The revenue line that deserves more attention
“If you have poor retention, then nothing else matters” said Brian Balfour, former VP Growth at HubSpot - a statement that might sound dramatic, but is simply true.
Retention is key to building a sustainable business as well as achieving persistent top-line growth. The premise of the SaaS business model is that revenue from a customer will be recurring and highly predictable, which will enable the business to recoup the cost of acquiring that customer over time (a.k.a the CAC payback period), ideally with some profit (a.k.a. LTV:CAC ratio). In a simplistic manner, if your customer stays a customer for longer than the CAC payback period, then you are likely to have a viable business. With >100% net revenue retention (NRR) and the power of compounding, a business can achieve exponential growth, even without acquiring new logos and by spending a fraction of the money they would spend otherwise - a phenomenon we cover in our Go-To-Market-Fit Toolkit.
If a business were to start at $100 in annual recurring revenue (ARR) today, and had an NRR of 120%, it would have grown by 150% in 5 years’ time without acquiring any new customers. If the same business had an NRR of 80%, it would have shrunk by c.70% within the same time frame.
The sceptical minds looking at this chart tend to argue that 120% NRR is not achievable on an ongoing basis as you start exhausting your expansion and upsell opportunities: Well, data shows otherwise!
A look at the top performing public SaaS companies’ NRR levels suggest that “high NRR can scale infinitely”. As Jason Lemkin of SaaStr writes, “Not only did high NRR not hit a ceiling at say $20m-$30m ARR, it did not hit that ceiling even now as we can see so many SaaS leaders pass $1B+ ARR.” And a case in point is Monday.com and their most recent investor presentation showing an impressive YoY growth rate of 65%, fueled by >120% NRR at >$500M ARR, in the midst of a ‘downturn’.
Of course, high NRR is the result of a combination of internal and external factors including (but not limited to) product offering, pricing strategy, customer service, clients’ business needs and budgets, internal customer success practices etc.
But whose responsibility is it to ensure high retention within a company at the end of the day? And are there ways to make their lives easier?
In this article, I’ll talk about the changing role of customer success and the increasing number of software solutions set out to serve customer success professionals. Let’s dive in!
Rise of Customer Success as a Revenue Center
So who’s responsible for this critical mission of ensuring high retention within a company? As with most things, it depends. For SaaS businesses with traditional outbound go-to-market (GTM) / sales processes, there are two schools of thought when it comes to whose responsibility it is to handle renewals and upsells:
one arguing that a Customer Success (CS) representative, who is closest to the customer as someone in charge of helping them achieve their business objectives, is best positioned for executing renewals and identifying upsell opportunities, and
the other arguing that a CS representative should act as a trusted pair of hands and a sounding board for the customer, with no agenda to sell, allowing for a more genuine and long term relationship to form.
A common approach is to start with the first school of thought and then transition into the latter: In the early days, companies tend to have more generalist employees who wear multiple hats and look after end-to-end processes. As companies scale, it becomes harder to recruit those superstars who are as great or willing at closing deals as they are at supporting customers and implementing long term product adoption roadmaps. Operational requirements also dictate dedicated and specialised teams to be put in place. That’s why many successful companies start with a generalist approach and specialise their GTM teams with dedicated KPIs over time.
With specialisation and scale, keeping marketing, sales, and customer success close friends, and having that 360 view on a customer become more difficult. Value delivered to customers gets impacted when key information is lost during handovers, or worse, when the specialised teams’ incentives/KPIs are not aligned properly. This then leads to poor customer engagement, which then leads to higher risk of churn. Similarly, when these teams have a close and harmonious working relationship supported by the right processes, culture and tech stack, results can be magical 🤩
Regardless of whose responsibility it is to ‘get the contracts signed’, as companies increasingly appreciate the value of retention and the role customer success teams play in it, CS teams are moving away from being perceived as cost centres and gaining strategic importance, influence and budget within organisations.
According to ChurnZero’s 2022 Customer Success Leadership Study,
78.5% of Customer Success teams now report into the C-suite. 36.0% report to the CEO, 17.1% to the chief operations officer, and 16.6% to the chief revenue officer—all indicating that Customer Success teams are revenue drivers. In companies with $500M or more in revenue, one-third (30.3%) of CS leaders have a place in the C-suite.
The top metrics in CS are all revenue metrics. NRR, which tracks the percentage of recurring revenue retained from existing customers, is now the top metric for CS teams in almost every revenue band. Overall, the industry’s top five measurements of success are NRR, gross revenue retention (GRR), churn rate, logo retention rate and expansion revenue—while “softer” metrics like NPS appear only further down the list.
Despite their critical role, customer success teams remain underserved by technology. “Although six out of ten teams have a CS operations role, less than half (46.3%) have a purpose-built Customer Success platform. This means that most CS teams still don’t have the appropriate infrastructure to deliver insights, increase efficiencies, drive revenue, and enhance the customer experience.”
Luckily, there’s an increasing number of software solutions that address these challenges, which as an investor I’m super excited about.
Here is a few of the European & Israeli players to watch:
Customer onboarding solutions
Primary ROI: faster time to value, good ‘first impression’
Quality of onboarding is becoming a more important cross functional area of focus. It's a key moment in a customer's journey that has a significant impact on potential future retention as it determines how quickly a customer will get to that 'aha moment' and start seeing value. In some cases, a poor onboarding experience can even have implications on your product’s buyer’s / champion’s reputation within their company.
Customer onboarding solutions like EverAfter are collaborative project management and engagement tools that enable businesses and their customers to design and execute a plan, have a single source of truth, and effectively communicate during an implementation and onboarding process. They provide pre-built and customisable project templates by customer type to kick-start onboarding, stay on top of progress and quickly address blockers along the way. EverAfter’s white-labelled customer-facing portal offering expands into the post-implementation phase, allowing software businesses to share reports, insights, updates, and meeting materials with their clients on a regular basis.
Digital Adoption Platforms
Primary ROI: Higher user engagement and product adoption, reduced number of tickets/ reduced time to resolve customer support tickets
Building a great product with all the shiny features and no-brainer benefits unfortunately doesn’t guarantee high engagement / adoption. There are a number of initiatives impacting a team at any point in time, so another new product is unlikely to get the attention it deserves by simply ‘going live’. There’s also the cost of learning a new application (i.e. time, attention, headspace, etc.) that cause people to resist change.
Digital adoption platforms (DAP), Userlane, Stonly and Usetiful are designed to simplify user experience and help drive the change required for a new product to be adopted within an organisation. They run as an overlay on software applications, and guide users through key tasks and processes via interactive, on-demand content. By enabling software platforms to easily create training and support content, they decrease customer support costs for SaaS solutions. Most DAP software solutions also provide feature level usage tracking and user feedback collection capabilities.
Predictive retention analytics
Primary ROI: Higher gross and net retention through proactive monitoring and management of customer health
More than half of the customer success managers agree that customers who ‘shout the loudest’ are not usually the greatest churn risk. Yet, customer meetings and gut feel are still the top two most widely used methods to assess customer health and predict churn.
Hook is on a mission to change this by enabling CS managers to be more data-driven when it comes to understanding which customers/revenue buckets are at risk so that they can spend their time and efforts more effectively.
Note: Most software solutions are as good as the data you’ll be able to feed them, but it’s particularly the case with these retention intelligence providers. Being able to provide historical product, revenue, and engagement data as well as initial hypotheses on what metrics most closely correlate with churn/retention will be needed to set these providers up for success.
All-in-one Customer Success Platforms
Primary ROI: More efficient customer success teams, higher gross and net retention through proactive monitoring and management of customer health
A common piece of advice shared with B2B SaaS founders looking to build category defining companies is to start with a single use case/customer segment, nail it*, and then expand to other/adjacent use cases/customer segments. Some companies on my watch list are a reminder that there isn’t a one way to build a great business, and a one size fits all approach is rarely the answer.
Having prioritised breadth, Planhat, Custify and Totango built an end-to-end customer success platform covering the entire customer journey from onboarding to renewal and expansion. Through integrations with various platforms that CS teams use, the likes of Planhat bring all key client metrics (e.g. renewal dates, payments, business objectives, notes from previous calls) into one place, and offer capabilities ranging from project management to workflow automation to customer health tracking and reporting.
I’m particularly excited to watch how different players will choose to build depth and breadth across the entire customer success value chain, and how they’ll approach build vs. buy vs. partner decisions over the next few years.
If you’re interested in reading more about the topic, I highly recommend ChurnZero’s latest Customer Success Leadership Study and Jason Lemkin’s take on it.
Special thanks to Jimi Guldstrand of Funnel, Amy McHugh of Codility and Ayala Ples of Crane who have shared their insights and experiences!