Even though bringing into COGS hurts the gross margin (as you correctly argue -- something that doesn’t “look good”) I feel that the S&M company expense should record activities focused on selling and marketing as opposed to satisfying and renewing.
I like the idea of the recurring expenses of satisfying and renewing to help in COGS.
When you think about the exercise of estimating LTV and CAC -- something that’s done wrong so many times, since people make bad assumptions about churn especially, but also about what the ongoing costs each year are -- putting these ongoing renewal costs in COGS feels smarter /better.
Nonetheless, if I were the decided and CFO -- in this world, I wouldn’t put 80% in COGS, as you would look “worse” than your peers.
And I think ultimately m, you’re trying to steer people to make the right choices given the facts and comparable of today.
So yeah I suppose I wouldn’t “advise” people to put 80% into COGS today unless we could get everyone else to treat it the same way (of course that’s impossible!)
I added the below to the article which I think is also helpful to think about. Just like R&D, there is a level of maintenance required to keep existing customers but it depends on the activities being performed to retain those customers. CSMs are one job title that there is little consistency between companies on what they are doing and the customer contract expectations.
"Also, if customer success management is actually S&M then it should decrease as a percentage of revenue over time because new business as a % of ARR decreases. If you find that it stays flat as a percentage of revenue then perhaps it belongs more in COGS."
Great topic! Once again, you and I are so aligned in what interests us and what we feel needs to be discussed and better understood!
Here is where I come out:
All activities - and related expenses -- associated with ongoing maintenance, support, satisfaction and ultimately renewal of existing customers -- even if the CSM is spiffed on the renewal -- should be in COGS. I suspect in most companies this is 80% or more of the CSM expense.
All activities focused on upsell/expansion should be in S&M. I’d be ok if we only put commissions paid to CSMs associated with such upsells -- although you could argue that if substantial time was dedicated to such activities that you should allocate some of their base salary to the S&M line.
So -- it should be split in most cases. Not 100% in one bucket of the other.
80% in COGS seems too high to me. That might be the case for early stage companies when CSMs are more about filling product gaps but I think it is the inverse of that (or more) after a certain maturity level.
Why do you think retention is COGS? I think it depends on what they are doing to drive the retention.
And like I mentioned, most companies I know who disbanded their CSM team have AEs take over all the responsibilities. You wouldn’t allocate any AE time to COGS.
Even though bringing into COGS hurts the gross margin (as you correctly argue -- something that doesn’t “look good”) I feel that the S&M company expense should record activities focused on selling and marketing as opposed to satisfying and renewing.
I like the idea of the recurring expenses of satisfying and renewing to help in COGS.
When you think about the exercise of estimating LTV and CAC -- something that’s done wrong so many times, since people make bad assumptions about churn especially, but also about what the ongoing costs each year are -- putting these ongoing renewal costs in COGS feels smarter /better.
Nonetheless, if I were the decided and CFO -- in this world, I wouldn’t put 80% in COGS, as you would look “worse” than your peers.
And I think ultimately m, you’re trying to steer people to make the right choices given the facts and comparable of today.
So yeah I suppose I wouldn’t “advise” people to put 80% into COGS today unless we could get everyone else to treat it the same way (of course that’s impossible!)
Great points.
I added the below to the article which I think is also helpful to think about. Just like R&D, there is a level of maintenance required to keep existing customers but it depends on the activities being performed to retain those customers. CSMs are one job title that there is little consistency between companies on what they are doing and the customer contract expectations.
"Also, if customer success management is actually S&M then it should decrease as a percentage of revenue over time because new business as a % of ARR decreases. If you find that it stays flat as a percentage of revenue then perhaps it belongs more in COGS."
Great topic! Once again, you and I are so aligned in what interests us and what we feel needs to be discussed and better understood!
Here is where I come out:
All activities - and related expenses -- associated with ongoing maintenance, support, satisfaction and ultimately renewal of existing customers -- even if the CSM is spiffed on the renewal -- should be in COGS. I suspect in most companies this is 80% or more of the CSM expense.
All activities focused on upsell/expansion should be in S&M. I’d be ok if we only put commissions paid to CSMs associated with such upsells -- although you could argue that if substantial time was dedicated to such activities that you should allocate some of their base salary to the S&M line.
So -- it should be split in most cases. Not 100% in one bucket of the other.
Thanks, David!
80% in COGS seems too high to me. That might be the case for early stage companies when CSMs are more about filling product gaps but I think it is the inverse of that (or more) after a certain maturity level.
Why do you think retention is COGS? I think it depends on what they are doing to drive the retention.
And like I mentioned, most companies I know who disbanded their CSM team have AEs take over all the responsibilities. You wouldn’t allocate any AE time to COGS.