The Seesaw Effect: A Customer Success Leader’s Effect on Company Valuation
By Bill Cushard
If the CEO’s number one job is to increase the value of the company, then every employee has the number one job of focusing on work that increases the value of the company. For customer success leaders, this means creating an environment in which customers remain customers (no churn), buy more (expansion), and bring their friends (referrals).
In The Effective Executive: The Definitive Guide to Getting the Right Things Done, Peter Drucker devoted an entire chapter to the question each executive should ask themselves, “What can I contribute that will significantly affect the performance and the results of the institution I serve?” Customer Success leaders can contribute by producing a strong, stable, and growing customer base. This will significantly affect the performance and the results of the company they serve, especially if the definition of “performance” and “results” is company valuation.
Chris Hicken, co-founder and CEO of 'Nuffsaid, joined Kristen Hayer on her podcast, Success League Radio, to talk about the impact of customer-led growth on a SaaS business, and he shares a great metric CS Leaders can use to understand their impact on valuation.
The Rule of 40
There is no better proxy for predicting the future valuation of a company than how an investor evaluates whether to invest money in that company. As the saying goes, “putting your money where your mouth is.” Hickens tells Hayer about the Rule of 40 and why customer success leaders should understand this rule.
This is the Rule of 40:
Revenue growth rate % + EBITDA % must be over 40.
The Rule of 40 suggests that a SaaS company with a score of 40 or higher, is an attractive investment because it shows the tradeoff between top line revenue growth and operating profit (EBITDA). Let’s look at two examples to see how this works.
If a SaaS company is growing at 100% a year (a very good sign) and has a EBITDA of negative 59% (a bad sign), then the Rule of 40 says this company has a score of 41 and is an attractive investment. Even with a large operating loss, the revenue growth rate is so high, the value of the company is likely to increase at an acceptable rate over time.
In another example, if the revenue growth rate is ONLY 20%, the EBITDA margin better be at least 21% (an outstanding margin) to show a score of 41.
It’s a seesaw.
If revenue growth is high, operating margins can be low. If operating margins are high, revenue growth can be low. At some point in the life of every company, revenue growth reverts to the mean, paving the way for EBITDA margin to become a priority.
This is the turning point and where customer success really has the opportunity to shine.
What does the Rule of 40 mean for customer success?
Customer success uniquely impacts both sides of the seesaw of revenue growth and EBITDA margin in two ways:
Expansion revenue, which contributes to revenue growth
The cost to retain and expand revenue is lower than the cost to acquire new revenue, which contributes to higher EBITDA margins.
A classic double whammy.
It’s not enough to create customer value
As I have argued, customer success leaders limit their contribution to company performance when they only think about delivering value to customers. The risk: you deliver value to customers, but it comes at too high of a cost and that does not lead to retaining customers or buying more. It might lead to really strong customer satisfaction and NPS, but Revenue growth and EBITDA margins fall; while we delivered value to customers. That’s not going to be what gets the company where it needs to be.
Delivering value is only one of three parts of the business model definition: to create, deliver, AND capture value. If you only do one, you won’t be in business long. The Rule of 40 helps customer success leaders see the seesaw implications of company valuation and how they can contribute.
Assuming your CEO is looking for a strong valuation -and whose isn’t? As a Customer Success Leader, you and your team contribute to increasing the value of the company by focusing on the activities and goals that drive retention, expansion and referrals. That is the formula to ensure you contribute to hitting the “Rule of 40” and make your team shine!
Final thought: Imagine presenting your customer success business case and your strategy: Your slide reads: Our customer success strategy is to drive our Rule of 40 score above 41 by 1) increasing revenue from renewals and expansions; and 2) increasing EBITDA % by reducing the cost to retain and expand revenue from our existing customer base.
You could even add a seesaw image to that slide.
