The Future of Customer Success
Spoiler Alert: It won't be like it used to be!
To claim the Tech industry is at a crossroads is too apparent. The industry has gone on quite a run. After the great financial crisis, the Nasdaq 100 was worth $1.5 Trillion; at the peak of 2021, it was worth $20 Trillion. This has been one of the most extraordinary wealth-generating events of all time—a once-in-a-generation event. Billionaires were created, start-ups became household names, and Western society was fundamentally altered for good or ill.
Well, how is that Nasdaq 100 doing now? Not that good…
Since the highs of 2021, the Nasdaq has lost around $3 trillion of value. To put that size into perspective, that is larger than the GDP of France. The tech bros, which you may know, have been riding high for a long time, but now they are coming down to earth. For most of their life, companies that seemed untouchable are now doing mass lay-offs. The tech sector broadly is in the worst place it has ever been since the Dotcom crash.
How did we get here? Hubris? Abundant venture capital? Rising interest rates? Digital exhaustion? A combination of all those things. I am not overly interested in discussing the causes of the problem, and there are people online who do a much better job at that than I could. What interests me is how the industry, specifically Software-as-a-Service (SaaS) companies, move past this and grow.
Humbly one division of the tech industry which, in its maturity, can aid in this widespread recovery is the division I am a part of - Customer Success.
What is Customer Success
Customer Success ensures customers achieve their desired outcomes using a company's products or services. One of the fundamental principles of customer success is proactively engaging with customers to understand their needs and goals. This may involve conducting surveys, hosting focus groups, or simply talking to customers regularly to gather feedback and identify areas for improvement. By understanding what customers need and want, companies can develop products and services that better meet their needs and help them achieve their goals. Another critical aspect of customer success is providing customers with the support and resources they need to succeed. This may involve offering training, tutorials, and other educational materials to help customers get the most out of the company's products and services. It may also include technical support and additional assistance to help customers overcome challenges or obstacles.
This corporate role was first introduced at scale within SaaS companies. When software changed from something one bought on a shelf to something one paid for recurrently each month, two big things changed. First, the software company became more profitable, and second, customer expectations increased every time they paid. Because of these significant changes, these SaaS companies changed two things internally; from a development perspective, they moved into an agile framework, continuously releasing minor improvements to the product instead of annually with an extensive new release. The sales side of these SaaS companies was slower to change, and a new role was invented, Customer Success, to maintain the relationship between the customer who purchased and a customer who theoretically could be a customer for life. In short, the Customer Success team put the Service in Software-as-a-Service.
Therefore, critical metrics for SaaS companies emerged. Including but not limited to customer retention rates, customer satisfaction levels, and customer usage of the company's products and services. By regularly monitoring these metrics, companies could identify areas where customers are struggling and take steps to address any issues or challenges they may be facing. As the software market becomes increasingly competitive, companies must work harder to keep their customers satisfied and engaged with their products and services. This may involve offering more personalized support and resources, such as tailored training and educational materials, and using data and analytics to understand better and predict customer behavior.
To understand the importance of Customer Success moving into this new tech environment, we must first have a firm understanding of the metrics which keeps these monolithic technology companies moving.
Focus Shifts to CLV and Churn
SaaS metrics are specific metrics used to measure the performance of software as a service (SaaS) businesses. The standard SaaS metrics include the following:
Monthly Recurring Revenue (MRR): This metric measures the total revenue that a company generates from its subscription-based services every month.
Customer Acquisition Cost (CAC): This metric measures the cost of acquiring a new customer, including marketing and sales expenses.
Customer Lifetime Value (CLV): This metric estimates the total revenue a company can expect from a customer over their relationship with the company.
Churn Rate: This metric measures the percentage of customers who cancel their subscriptions or stop using the company's services within a given period.
Usage Rate: This metric measures the percentage of customers actively using the company's services and can help indicate how well the company retains and engages its customer base.
SaaS metrics are essential because they help companies understand the health and performance of their business and identify areas for improvement. By regularly monitoring and analyzing these metrics, companies can gain valuable insights into their customer base and make data-driven decisions to improve their business. The equation is quite simple: keep CAC lower than your CLV, have your sales team add new MRR, and have your Success team lower your Churn, or ideally, turn your Churn negative by having more expansion than contraction revenue. If a SaaS company can do that, the revenue line looks something like the following:
Now let us think about this in the context of interest rates. Imagine that interest rates are low (This shouldn’t be difficult. This was not long ago). That means the value of a current and future dollar is roughly the same1. Thus, if one knows that CAC > CLV, it makes sense to pour TONS of money into the software company to attain clients; that is why so many of these software unicorns going public in the 2010s were losing money. They were losing money because they were acquiring clients that had not paid back yet. But they would pay back in the future, in theory.
That is the state of the SaaS economy when interest rates are low. These companies hire many bodies, typically in the Sales and Marketing departments. The focus is on MRR and growing it. Now let us ask ourselves what occurs when interest rates rise. Well, that means that the value of a current dollar is more than that of a future dollar. Meaning CAC goes up relatively, not because of anything our Sales and Marketing team did, but because of what our Central Banks did. Match that with an upcoming recession (Also because of rising rates) and new software spending decreases. As illustrated by David Sacks below, the result means that SaaS companies need to reduce their sales and marketing spending to maintain their CAC payback times at their previous levels.
So what does this mean for Customer Success? Simple, the Sales teams attaining new clients isn’t cool anymore because they are more expensive, and the juice they give is not looking like it is worth the squeeze. It is always cheaper to renew an existing client than to attain a new one, and rising rates make that fact more obvious.
Thus the focus of SaaS will shift. It will move away from attaining new clients, adding MRR, and moving toward the post-sale. The focus will be on lowering Churn through proactive means and increasing the CLV of existing clients through novel strategies. It will be the most cost-effective way to increase evaluations and profits. That means updating and modernizing one’s Customer Success divisions.
It’s Still Early Days
One must remember to take a step back sometimes and see the forest from the trees. When that is done, gazing at the Customer Success roles and department, a startling fact becomes clear. This type of role is still in its early days. It hasn’t been fully cracked like other corporate roles. There is still much experimentation that needs to occur and a tremendous amount of efficiencies to find.
Success has the metrics to gauge their work (CLV, Churn, NPS, etc.), and they have broad concepts and frameworks (Playbooks, standardized onboarding, engagement, etc.). When Customer Success is compared to their sales counterparts, it is striking. SaaS sales teams and the CAC process have been fine-tuned. It is deadly efficient and getting even more efficient. This made sense because, during the beginning of software, eating the world and attaining customers and clients was the game's main aim. I’d wager there is still much more of the world for software to eat, but esoterically, it feels as if we are about halfway there.
Customer Success is where SaaS sales were 7-10ish years ago. There is tremendous room to grow and develop, specifically around processes and integrations with existing software and software that is yet to come. A common complaint in the Customer Success space is that there always needs to be more time. There are always fires to be put out, things to do, and very little time to be proactive. This is alarming because leverage and money are in all the visionary and proactive work. That would be the equivalent of an Account Executive complaining about spending so much time doing admin at the expense of doing demos.
In short, Customer Success is exiting its wild west phase and moving into its technician phase. A point in time that benefits not the maverick but the scientist, not the smooth talker but the systems thinker. It is a great time to be in this SaaS role because people who can stay in it will be asked to do more with less. The Customer Success divisions will be asked to scale rapidly, and their failure to do so will lower the profitability of the SaaS company in question. It sounds daunting, but it also sounds like a fantastic opportunity shrouded in adversity!
Stay Curious,
Michael Tastad
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This shouldn’t be the case, but we don’t live in a crypto utopia currently, instead we live in a fiat central bank hellscape, but hopefully, that changes :) Long live Bitcoin! HODL forever!