By: Nick Mehta, CEO of Gainsight

Screen Shot 2014-12-17 at 5.13.14 PMI have a confession: this is my favorite time of year. It’s Budget Season!

I know that sounds weird since budgets are usually the least exciting part of a job, but when I look at 2015 and think about how Customer Success will play a massive role in everything we do, it makes the budgeting process actually… fun.

In fact, to make your Customer Success Management budgeting process easier – if not fun, too – we put together this Excel template that you can download.

To me, 2014 was the year that companies, executives, and investors finally realized that Customer Success is a strategic asset and a revenue driver.

So 2015 is the year to double-down on Customer Success Management (CSM), to take full advantage of the upside potential that comes from helping your customers achieve success.

Which probably brings up this question…

How do I set my Customer Success Goals for 2015?

The method to figuring out what goals to set – and then how to achieve those objectives and justify the costs associated with doing that – is fairly straightforward:

  1.     Determine the primary objective of your CSM activities
  2.     Understand how those objectives will help your business
  3.     Figure out what to do to reach those objectives
  4.     Budget to reach those objectives

While the todo list is straightforward, the execution on that list isn’t always, so let’s dig in by first figuring out what we should focus on in 2015.

First, determine your…

Determine Primary Objective: Churn Reduction or Revenue Expansion?

The first thing to do is figure out what your primary focus will be: expansion within existing accounts or reducing churn.

Of course, focus evolves with as your company or CSM organization matures.

In the super-early days, you’re probably just focused on customer acquisition; though the days of doing that without any thought of retention are pretty much over. You just can’t do that anymore… it doesn’t fly.

But just beyond the super-early days – your Customer Success focus is generally on retention and renewals, primarily driven by adoption and onboarding.

As your company matures, you’ll likely add more pricing tiers, add-ons, products – or all of the above – and you’ll begin to focus more attention on expansion within existing accounts.

Many companies eventually get churn to such a manageable level, and they also have more products to sell and more mature client relationships, so upsell and cross-sell becomes the primary focus.

What if you Focus on Churn Reduction?

Most of the time, churn reduction starts with a goal: reduce churn from 10% to 8%.

But what does that actually mean? Not much, which is why getting super-clear on Unavoidable vs. Avoidable churn – and then focusing your attention on the latter – is the only way to actually take action on reducing churn.

This post I wrote titled “The Myth of Unavoidable Churn” shows you exactly how to do this, by the way.

For the sake of this article, let’s use an imaginary company with an avoidable churn rate of 5%; 2% in the larger, 5% in the mid-size and 10% in the smaller group.

Maybe you’ll reduce churn in the Top group from 2% to 1%, cut mid-market churn from 5% to 2.5%, and Small churn from 10% to 8%.

1-focus-on-avoidable-churn

While you could have said you just wanted to reduce overall churn from 10% to 8%, by focusing on reducing avoidable churn from 5% to 3.4%, that overall result is achieved, only in a way that gives you an idea of how to actually do that.

And if you take the average Annual Contract Value (ACV) per customer group, you’ll see actual customers saved: 1 more customer in the big accounts, 2 in the mid-market and 24 in the small customer group.

This is when this all becomes really tangible; you move from “let’s reduce churn from 10% to 8%” to “we can save an extra 27 customers!”

And having a specific goal, based on a metric everyone instantly understands – customers – makes it much easier to put a plan in place and rally the troops.

2-focus-on-avoidable-churn

As you evolve as a company, the focus generally shifts from just preventing churn to growing your customers.

When should you…

Focus on Revenue Expansion / Customer Growth?

When churn is at a certain level – probably not actually zero due to (actual, real) Unavoidable Churn – the real upside will come from expansion.

And you can take that same segmentation I used earlier, research your upsell rate and ARR in 2014 – by segment – and start to apply targets for 2015 to that.

So again, in this imaginary business scenario, gross churn is going to go from 10% to 8%, and then net upsell is going to go from 3.3% to 6.6%.

That builds a pretty detailed plan that’s the basis for a conversation with your CEO or CFO.

3-focus-on-account-expansion

Once you know what you need to solve for, you have…

Determine Appropriate Initiatives

What are you going to do to actually make that churn mitigation or upsell happen?

If you wanted to retain your customers you might:

  •      Improve your on-boarding velocity
  •      Drive value faster (what we refer to as reducing Time to First Value – TTFV)
  •      Managing the playbooks of what your team’s doing to manage CSM operations
  •      Remedy the #1 retention risk – a sponsor’s departure – by monitoring social media for title, location, or other changes

If you wanted to upsell customers, you might:

  •      Identify and Agree on “success” milestones with your customers
  •      Peg upsell opportunities to those milestones
  •      Present the best upsell offer at the right time
  •      We did a webinar on operationalizing upsell in 2015 here.

From there, you need to have an honest conversation with your management team and/or board and…

Get Buy-in and Budget for your Customer Success Initiatives

Jason has said here on SaaStr that you need a ratio of “about $2M/ARR per CSM but in the early days, you went over-invest even more than that but eventually it gets to $2M.”

But what does that mean to your P&L?

Imagine a company is doing $100M ARR at 70% gross margin; pretty common for SaaS company.

That means that out of a $100M, you get $70M to do stuff with. Most companies in SaaS spend 15% of that revenue on R&D, so that’s $15M gone.

Another $5M is usually spent on G&A (Finance, HR, etc.).

That leaves you with $50M before you invest in sales and marketing.

Now, imagine this company’s growing 20% a year and wants to add $20M in ARR.

As you probably know, a lot of SaaS companies spend one dollar on sales and marketing to acquire one dollar in ARR; sometimes more than that.

4-how-many-csms

But even with those clear ratios in place, I suggest that you…

Over-invest in CSM Early

When it comes to CSMs for early or growth-stage startups, I believe you should over-invest in CSM; especially in the early days.

If you’re growing fast or earlier stage, or if you just don’t need to be as profitable, you can have way less that $2M per CSM.

In fact, $2M per CSM is probably more of the end point instead of the starting point for earlier-stage companies.

But because I don’t want to leave you with more questions than answers, I put together a little simple 2×2 matrix, just based on my gut feeling and experience.

5-how-many-csms

What this basically says is that if you’re growing really fast, you need to hire a lot of people because they have to ramp and they need to be ready to help the customers when they come on board. If the CSM is learning the product while the customer is, that is just a recipe for disaster!

If you’re early stage, the CSM is doing so many things. It’s not really just managing that revenue. They’re onboarding, they’re training, they’re making the product better, they’re doing webinars, they’re in sales demos, they’re at conferences.

I have seen a lot of early stage companies – including one I just visited in New York a couple of days ago – at the level of $250k of ARR per CSM. They’re probably just breaking even on that, but the ROI on that long-term is substantial.

In the early days, not only can you get away with this, what you’ll learn from this high-touch process will become invaluable as you move toward a more automated way of working with customers.

Take Action in 2015

Customer Success – whether in place to retain or grow customers – will have a massive impact on your growth in 2015.

And using the process I outlined here, from determining your primary objective to implementing and executing on the plan, will help you take action, whether you’re focused on low-hanging retention fruit or completely shifting focus completely to a Customer Success-driven organization.

This article is just the tip of the iceberg, though. If you want to deep-dive on this, including understanding the people and processes necessary – and how to budget for them – then check out the archive of the Budgeting for Customer Success in 2015 webinar I did with Byron Deeter from Bessemer Venture Partners.

While you’re at it, you should grab a copy of our CSM Budget Template Excel spreadsheet.

 

 

About Gainsight
Gainsight_LogoGainsight, the first and only complete Customer Success solution, helps businesses grow faster by reducing churn, increasing upsell, and driving customer advocacy. The company’s SaaS solution is 100% Salesforce native and uses predictive analytics to drive revenue from sales, usage, support, survey and other sources of external customer data. In this way, Gainsight provides a 360° view of customers and drives retention across Customer Success, sales, marketing, executive and product management. Learn how leading companies like Angie’s List, Castlight Health, Marketo and Informatica use Gainsight to help their customers succeed at www.gainsight.com.

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