Untangling Customer Success Financials
By Irene Lefton, CSLN Board Member
Business cycles have their ups and downs and when you lead a relatively new function like Customer Success (CS) it can feel like an uphill battle to know what to measure, how to capture your share of the budget, and ensure proper investment in your team. You might wonder if you are measuring the right things to make sure your CS function thrives.
Recently the CS Leadership Network convened a conversation between a Chief Customer Officer, a Chief Financial Officer, and a Venture Capitalist to discuss their views and perspectives on CS Financials. Not surprisingly, there were areas of commonality and areas of differences in how each of these roles view this important topic. This article untangles Customer Success financials and provides some insights and conclusions that you can use as you navigate this tricky area.
How different Roles view CS Financials:
VC’s often view CS as a board member, and they look to ensure strong company results and a good return on their investment. CS is seen as a critical function and the important metrics are typically churn and retention-focused such as: Net Dollar Retention (NDR); Churn; Cost to Retain (CRC); Cost to Expand (CEC).
Depending on the stage and size of the company, it’s important that the board conversation also includes some other stories and metrics that help the board understand the impact of underlying go-to-market and product challenges based on customer inputs. The VC on our panel noted that the right mix of CS metrics can provide a valuable view of the overall health of the business.
CFO’s have a role as the gatekeepers of spend and profitability, they manage costs, ensure revenue growth, and facilitate proper levels of investment for overall company success. In subscription businesses, there is always a focus on measuring and reporting on: Net Revenue Retention (NRR or NDR); and minimizing Churn. There is also a focus on managing costs. Some of these costs are accounted for “above the line” (applying to expensed sales / marketing / revenue) and some “below the line” (applying to amortized COGS and Support Costs). Because it is challenging to capture actual costs, often from an accounting perspective an allocation model is used to determine where to apply the team costs in the balance sheet (50/50 or 60/40, etc). This is necessary because the team performs many different functions with the same staff. Our CFO noted that CS is often discussed in terms of cost and not all CS teams are attached to revenue.
The Chief Customer Officer (CCO) or VP of CS or other CS Leader has many balls to juggle. Often they must manage costs and ensure revenue retention, and growth. A typical CS team addresses multiple areas of the business including bringing the voice of the customer to internal teams to identify gaps in product/market fit, and suggesting product and other strategic adjustments.
Most CCO’s manage retention and expansion revenue with a CSM team. They also handle onboarding for new customers, often with mismatched expectations from sales teams whose quota is based purely on customer acquisition, without a retention component. CCO’s can manage a CS Operations function which includes content creation and Ops management for a digital go-to-market business model for lower-end customers, and they often own Support and Customer Communities which are reactive functions that help retention by eliminating customer issues quickly, ensuring long-term engagement. Every CS team is structured differently.
Friction happens when the wrong things are measured.
Our panelists all agreed that CS is often viewed as a cost generator, not as a revenue driver. This implication results in many turnovers for CS Leaders during difficult times. It’s very easy to cut things that are not well understood. How CS organizations are measured and what they report to other C-Suite executives impacts how they are viewed. Without proper information and data to identify the value provided by CS teams, CS will not survive.
It’s unfortunate, but clear objectives for CS teams are not often well-defined. The changing nature of companies as they grow, and scale requires different objectives for CS teams. Not properly redefining what CS is for your company and stage of growth often can lead to additional friction. Also, many CS teams are focused on soft goals and those are also harder to measure. Most CS leaders provide stories or anecdotes because they don’t have the data to illustrate what is really happening. This is especially true in early growth stages. This friction can be solved by measuring different things related to operations, retention, and expansion thereby ensuring that the value your CS Team brings is recognized. The revenue (both retention and expansion) must be credited to the team and reported on properly. Revenue is a company-wide metric and CS needs to own it’s part of it.
Profitability is foremost for all companies. The panel discussed the “Rule of 40” and responses ranged from “It is no longer relevant” to “The new rule is the Rule of 60”. The stage, business model, and ownership structure all play into why this is a potential area of friction. When ARR for a SaaS company reaches the 25-50 million dollar range, there is a focus on growth. After 50 million, most companies shift to focus on margin. The structure and management of your CS Team will be different, requiring different objectives and measures depending on how it is defined. When you are looking at profitability, you need to consider both the revenue side and the cost side.
This brings us full circle to viewing CS as a Cost Center. The complexity of where to place the CS costs impacts how the CS organization is viewed and funded. When you are looking at the pure numbers, cost centers tend to be cut more quickly in downturns, and revenue-growing or product development organizations tend to be invested in.
What should be measured:
What gets measured will vary by company. It needs to relate to the company objectives, and appropriate metrics for CS teams will change over time as companies grow and shift focus. CS Leaders need to understand where they are in their business cycle, and how value is measured for their customer segments to properly create metrics that reflect the appropriate team objectives and value-added. This can be done with data, and by collecting information from customers.
For example, you look for the connections between operational measures such as product usage or support interactions or onboarding experience, time to value, and their correlation to long-term retention or churn. This requires starting to track these things early, well before enough data is available to report on. It’s worth looking backward too, if you have historical data.
Remember that retention, churn, and even revenue are all lagging metrics. You need to balance them with some leading indicators. Be imaginative, there are things you can use to predict, especially if you think about operational metrics as mentioned above. It might require modeling – don’t be afraid of that. There are certainly great tools around that can help with this. Of course, you need to measure revenue, such as NRR /NDR, as well as its components (gross revenue, churn, expansion). Don’t forget to forecast, both revenue and churn, it can be helpful to setting strategy and understanding where to allocate resources.
Measuring cost is also critical to be able to know where to invest for scale, and don’t forget to measure cost to retain and expand customers across segments. It’s also very important to understand customer engagement (product usage, average tickets for sticky customers, ticket response time impacts, ticket close rates) and customer ratings (NPS, Engagement, C-Sat). Measuring is a lot of work and you won’t get it all right, but pick a set of metrics that apply to your current definition and objectives for CS and adapt them over time.
Key Learnings
At the end of our discussion, our esteemed panel shared a few key learnings that they felt are important:
Know that retention is not just a CS Problem- educate peers and management so that all departments understand what they contribute to this important metric.
CS is a young function and doesn’t have the discipline to use data – anecdotes are weak, so start collecting and using data early
What is needed to measure CS is different based on Company size, stage, and go-to-market approach.
Measuring what’s important is hard – don’t let that stop you from getting it done. Focus on leading indicators instead of revenue/retention and churn.
It takes advocacy to help companies with older cultures/customs change their view of CS as a cost center. For many, it is a legacy of Customer Service organizations.
How we untangle CS Financials will be an ongoing body of work, and we would love to hear from you what you think about what we are sharing, what we missed, and what you are doing.
