Funding a Customer Success Practice
The practice of Customer Success (CS) has long been associated with being a key growth engine for SaaS companies. But Customer Success has come a long way since those early beginnings. Today, CS is the growth engine supporting a tremendous variety of organizations and industry segments. And in truth, there is no better time than now for B2B organizations to adopt the proven principles of CS as an essential strategic component of staying competitive and meeting customer expectations.
Organizations that successfully deliver CS can simultaneously secure current revenues and uncover new revenue streams. This is especially important in the face of today’s unprecedented marketplace uncertainty and turmoil. Largely in response to vast changes that have occurred during the last couple of years, dedicated CS teams in a host of verticals—especially retail, durable goods, and hospitality/travel/leisure—are concentrating their energies on growing sales and revenue, with great results.
Organizations that have not yet activated a CS team are often concerned with the overriding question of how to fund their CS efforts. This is totally understandable. In this regard, B2B organizations often ask:
1. Do Customer Success organizations get rolled into the Cost of Goods Sold (COGS)?
2. Is CS a line item owned by Sales and Marketing?
3. Can we find the “holy grail” and monetize CS as an offering, much like professional, consultative, or business innovation services?
Customer Success 2.0
In the days of Customer Success 1.0—that is, prior to 2010—CS was looked upon as a cost center…one with too many unfair comparisons to that of a Professional Services organization. However, the companies that put a dedicated, coordinated CS team in place found it to be well-justified. The reason? Those companies were realizing the long-term financial gains and discovering increases in customer loyalty, service, and retention. Visionary organizations understood that by deftly serving their valuable base of select customers, the ROI was well-earned in playing the long game.
As more and more companies began to routinely experience these kinds of results, we’ve seen CS evolve. Now we are at Customer Success 2.0, and it clearly illustrates the commercial returns possible with the right customer segmentation, operational support, tooling, and resource allocation. This resource allocation approach involves moving away from classic account management-style CS into more digitally led, customer-facing delivery models. Ever-broadening digital adoption has brought with it many additional benefits, among them the ability to scale.
That “holy grail” of monetizing CS is well within reach of B2B organizations. At MarketSource, we know this, because we’ve helped many companies achieve it. We know that CS can deliver respectable commercial returns to a company and its customers. We have seen CS teams return 10x on their fully burdened costs. These teams are of the “pooled CS” model, not the strict account management model—a part of the CS evolution we just outlined.
Cost Center or Profit Center?
Before we go further, let’s establish a baseline definition for cost centers vs. profit centers.
The mission of cost centers is to decrease operational costs of a function while increasing overall efficiencies and value driven from the function. Cost centers are not directly responsible for operating at a profit, and as such, do not hold quotas tied to profitability, although they may use them as measures to gauge the overall health of the function. Cost centers reflect the older model of Customer Success, where the emphasis is on lower churn and the chief aim is to increase retention.
Profit centers own commercial responsibility for the company they serve. They own performance metrics with the goal of increasing net income and profits delivered by their activities to their organization. Like a cost center, profit centers incur expenses to operate, and they drive efficiencies while reducing overhead. For most CS organizations, these models focus on Net Recurring Revenue (NRR).
An understanding of differences between profit centers and cost centers lays the foundation for creating a viable Customer Success model. However, right out of the gate, the topic of Customer Success falling into one or the other category is a very highly debated topic. The division among Customer Success practitioners and executive sponsors boils down to this: Can Customer Success functions truly serve as trusted advisors for their customers if they are also obligated to derive commercial responsibilities from the relationship? In other words, can CS balance the delicacy and complexity of being responsible for generating revenue for their company, while also keeping their customers’ interests top of mind and heart?
From my perspective, if a CS professional is helping the customer achieve their goals and outcomes, and ensuring the customer is receiving the maximum value from their investment, then the customer’s purchase of additional products and services is the result of their experience, and the trust that the new products and services will deliver continued returns and ROI. When the CS professional is acting in the best interest of their customers, any expansion sales will necessarily also be in the best interest of the customer.
Whether Customer Success functions as a cost or profit center, the ownership of renewals and/or expansions is the central focus of the debate. Understandably, if a Customer Success function owns both renewals and expansions, the CS team is expected to deliver revenue, and ultimately, profits. It is important, then, that CS organizations operating in this model should be granted shared authority within such cross-functional initiatives as Deal Desk, with the ability to validate and approve the customers they will ultimately be responsible for retaining and growing. Conversely, Customer Success teams that are strictly cost centers hold less authority in their own organizations, which can reduce their ability to take advantage of opportunities to advocate on behalf of their customers. Simply put, companies and their executives allocate resources and decision-making toward those initiatives that are generating revenue.
Use Case: A Profit Center Model
Let me share with you a very simplified example from my experience. I had a hypothesis that with a pooled team of Customer Success Manager (CSM) resources, we could increase the level of service and value to our customers, while also increasing the CS department’s revenue contribution to the company. I started with a test of two CSMs spending 10 hours a week attending to non-named accounts that were at the top of their plan usage and/or seat count, who demonstrated interest in upgrading to a higher plan or adding additional seats. In one month, we saw an average 28% increase in revenue on these accounts, versus unattended accounts with the same profile. With an ARPA of $650 and each CSM averaging 15 expanded accounts per week, we drove $2,730 in new Net Recurring Revenue. Working with Finance, we evaluated these additional revenues against the fully burdened costs of the employee and easily justified building this test team into a formal team of pooled CSMs.
Measure What Matters
Experience has taught us that, when establishing your Customer Success function as a profit center, it is essential to target the metrics that matter to your C-level executives and to the Board.
Yes, the classic CS metrics, such as churn, renewal, health scores, NPS/CSAT, and product usage should still be measured. But NRR, GRR, LTV, Earned Growth Rate, and forecasting metrics should be among the metrics that you make highly visible to your leadership. In general, C-levels and Board members crave predictability, and this is what makes the SaaS business model so attractive to investors and has shifted the world of business to focus on the subscription economy. Ultimately you can drive the success of your company, your team, and your customers by leading with these metrics.
It is a proven fact that every organization that offers a product or a service can enjoy increased profits from both new and current customers by applying a strong Customer Success strategy.
Want to learn more about implementing Customer Success at your organization? Contact us today >>