Yesterday was the first annual “Pulse” Conference, sponsored by Gainsight to generate awareness for the Customer Success space. The team put on an impressive first year event that attracted around 300 attendees and included engaging, high-profile speakers with relevant content. Gainsight plays in a growing space of solutions around Customer Success Automation (that’s my term, not the industry’s… yet). I’ll talk a bit more about the space and the other players in a future post as it is a very interesting space with some great technology solutions. This post is about the highlights of the conference:
The “Three R’s”
Nick Mehta, Gainsight CEO opened by introducing some key fundamental objectives of Customer Succes – and they’re all measurable. I’ve referred to them as the “Three R’s”: Retention, Renewals, and References.
Geoffrey Moore and the “Four Gear Framework”
Geoffrey Moore, Author of “Crossing the Chasm” and “Inside the Tornado”, presented an alternative framework to the traditional Technology Adoption Lifecycle, explaining that some consumer-focused businesses never faced a chasm to cross, but rather drove their growth through the “Four Gears” of Acquisition, Monetization, Engagement, and Enlistment – presenting a good case that a company’s growth is constrained by the slowest gear and that a strong Customer Success focus can help “Power gear” of Enlistment move more quickly. I’ve been a huge fan of Geoffrey Moore since the days of “Crossing the Chasm” and thought his observation and insight were spot-on. His message was so relevant, that not even a full-blown test of the fire alarm system at the Four Seasons in SF was able to detract from it. He kept the audience engaged.
The “Safe-Switch” Process
Bill Binch from Marketo shared that one of the key risk indicators for customer health they observed was employee churn on the customer side. I’m sure anyone who has managed a customer relationship can attest that changes in a customer’s key users or sponsors can sometimes jeopardize the status of an incumbent technology solution (especially if the solution has low switching costs) in a pay-as-you-go model. The CSM team there would offer free “re-training” for the customer’s new team members to reduce any re-adoption obstacles.
Track the profitability of your renewal stream.
Bruce Felt, former CFO at SuccessFactors shared some of the economics of renewals. SuccessFactors had a great valuation when it was acquired by SAP: $3.2 Billion. Interestingly enough, their acquisition costs for a customer where astronomical. Significantly higher than the first year’s Annual Recurring Revenue. When they tracked the profitability of the renewal stream, however, they calculated roughly 70% operating margins on their renewal stream. In his words: “You don’t have a business model if your customers don’t renew.”
Renewals are a trailing indicator of customer health
A number of speakers made the point (and I strongly agree), that basically renewal rates measure the score at the end of the game. They aren’t a timely actionable metric that can be used to impact individual customers. I’d argue that usage is also a trailing indicator of poor health – it may be useful in determining upsell opportunities for some variable usage products/services, but if a customer’s usage has gone down, in many cases, it’s because they’ve already moved on to a competitor’s solution. It’s vital for every company to identify the *leading* indicators of customer health for their solution and watch those closely.
Apply leading indicators of customer health in the sales process
Fantastic insight from Catherine Blackmore at Badgeville, where they identify leading health indicators for existing customers and run their sales prospects through those filters to determine whether the prospect is at risk of being a successful customer. If so, they act early to identify any required services and expectation management up front to ensure the customer will be successful before they’re brought on board. Otherwise, they won’t sign the customer. Now that’s a culture focused on success.
Retention and Valuation
Roger Lee from Battery Ventures, Ping Lee from Accel, Byron Deeter from Bessemer, and Aref Hillaly from Sequoia all sat on a panel together to provide the investor perspective on recurring revenue. Some key points:
- Net churn, or $ Retention Rate (revenue from existing customers, minus churn, plus upsell) should be at least 100%, ideally 110% to 125% for best-in-class
- Best-in-class companies churn fewer than 5% of their accounts per year
- Churn is a compounding factor in revenue growth (obvious, but worth noting as it really impacts the math… see next bullet point)
- Some investors estimate that for every 2% improvement in churn a company will see a 20% bump in valuation.
- Currently 15% of the total software market is SaaS and 85% is enterprise software. Some members of the panel expected those percentages to invert in the next 10 years.
Who is more valuable to an organization?
At the end of the day (literally, not figuratively), a panel of CEOs, consisting of Chris Cabrera from Xactly, Aaron Levie from Box, Tien Tzuo from Zuora, and Nick Mehta from Gainsight gave the CEOs’ perspective on Customer Success. When fielding a loaded audience question of “when will Customer Success become more important than sales?”, the group tactfully raised a good point. Namely, that many parts of an organization are necessary and equally key to success. More importantly, however, is that in the absence of implementation/switching costs, in the world of pay-as-you-go SaaS, sales becomes easier (still not “easy”) and retention becomes more difficult.
A long inaugural blog post, but hard to make it any shorter given the great content at the conference. Job well done!