“What is customer success and why should I pay for it?”
One of the biggest challenges in customer success management is educating business leaders to make space for it. How do you make the case that customer support staff isn’t enough, that you really need a dedicated customer success manager (or 5) on the team?
The question always pops up: is customer success worth the investment? Shouldn’t we focus resources on business development, sales, marketing… you know, the stuff that actually makes us money?
Fair enough, but today I’ll challenge the idea that focusing on sales is a better way to grow revenue than bringing on dedicated customer success staff.
In this post, I want to show how focusing on customer success can actually lead to more revenue than a focus on sales. After that, I’ll to leave you with a basic model for thinking strategically about how to fold customer success staff into your business.
Expand Less. Grow More.
As intuitive as the idea may be, most people are startled to hear that a modest 5% increase in customer retention can add up to 95% in increased profits. Why such outsized results?
In a previous post, I talked about churn reduction as one of the key reasons why we should think of customer success as a revenue generator, rather than a cost center. Right now, I’m going to drill deeper on that claim and add some important nuance.
The global consulting firm McKinsey & Company wanted to get clear about the impact of churn on revenue growth. So, they dug into their SaaSRadar database to analyze churn statistics for nearly 200 start-ups ranging in revenue from $10 million to $200 million.
The study is fascinating and worth checking out. But you’re busy, so I’ll sum it up here.
Unsurprisingly, McKinsey discovered that the top quarter of performers (with respect to revenue growth) had a 22.7% lower amount of net-revenue churn relative to the average of the 200 companies.
Ok. That makes sense. Less churn = more revenue. Thanks for that amazing insight…
But when McKinsey looked at the components of net-revenue churn - that is, gross-revenue churn and expansion revenue - they found that top performers outstripped their peers not by increasing expansion revenue, but by decreasing gross-revenue churn. In fact, the top performers registered 40-50% less gross-revenue churn than the average.
Long story short. The companies that grew the most did so by focusing less on expansion (cross-selling, up-selling) and more on reducing gross-revenue churn (refunds, defection).
It may be counterintuitive, but this data shows that the time comes in every business when it makes sense to ratchet down on pursuing expansion revenue and turn up the volume on strengthening current customer relationships.
So What Do We Do With That?
So far, we’ve successfully proven that Customer Success is worthy of at least a modest slice of the budget pie at the beginning of the next fiscal year. But how do we convince the higher-ups to take the next step and throw in a scoop or two of ice cream?
Well, let’s go back to McKinsey for one more little insight. When looking beneath the surface to identify which factors drive churn reduction, they saw that their best performers rose to the top by investing in contextually sensitive customer success solutions.
That's to say; they didn't go full court press on customer success. In fact, some of the top performers actually spent 40% less than their competitors in the same area. What was the difference?
Ready for it? Those top performers spent their customer success dollars in strategic places, focusing the bulk of their attention on higher value customers.
Believe it or not, there is such a thing as a healthy level of churn. If you focus your efforts on retaining high-value customers while letting low-value accounts wash themselves out, then you have the recipe for a sustainable approach to customer success.
He then suggests allocating resources in this way:
1. Strategic Customers (1 to 25 per manager) – These are our highest producing, most valuable customers. They deserve close attention and a high level of touch.
2. High Priority Customers (30-50 per manager) – These customers constitute the core of your business. They should get your attention, but not as intensively as your top tier.
3. Foundational Customers (50-150 per manager) – You value these customers but aren't willing to expend too much time and energy keeping them engaged.
Leaving aside the particulars of Philip’s tiered approach, the gist of his suggestion is interesting in that it provides us with a low-stakes model for entry into customer success.
For organizations who aren’t sold on customer success, you can either hire a temporary contingent employee or reassign a current one to take on a small contingent of your highest-level customers. Monitor their production for six months and then revisit. If you see demonstrable results, build out your team from there. If not, then reevaluate.
Stick around for the next few days and weeks. Soon, we’ll take a closer look at how customer success management can be implemented throughout an organization.