The Future of Customer Success

How to budget and determine the ROI of your Customer Success team. Do you even need a Customer Success team?

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The Future of Customer Success

“Customer Success” is the only department where companies routinely debate whether they should nuke the entire org and hope for the best.

Customer success can have many teams within it, but for this post I am referring to the customer success manager team (aka CSMs).

This debate about CSMs has escalated in the past couple years as cloud companies have been pushed to radically improve efficiency. The mentality has shifted to “build, sell, or get out of the way”.

When budgets are tight, CFOs evaluate spend in three categories:

1. Does it help us make money?

2. Does it help us save money?

3. Does it keep us off the front page of a newspaper?

This has many people questioning if CSMs are a nice-to-have….

The problem with CSMs is that they don’t fit neatly into any of the above categories. The CSM ROI can be very fuzzy because they have the most lagging measurement outcomes of any department. But the goals of CSMs also happens to be what the entire SaaS business model is built upon (more on this below).

When efficiency is in focus, many companies question the value of their CSMs because of the long-term lag between their work and a monetary measurable outcome.

My goal with this post is to help companies evaluate how to budget and think about their CSM teams. There is a lot potentially at stake so you need to be careful.

Theory of Customer Success

The theory behind the CSM team’s value is what makes the SaaS business model possible.

SaaS business models are dependent on true recurring revenue. If SaaS companies don’t retain customers then the SaaS business model math completely breaks and valuations go to near zero — see Is ARR Dead? post.

Here is how I define the objective of CSMs:

CSM Objective: To drive product stickiness and successful customer outcomes with the purpose of increasing retention, which will naturally lead to more revenue.

If the goal of a CSM is to drive stronger customer retention (and they are successful) then CSMs play a critical role in the viability of the SaaS business model.

The SaaS business model is dependent on long customer lives because only then can SaaS companies generate the juicy 20%+ FCF margins that has been expected of cloud companies.

The big question is if CSMs are actually improving the retention curve or if the alternatives are better.

Defining Customer Success ROI

This is where things get fuzzy and a reason why companies debate the value of Customer Success — defining their ROI is really hard.

What is the lost revenue from not having CSMs?

With CSM vs Without CSM

Let’s look at the impact/assumptions that would have to be true for CSMs to be worth their cost using an example that compares a “with CSM” and “without CSM” scenarios:

There are a number of assumptions below, but the most important one is that the “with CSM” scenario has 5% less churn. The goal is to see how much net $ savings a CSM might be able to provide.

What?!?! Having a CSM only gets us $20K savings?

Let’s fire every single CSM. If we only save $20K/year, then the organizational complexity isn’t worth it. CSMs probably don’t even save 5% additional churn!

But not so fast. Remember that the SaaS business model is built on recurring revenue...

ARR is a Double-Edged Sword

A dollar of churn does not equal just one dollar of lost revenue. The impact of churn is much greater than this year’s churned revenue. ARR is a double-edged sword. Cloud revenue is supposed to be recurring, but if companies churn a customer then that is multiple years of lost revenue that is lost forever.

Let’s continue the example from above, but let’s assume the company is not selling to any new customers and let’s see how the “with CSM vs without CSM” plays out over the life of this cohort of customers:

In year 1, the CSM cost is barely breakeven. But SaaS is a long-term game….so if our assumptions are even remotely accurate then CSMs end up having a pretty good ROI over a longer period of time. In our example, CSMs saved the company $2.2M over this cohort’s life.

As you can see below, the impact looks/feels small initially. But as you get further out the difference is painfully obvious, especially if you look at the cumulative revenue difference (dashed line below) between the two churn assumptions.

What surprises me is how many Customer Success leaders don’t fully grasp the significance of this. I often hear people say retention is only down 2-3%, as if it’s a minor issue, when in reality, even small dips in retention can snowball into substantial losses over time. — John Gleeson, GP @ SuccessVP

Churn Snowballs

The analysis above only considers the $ impact that results directly from churn, but churn has some sneaky indirect consequences that can be hard to quantify.

The other indirect consequences are what create the “Churn Snowball” - the impact from the directly lost ARR from churn starts small but the total ARR lost over time can snowball…

Expansion revenue

Whether CSMs are directly driving expansion or not, if there is higher churn then there is less opportunity for expansion revenue (since you have less customers).

This lost expansion revenue can be huge over time. A company may continue to build more products and/or your customers grow in size….and those opportunities to sell more over time are now gone forever.

Second Order Impacts

More churn = less customer referrals

Whether it is happy customers referring others or unhappy customers spreading the word that they hate a vendor, second order revenue impacts are very real. The problem is this impact is REALLY hard to quantify.

I believe most companies underestimate how big of an impact these second order churn impacts can actually be though.

Case for CSMs

The argument for CSMs is that they do the best job in preventing these churn snowballs.

If CSMs can prevent a significant amount of churn and impact the curve more than other investments, then they are 100% worth the investment.

Case Against Customer Success

The case against customer success is either:

1. The above assumptions are not true

2. The dollars spent on CSMs will have a higher ROI elsewhere (more AEs, product, etc)

Many people have heard the Snowflake crew (Slootman, Scarpelli, Scheinder) say something like the below. And these are some of the smartest cloud leaders ever….so should you listen?

We don’t believe companies should have a separate customer success function. The first thing we did when Frank joined Snowflake was we blew up the customer success function. You are either going to do support, sales, or professional services. Customer success is not accountable for anything. — Mike Scarpelli, Snowflake CFO

Many people believe that CSMs just get in the way - they are just an unnecessary middleman. And removing them not only saves money but is actually better for the company and preventing churn.

If you have a solid case about CSM ROI being weak compared to other alternatives…then maybe you should nuke (or at least reduce) the customer success department.

But…you may want to test out your hypothesis though and make sure there won’t be a large long-term churn impact.

An Alternative Scenario

There is also a third scenario for how to think about the Customer Success department.

Maybe your Customer Success department really does have bad ROI, but it isn’t because the concept of CSMs is flawed.

Perhaps the problem is:

1. Your Customer Success strategy is bad

2. You have the wrong leaders/team.

Example: When companies miss their sales numbers, they don't question the need in general for sales reps, a CRO or a sales approach. They just change the strategy, CRO and/or the sales reps. They don’t question the need itself.

I wrote a relevant post last week (Fixing Organizational Debt) where I challenge companies to take a harder look at their people and organizational structures. The challenge for customer success departments is that their roles should change/evolve a lot more than others as the company scales.

CSMs become a Swiss Army knife that gets used for everything, which also means their objectives can easily get bent based on current company problems, who they report to, etc.

For example, lately I have seen many CSMs become primarily focused on upsells because of company initiatives to re-accelerate growth in a tough macro environment. If CSMs are going to be focused on expansion then the company probably would be better off with more salespeople instead.

Maybe the problem is not with the actual need of the CSM team, but with the people or strategy instead.

Consider if fixing your CSM team/strategy could yield a meaningful positive impact to churn.

Final Thoughts

I am not trying to convince anyone that they need CSMs (or how much they should spend on CSMs), but rather convince every company to properly evaluate their CSM department.

I have no doubt that many companies have CSM teams with negative ROI or weak ROI compared to other investment opportunities. If there are higher ROI investments elsewhere, then make those investments.

But be careful before you nuke the entire CSM department. In theory, their objectives line up exactly with why the SaaS business model works. If the company can be more successful to some degree with CSMs than without CSMs, then they are probably worth the investment.

Short-term metrics/efficiency improvements can definitely happen if you fire your CSM team, but this year (or maybe even next) isn’t the problem that CSMs are trying to solve. It is the long-term impact of churn and the cumulative revenue loss that can destroy significant company value.

**Thanks to my Customer Success friends for reviewing and providing feedback on this post - Nick Mehta and John Gleeson

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