Customer Success Without Recurring Revenue
Editor’s Note: The article first appeared on the Brooke.land blog here.
The mission statement of Customer Success is simple: ensure customers realize value from your products or services. A defining characteristic that separates Customer Success from Customer Support is being proactive in delivering that value. And allocating additional resources toward your customer’s long-term success pays huge dividends – improving retention by just 1% affects a company’s bottom line by around 7%. With that kind of upside, it’s no wonder companies have enthusiastically adopted the principles of Customer Success. The prototypical company with a Customer Success team is a high-priced subscription business with 12–24 month contracts. But what about companies where the majority of revenue is tied to a variable component of their pricing model? What does Customer Success look like when you don’t have consistent recurring revenue?
What is recurring revenue and why does it matter?
Recurring revenue is “the portion of a company’s revenue that is highly likely to continue in the future. This is revenue that’s predictable, stable and can be counted on in the future with a high degree of certainty,” according to Investopedia. With value-based pricing, costs are tied to a value metric that aligns with usage. This ensures customers get more of the service as they grow, and that the company captures more revenue with this increased value. However, this more flexible pricing model means revenue is no longer predictable or stable.
Many SaaS companies have made a shift toward relying on a variable pricing component for the majority of their revenue. 62% of SaaS companies have variable pricing that accounts for product usage such as number of seats, infrastructure load, etc. — think of infrastructure companies such as AWS or CloudFlare, and platform services like Okta or Twilio. While these companies likely have minimum contract values, they might not have a maximum. The rise of value-based pricing and the variable revenue model has implications for Customer Success teams.
When recurring revenue no longer makes up the majority of a company’s overall revenue, CSMs become responsible for more than protecting existing revenue – they’re intrinsically tasked with growing revenue as well.
Impact on Customer Success teams
The most common metric executives use to measure the effectiveness of Customer Success teams is net revenue – either from retention or expansion.
Retention has always been hard, and is only getting harder due to increased competition and lower switching costs. Now imagine a world where renewal conversations don’t just happen once a year, but every month. That’s the dynamic variable revenue models create among CSMs and their customers. As a result, CSMs need to be prepared to discuss value attainment in every customer conversation. A good starting point to better retention rates is to build even stronger relationships with customers. Having a pulse on the status of the partnership gives CSMs a chance to hedge against downsizing or replacement. Internal advocates can help navigate org charts to increase product adoption and expansion. An enthusiastic advocate could even be willing to spearhead introducing a contract with more commitment and stability.
Expansion is no less difficult, but is less of a focus for most CSMs. Survey data shows 42% of Customer Success teams list retention and churn reduction as a top priority, while upsells/cross-sells only win 21% of mindshare. How do we square this focus on revenue with the realities of churn and contraction? The upside of upsells and expansion revenue in a variable pricing model is also their greatest weakness – the low risk associated with trying something new. The underlying lack of commitment increases the likelihood of churn due to poor implementation or low usage. Becoming intrenched across the company leads to greater value delivery and product stickiness, but variable pricing raises the stakes on onboarding and user adoption.
The good news is Customer Success teams are adapting to the complexities of overseeing variable revenue and maintaining high retention rates and capturing additional revenue through expansion. According to ProfitWell, “Customer Success has an aggregate impact on net retention with those companies with some sort of Customer Success function seeing at least a 10% boost in net dollar retention compared to their non-customer success peers.” This includes a 15–27% drop in gross churn, and a 50–125% increase in expansion revenue compared to companies without Customer Success teams.
With only lagging metrics in their toolset, customer success leaders can’t really drive strategy at the executive level. Here’s Chris Hicken, former president at UserTesting, on how to change that.