Getting people on the same page who literally never collaborated outside of their silos may be the hardest challenge of all. However, I’ve identified 5 things that are crucial for a successful implementation.
Define a customer success narrative
What is customer success? According to Lincoln Murphy it “is about ensuring your customers achieve their desired outcomes.”
Sounds pretty easy, doesn’t it? But in reality, most SaaS companies don’t even know what their customers really want. They are guessing and spend little effort on finding out. Put simply, they are poking around in the dark.
As a result everybody will have different perceptions and expectations. Product developers, marketers, sales reps, customer success managers and last but not least the customers.
And the consequences are fatal:
- Product developers spend months building the wrong features.
- Marketing and sales are over- and underselling the product at the same time causing churn and lost opportunities
- Sales teams spend a lot of time manually disqualifying bad leads that drives CAC.
- Customer success teams help customers achieve the wrong goal.
A single mission and goal
The first step to make customer success a company-wide initiative is to align the whole organization around a single mission and goal. You need to define a customer success narrative that clearly communicates what customers will get out of your product. The outcome your company stands for – your positioning.
Every SaaS company wants to be the leader within their product category. But your customers don’t care about. Become the leader in delivering a specific outcome and create your own category.
The customer success narrative is a living organism. As your product and customer success services improve so does the outcome. If the majority of your customers e.g. does not only meet their but exceed it frequently you should certainly raise the bar and promise more.
As a CEO you need to take charge of defining the outcome to be delivered and ensuring customers get what they’ve been promised. Because your customers’ success is the only reason why your company exists.
The definition and communicating of a clear positioning will have an immediate impact on your business performance. Customers who are a bad-fit for the product disqualify themselves automatically reducing CAC and churn.
At the same time you will create more opportunities. Because customers who did not see (enough) value in your offer and did not spend time investigating further will now be ready to talk to you. Which is awesome as your sales reps now have more time talking to high quality leads.
Most SaaS companies are afraid to loose sales opportunities if they commit to a single outcome. Admittedly, it sounds perfectly logical that not excluding anyone would have such an effect. But the opposite is true. Don’t be one of those.
Adopt the process organization
The customer success narrative shapes your customers expectations. If you are not able to live up to your promise you’ll get a serious problem. The arguably most serious threat to meeting your customer expectations are the team silos and the friction they create.
It’s a long road from the first engagement to a successful customer. In order to master the transition your various teams have to step up their collaboration.
A powerful method to get everyone on board is to change your organizational structure from functional to processual. In a process organization the team and role tags are no longer important. Because everybody becomes a contributor to one single company-wide customer success process.
A key part of the process management philosophy is that in order to deliver high value to your end customer, you have to delight your internal customer first. All of your operational teams become buyers and sellers of products and services.
Sounds cumbersome, I know. Here’s a translation into human language:
- The process starts with the leadership defining the customer success goal aka what’s to be delivered (customer success narrative)
- Product development buys the narrative from the management and transforms it into the right product
- Marketing buys the product and distributes its value to the right audience.
- Sales buys leads from marketing to turn them into opportunities and eventually sales.
- Customer success intends to buy customers with high success potential from sales.
If the quality perceptions of the buyer is not met, they will eventually stop. Of course, it won’t happen with an internal buyer because they can’t escape (unless they quit their job). But the effects of this change in mindset are invaluable.
It’s highly important to specify the inputs and outputs as clearly as possible – together. If you e.g. want 20% instead of 2% of MQLs turn into SQLs you need to define the criteria.
The (possible) end result is pure beauty: The right product for the right customer who comes with the right expectations. So many “rights” can’t be wrong, don’t you think?
All Access to customer data
The definition of the inputs and outputs along the customer success process do not result from guesswork or wishful thinking. You have to take a deep dive into your quantitative and qualitative customer data. Unless you don’t have a sufficient number of customers yet.
Everybody that works in your operational teams needs to understand the customers and their actions on a granular level – the “what” and the “why”.
They need unlimited access to all customer data – financials, CRM, product feedback, support tickets, product usage etc.
If you are a marketer who strives to improve the lead quality you need to understand the characteristics of a high quality lead. What would make more sense than getting a “360°” view of your actual customers? Finding out what makes them awesome, what they have in common and reverse-engineer your profiles.
- The sales team analyzes the data of churned customers to improve their lead qualification criteria.
- The product development team wants to understand who the customers are that madespecific request and understand why they need it.
Form multifunctional teams
Getting access to all customer data is a start. Acting on the insights even better. But the value grows exponentially when the various teams collaborate based on.
In the process organization they certainly do as because they have defined touchpoints with their internal customers. Collaborating in the daily business and giving each other feedback regularly is highly valuable to improve your operational performance.
But it can be further enhanced by adding a strategical dimension by forming multifunctional committees consisting of members from all your operational teams.
Their mission is to discuss the status quo and prepare the ground for making decisions on strategic initiatives.
- Changes to the ideal customer profile
- New prices and packages
- New product features
Note: This makes only sense if everybody got access to a 360° customer data view.
Being part of multifunctional committees will improve trust, engagement and committment. Coincidently what you want from your customers. Maybe it’s not a coincidence at all.
Introduce Shared Incentives
The changes in your organization and new initiatives need one last but very important ingredient to make things work. You have to unify the incentive and commission structure for all your teams.
See, if your marketing team’s goal is to maximize the number of leads they will optimize for their goal. And it’s only natural that they will sacrifice lead quality if necessary. Same with your sales team, if they will likely fail to reach their quota they will sign every deal possible – profitable or not.
As customer success is a long-term strategy it should be reflected by a corresponding metric. It also needs to be a metric that can’t be artificially enhanced. Which literally eliminates all revenue growth metrics.
I’d recommend to use the customer lifetime value, its growth or both to set incentives and build a commission structure. Because it’s literally impossible to achieve a strong performance as long as you choose quantity over quality.
Product bugs will hurt it, churn will hurt it and so will acquiring low-profitable customers and delivering low-quality customer success services.
Part II: Building a dedicated customer success program
The status quo in customer success is being proactive. To create a complete customer success journey and reach out when you anticipate the customer needs help with pre-defined “plays”.
While it’s certainly well-meant and definitely a big upgrade to any kind of reactive approach it’s still fundamentally flawed. Because it relies on guesswork and leaves an infinite number of possibilities for customers to leave the success path.
By the time your playbook tells you it’s time to reach out because e.g. a feature has not been adopted they may be gone forever.
In the Customer-Value-Led-Growth business model customer success managers will lead the customer all the way to the promised land with a specific program and process. Unless the customer explicitely declines.
The CSM will be up to date about the customer’s progress and results at any time. Problems will no longer have be anticipated but will either be eliminated right away or before they have a chance to appear.
Build close customer relationships with conversations
The secret ingredient for delivering high-quality customer success services is to win your customer’s outright trust. Because trust leads to transparency and when you get access to in-depth information about your customer’s business you can tailor your inputs to your customers specific needs.
At this point, you’ve successfully grown from vendor to trusted advisor. An inevitable partner for your customer’s success. It’s impossible to reach that status via sending generic E-mails and messages. Humans trust humans, not a faceless company.
You have to build human relationships and they are built from conversations. Start with having conversations right away.
Kristi Faltorusso, VP of Customer Success at Intellishift, transformed the first meeting with the customer into a strategic kick-off. This is an awesome example for how to build trust right away because you take genuine interest in your customer and offer upfront transparency.
The further the customer climbs on the success ladder the less effective generic inputs will become. At some point you will no longer educate the customer on how to get the most out of the product but act as a strategic advisor.
Most companies view customer success as helping the customer to master the product. But that does not consider the customer’s skill on the job. If you sell a content marketing software the best technology can’t turn mediocre into awesome content. So the ultimate goal is to help customers become awesome on the job for which they need your product.
Of course, that does not work in any case. Sometimes the customer’s skills are that far below the requirements, that educating them would certainly outweigh the potential benefits. Like every other business function, customer success needs to generate a ROI at the end of the day. Another strong argument why proper lead qualification matters.
Spending time on building close customer relationships with 1:1 conversations does not mean you should do everything manually. Just make sure you restrict your automation to the things where no human touch is required.
Your 1st commandment in customer success: Quality first, scalability second.
A recommendation of mine is to hire CSMs who have been teachers, coaches or consultants before. Because they bring the right mindset. Everything else can be acquired.
Design the customer success process
With the definition of the customer success narrative you’ve successfully set the end goal. Now you can reverse-engineer the customer success process back to the start. How far you have to go back depends on your identified ideal customer.
Design the entire process with milestones, tasks to complete, inputs and outputs as well as the skills and knowledge customers have to acquire to successfully move forward. Build milestones on customer performance or performance increases, not feature adoption.
You can be creative and find tags for segmenting customers based on their success level (e.g. from Padawan to Master). Fast progress can be an important trait for your ideal customer profile optimization. This is much more accurate than any feature adoption plans that say little about your customers’ results.
However, customer success is an ongoing process. It only ever ends when the customer can’t further improve the results after literally exhausting all options. It’s unlikely that it will ever happen but certainly the progress will slow down after a specific point.
A typical performance-based milestone could be the percentage of deadlines met, a conversion rate or revenue growth. So a customer starts with missing 50% deadlines and unhappy customers. In time, thanks to your efforts, it decreases to only 5% and a ton of happy customers leading to follow-up jobs and getting access to high-profile jobs.
The goal could be to take a customer from missing 50% of deadlines and unhappy customers to completing 95% of projects in time. Boosting the customer’s reputation and getting access to more prestigious and profitable jobs.
Based on this example the customer success process could include steps like:
- Help the customer set deadlines more accurately.
- Work on improving task distribution and collaboration
- Improve scheduling and communication
- Increase time and quality of customer feedback
As you can see, none of these are actually about your product. The point is that your product can’t work magic. Bad inputs will lead to bad outputs. Help the customer solve the problem(s).
A customer who wants to operate on master level needs to have a strong performance in all areas. But what’s different are the problems and their intensity. Going with these possible reasons why the problem exists the customer success process would need 24 variations.
This is why customization is so important. You need to prioritize the most urgent problems with the strongest impact. What’s most pressing for 10% of your customers might be a small bump in the road for 90% of the others.
The performance of your customer success process will improve with repetition. If you are doing things completely different every time you’ll more often miss the target and spend a lot of time on the set-up rather than delivering value.
In a best-case scenario marketing and sales teams’ have exhaustingly segmented your customers. Which includes determining the current performance level, the issues that led to it as well as the skills, resources and prior experiences connected with your product and the jobs your customers need it for.
This is another great example of the importance of interdisciplinary collaboration. An often discussed and closely related topic are sales hand-offs to customer success. This is literally the same. Both teams need to stick their heads together and come up with a plan on what kind of information is required and who is responsible for collecting.
A kick-off meeting with the customer is also a great opportunity to acquire segmentation-related information or get more details.
With your customer success-ready segmentation you identify where your customers start, what they want to do first and what they need to take their performance to the next level. A common approach among larger SaaS companies is to have CSMs focus on SMB/enterprise or different industries.
While that’s a viable approach to improve your performance through higher repetition I don’t consider it as the top notch. A viable approach is to focus on solving specific customer problems, build expertise on it and then further “niche down” with a growing number of customers.
Defining and preparing the Inputs
Taking your customer to the next level of the success journey will require a mix of different content and services.
Some can be prepared in advance like E-Mail sequences, in-app-guides or product documentation and other generic stuff. However, being generic does not necessarily mean low quality.
It’s a big difference if you e.g. create 1h video tutorials explaining every feature or 3min tutorials on how to solve a specific problem. You need to think in problems and solutions, not features and functions. Customers are not interested in your product, it’s merely the tool they need to get what they want.
But the closer you’ve led the customer to the promised land the less generic and more specific your inputs need to become. Put simply, you will do less educating and more advisory services.
The advisory services are highly customized and preparing them in advance is virtually not possible. But there are things that can be planned in advance:
- Strategic meetings to deliver your advisory services
- Industry-specific questions to ask based on prior experiences
- Determining the data you need to help your customer appropriately.
One more thing to consider is that not everybody learns the same way. Some prefer to read, some like graphics and others prefer video tutorials. It pays off to have more than a single option to choose from.
Customer Success Metrics
The way SaaS companies think about customer success metrics is broken. Because metrics like the Net Promoter-, Customer Health- or Customer Satisfaction and the inputs that run into are how you measure customer success and not how your customers do it.
Customers buy your product for one reason and one reason only – to become (more successful). They want to increase their revenue, save costs or improve their productivity. And if it can’t be quantified then it can be measured by a quality metric like “no more pain”.
Measuring how often customers use your product or how many features they’ve adopted tells you exactly nothing. The only thing you can do is to make assumptions. But a customer who is active every day still might get zero results.
A customer who has not adopted a feature within the period you’ve defined simply might not need it yet because another feature is more important because it solves the most pressing issue. But you would most likely assume that this customer is at risk of churn.
Who are your most healthy customers? The ones who get high value from your product. Who are the most likely to actually promote your product? The same. Who are your most satisfied customers? Cue the answer.
It’s absolutely crucial that you determine how your customers are measuring success and, as a consequence evaluate the value of your product. This is another reason why building customer relationships is so important. Because they give you access to this kind of information. And in a best-case-scenario the customer agrees to use a shared metric system.
If you can’t live without your scoring metrics then make sure that the inputs that run into their calculation come from your customers.
However, I recommend to focus on the correlation between customer success and customer action. Put simply how much success it takes to make a customer renew the contract, expand or actually refer your product. And ultimately, the impact on the customer lifetime value.
Customer Success Process metrics
Determining the correlations between customer success and customer action will give you a ton of valuable insights. They are your top level customer success metrics driven by the performance of your dedicated customer success processes.
The performance of a business process is measured in 3 dimensions – time, cost and quality. Customer success, like basically everything you do, needs to generate a ROI. If it costs more to make a customer successful than the revenue impact it creates (no renewal/expansion) you are loosing money.
Time is actually a two-edged sword. The time to make a customer reach the next (performance) milestone and the time to revenue impact which might not be the same.
The quality of your process refers to your ability to take your customers to the next level. Think about it like a customer success funnel. Customers start at their specific level and move up the pipeline. Put simply, the percentage of customers reaching the next milestone and ultimately the end goal.
There are 2 ways to determine the costs. The first option is to calculate them like CAC and add up all costs related to customer success and divide it by the number of customers. A more accurate version is to determine the individual costs by dividing the wages according to the time spent with customers (at least approximately).
Part III: Monetize customer success with the 5 forces of growth
When you ask Google about growth strategies in SaaS literally every single hit you get is about growth marketing. That’s not a growth strategy. Acquiring new customers is just one part of it. However, it’s a perfect mirror for what happens in the real world.
While SaaS companies put so much money and effort into acquiring new customers they care little about other revenue streams. This is not how the subscription model works. For a SaaS to grow at peak rate, you have to max out the customer lifetime value with the 5 forces of growth.
New Customer Acquisition
Signing new customers still plays an important role in the Customer-Value-Led-Growth business model. What changes is the way it is done.
In the Acquisition-Led growth business model it’s all about quantity. Acquiring a high-volume of (mostly) low-profitable customers. The results are low conversion rates, high CAC and long CAC payback periods. What these companies do is slow down their growth, not accelerating it. But hey, let’s keep that our little secret.
So as you’ve maybe already guessed in the CVLG business model a shift happens from quantity to quality. That means only customers with high success- and therefore ROI potential will be acquired – as outlined by the demands from internal customers in the process organization.
That means your ideal customer will be nothing else than your most profitable customers. They’ve become so valuable for your business because you’ve become to theirs.
While marketing and sales work with assumptions about the ideal customer it’s your customer success team discovering who they are and what they have in common. As a result you can reverse-engineer your ideal customer profile based on quantitative and qualitative data.
What happens when you shift from quantity to quality is a much higher CAC efficiency. In most cases your CAC will go down because of much harder qualification criteria. So your sales reps will spend much less time disqualifying low quality leads in 1:1 interactions. However, it’s perfectly fine when your CAC don’t get down and your initial ACV doubles.
Getting customers to continuously pay for using your product is the lifeblood that powers any kind of subscription business. That makes it highly important and yet it’s the low hanging fruit. The basic goal if you want.
An often debated topic in SaaS is whether CSMs, AEs or sales reps should sell renewals and expansions. The correct answer is: Neither. Renewals (and expansions) are earned and bought not sold.
Renewals should always be seamless – the logical consequence of a customer getting the expected value from the product. And it obviously happens as a byproduct when a customer expands. If they buy more from you why would they churn soon afterwards?
Well, there may be a twilight zone where customers are not sure if they got enough but want to keep trying. Customers who don’t see enough success will churn and selling won’t get you anywhere.
However, you should always be on top of it, meaning that you can accurately predict whether or not a customer will renew because you simply talk to them.
The dedicated customer success team is often perceived as an anti-churn brigade but this is only particularly true. Because most churn is produced before the customer buys the product and is handed over from sales. Customers who come with the wrong expectations or without the right fit which is inevitable churn.
Put simply, retention in the Customer-Value-Led-Growth business model is not the purpose of customer success but the logical consequence. A customer who is successful has no reason to leave. Focus on delivering value, not (hard) selling renewals.
If there was a single goal for customer success It would be: Help your customers become so successful that they outgrow their current tier and buy more – as fast and as often as possible. Following a simple concept, if your customers grow, you grow.
The beautiful thing about expansions is, that while a customer can be acquired just once, they can buy more resources every month if your pricing strategy allows it.
If I’d take Hubspot’s Marketing Suite as an example the pricing starts with 41€ p.m. and ends at 9.127€. Customers who would grow from the low to the top end would pay 222x as much for the rest of their lifetime.
Yes, that will barely ever happen. But that’s not the point. What if you can get 50% of your customers to pay twice within a year? Your growth is skyrocketing. And in the long run, doubling your customers’ account value is the low hanging fruit of the low hanging fruit.
In the Customer-Value-Led-Growth business model expansions like renewals are bought, not sold. That’s why you don’t need to have a process in place. Focus on delivering value instead and make them an inevitable consequence of your successful efforts.
The arguably most underutilized lever of growth in SaaS is the pricing. So many companies care so little about what they charge their customers. In most cases, they simply copy & adapt from their competitors. Which would not even be the worst thing to start with. However, most of them never look back and keep their prices this way.
There’s literally nothing that can hurt growth as bad as not optimizing your prices. Because your prices are your most scalable growth lever. Any increase affects all new acquisition, renewal and expansion.
But what’s the optimal price for your product? The maximum price your customers are willing to pay. And how much are they willing to pay? It obviously depends on how much value they get out of the product. Hopefully, the value will increase in time.
That’s, once again, why building in-depth customer relationships is so important. Without getting access to you can only either guess or set the price low and leave a lot of money on the table.
It’s obvious that not all of your customers get the same value out of your product. However, you should not derive your price tag from your low- but most successful customers. Why? Because if they don’t get enough value from your product they will be gone anyways. But you need to optimize your prices (and everything else) for your ideal (= most successful) customers.
Optimizing your prices is highly complex and needs serious and ongoing effort. Here’s some guidance:
The first part of a value-based pricing model is to find a metric that grows with the customer. The number of contacts, leads, searches, social media postings, pieces of customer feedback, etc.
It’s simply a numbers game. If you are converting leads to paying customers at a 5% conversion rates then your value will increase with the number of leads.
In some cases finding the right quantitative value metric can be difficult:
- For a social media software contenders would be postings, channels and users.
- A BI tool with the number of data sources, dashboards or users
How can you find the right one? The advice I’d like you to give is to find the one where the volatility between the units is the lowest.
So for the social media tool it’s unlikely that your customers get the same value from each one. Why would they pay the same price for? Some users may be highly active and others only occasionally reach out to their audience. Which likely leaves the number of postings the hottest contender for the lowest value volatility.
For the BI tool the case is literally the same (data sources = social media channels) and points to the number of dashboards.
Qualitative value metric
The most difficult part of your value-based pricing: What’s a single “unit” worth? Sticking with the examples from above – what is a single posting or dashboard worth to your customer?
In a best-case-scenario you get all the data you need – postings, leads, customers and revenue so that revenue divided by the number of postings would point you in the right direction.
However, it becomes infinitely more difficult if your customer does not (solely) use social media postings as content marketing for generating revenue.
Unfortunately in this case there is no exact science but some guesswork. Alternative ways to determine the value is to ask your customers right away or make an estimate yourself and ask your customers whether they think it’s accurate (it’s often easier for people this way). Where studies and other research may be of help.
One of the things in SaaS I’ll never understand are companies who build new features but never raise their prices. If you build new features you usually do it with the purpose of making your product better. A better product delivers better outcomes and better outcomes are worth more.
Of course, they build a lot of pointless stuff in the process but it’s literally statistically impossible that you never land at least a small hit. However, there is an alternative for building a lot of random stuff to appease everybody:
Build and prioritize the features that enhance the value for your most successful customers. Features, for which they are willing to pay more.
So should you build everything your highly decorated customers request? Obviously, a rhetorical question. First, they might make reasonable requests and others that are completely pointless. And second, they might not even know for themselves what adds value and what does not.
This is, once more, why investing into customer relationships pay off. Because the best way to identify value-adding features is to work them out together. Giving the “what” a “why” that makes sense. It can’t be said too often, the better you understand your customers business, the more value is in for your customer and your company.