Welcome to Part 2 of Strategic Customer Success Lessons from 400 SaaS Companies. This 2 part series offers strategic lessons on how to use your Customer Success Strategy to improve the unit economics and, therefore, the growth and valuation of your SaaS company.
These lessons are a result of my analysis of the 2017 Private SaaS Company Survey from David Skok and the KBCM Technology Group. The survey provides performance benchmarks generated from the responses of over 400 private SaaS companies with a median ARR of $8.5MM.
Building upon the 3 lessons I presented in Part 1, here are 2 more strategic Customer Success-focused takeaways.
1. Customer Success Will Put You On The Right Side Of The Rule of 40%
I’m referring to Brad Feld’s article ‘The Rule of 40% for a Healthy SaaS Company”. Brad provides a simple benchmark to measure the balance between the growth and profitability of your SaaS business. This article won’t go into why such a balance is critical for your SaaS business. Instead, everyone should check out Dave Kellog’s 2 articles on the 2016 SaaSacre.
The Rule of 40% is:
Your Growth (G) rate + your Profit (P) should equal or exceed 40%
The Private SaaS Company Survey uses this rule to serve as an index to measure the survey respondents with > $15MM ARR . The results? The median Growth + Profit index for this group of respondents was 17%. This is less than than half the Rule of 40% threshold that is now commonly targeted by SaaS investors.
The survey report provides a breakdown of the unit economics and other key characteristics of those respondents above the 40% threshold and those below. The results, as they relate to the effectiveness of your Customer Success Strategy, are striking.
Lower Gross Dollar Churn, higher Net Dollar Retention Rate and higher Expansion ARR all characterize SaaS businesses operating above the 40% threshold. Let’s drill into how your Customer Success Strategy should be driving these metrics and therefore your company’s relationship to the Rule of 40%
|Above the 40% threshold||Below the 40% threshold|
|Gross Dollar Churn||6.3%||8.3%|
|Net Dollar Retention Rate||104%||100%|
|% of new ARR from Existing Customers||34%||29%|
Gross Dollar Churn
An effective Customer Success Strategy will improve your Gross Dollar Churn in two steps:
1. As part of Customer Acquisition: Your Customer Success Strategy should play a central role in your Sales process. One such role is ensuring that the customer is purchasing the correct products/modules with the correct number of users/role profiles. “Correct” is defined as those products/modules and users/roles that enable the customer to perform the activities your Customer Success team have mapped out for the customer to achieve the prescribed measurable Value-based Outcomes.
2. As part of Customer Adoption: At its core, your Customer Success Strategy should be guaranteeing that the customer realizes value from the products/modules and users/roles they purchased above. Customer Success achieves this by guiding the customer to the successful completion of the activities that are enabled by the products/modules and users/roles purchased per Step 1 above.
The risk of customers reducing their subscriptions or cancelling entirely is dramatically reduced by consistently completing the 2 steps above. This will reduce your Gross Dollar Churn.
Net Dollar Retention Rate and % of New ARR from Existing Customers
Achieving a reduction in your Gross Dollar Churn is going to improve your Net Dollar Retention Rate. Improving the % of New ARR from Existing Customers, i.e. your Expansion ARR, will also improve your Net Dollar Retention Rate.
At Valuize we develop strategic formulas for our clients that combine to produce a Customer Success Strategy that will reduce the risk of revenue churn and increase the opportunity to expand revenue. These are the formulas that Customer Success Science is built upon.
2. Recognize Customer Success on Renewal Wins
Customer renewals are oxygen for your SaaS business. This is not news to any of you unless you are just entering the SaaS subscription economy.
This series of 2 articles along with the survey report itself has, hopefully, reinforced the importance of churn in its various forms as a key unit economic for your SaaS business. Again, probably nothing new to you SaaS business leaders. Yet…
…35% of the 2017 Private SaaS Company Survey respondent companies pay 0% commission on renewal revenue.
(For the sake of clarity, I’m assuming ‘commission’ in the survey is defined as commission potentially paid to any role in the company as opposed to commission only paid to Sales. If I obtain a definition that differs, I will update accordingly.)
The survey does not specify whether the 35% recognize successful closure of renewal revenue in another way like bonuses tied to revenue targets. They should and so should you. Recognize renewal wins. Recognize renewal wins with revenue-related commission or bonuses and direct this recognition at your Customer Success team focused on Adoption.
Recognizing the achievement of Customer Success in each renewal win is critical to keep the oxygen flowing through your business.
Renewal revenue is too important to not leverage the power of recognition. I fully subscribe to the arguments that money isn’t a primary motivator for a lot of today’s workforce. $-based incentivization isn’t always THE best way to drive desired behaviors in a business. However, $-based recognition does have a place. It does deliver a positive impact on motivation. Go ask your teams.
Renewal revenue is, ultimately, secured through the achievement of the customer’s Value-based Outcomes. This achievement is enabled by your Customer Success team. Using knowledge, experience, skill and drive, Customer Success makes customers successful through adoption of your SaaS solution.
Recognize this. Recognize the role Customer Success plays in the optimization of one the most important unit economic metrics in your SaaS business.
Make renewal revenue-based commission or bonuses part of this recognition. This type of recognition enables your Customer Success team to appreciate the impact of their work on the financial health of your company. This, in turn, enables your Customer Success team to understand the impact they have on security and future opportunities for all your company employees…even you.
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