Understanding Customer Success — with Gainsight’s Dan Steinman
Why Customer Success isn’t about making customers happy — and shouldn’t be confused with support.
Big thanks to Frontline and Balderton for hosting a workshop with Dan Steinman from Customer Success software-makers Gainsight. Dan literally co-wrote the book on Customer Success, which left him perfectly equipped to guide us through the field.
The Origins of Customer Success
The first Customer Success team was formed at Salesforce in 2005 — 6 months after the IPO. Back then, churn was 8% per month — Salesforce was churning most of their customers every year.
Most Salesforce execs came from old-school enterprise software giant Oracle. In those times, all focus was on new customer acquisition: sales and marketing.
These were the days of the “transactional economy”. When vendors collected almost all (>80%) of their revenue from each customer up front, they didn’t need to care whether people actually used the product.
Salesforce was one of the new generation of companies operating under the “subscription economy”. When business models switched to rely on subscription renewals and/or recurrent business to provide the majority of a customer’s lifetime value, vendor success and customer success became interlinked.
Dan highlighted two power shifts that came with the transition from transactional to subscription businesses:
Power Shift #1: from Vendor to Customer
A typical enterprise software solution used to cost $2M to licence, $2M for the data centre, $1–2M for a big consultancy like Accenture to roll out, and 3 years to deploy. If at the end of this process an end-user didn’t like the UI, there was no going back after all that sunk cost — that person was fired and replaced with someone who did(!)
Today, hosted platforms have decimated switching costs and rollout times, liberating and empowering the customer.
Power Shift #2: from Sales to Retention
Businesses have to be growing in value. As a subscription economy company matures, it’s value comes from the install base — active customers from which it will source the majority of it’s future revenue through recurring subscriptions and renewed contracts.
It used to be the vendor’s job to deliver products to make sales. Now, the vendor’s job is to deliver success to drive retention.
The Role of Customer Success
The Consumption Gap
The following illustration highlights the consumption gap — the distance between what’s possible with your product, vs. what your customer actually does with it:
The job of Customer Success is to push the consumption line closer to the possibility line.
Adopt, Expand, Renew
The job of Customer Success is to push the consumption line closer to the possibility line. This is done by ensuring customers adopt the product successfully, and subsequently expand their ongoing usage of it.
By doing so, the company benefits from increased renewals and upsold expansion revenue.
(An ongoing challenge for Customer Success is that the product team is simultaneously trying to push the possibility line up through the launch of new features!)
Customer Success is not Customer Support
Customer Success should not be confused with customer support. Support is a reactive model designed to reduce cost-to-serve, viewed as a cost centre.
Customer Success is a proactive model, designed to increase revenue per customer. It’s a revenue-driving centre, not a cost centre:
Customer Success is not customer happiness
It’s great if customers are happy. But the job of Customer Success is to make customers successful through adopting and expanding their use of the product such that they renew — not to make them happy.
Making a Success of Customer Success
An effective Customer Success effort is not found located in a corner of the org chart — it needs to be top-down. A Customer Success team can’t just be dealing with things that roll downhill — they need to be proactive.
According to SaaStr’s Jason Lemkin, Customer Success is a “single-digit hire” — i.e. should be one of the company’s first 10 hires.
Give ownership of retention
Customer Success should be given ownership of — and measured by — retention of existing customers.
Consider the cycle of managing daily activities → measuring progress → achieving results. Applied to Sales:
- Managing concerns leads, calls, meetings etc.
- Measuring is done on the size of the pipeline.
- Results are simple: how much did you sell?
Applied to Customer Success:
- Managing involves training sessions, quarterly business reviews, calls etc.
- Measuring is done using a Health Score indicating the likelihood that each active customer will churn.
- Results come via the retention rate for existing customers.
Measure time-to-value
Customer Success is the team responsible for successful customer onboarding. Progress can be tracked by monitoring the time-to-value.
Create healthy tension
Each morning, a VP Sales walks into the VP Product’s office saying “we need to complete these features, increase performance etc so we can close deals and renew contracts”.
The VP Customer Success should create the same healthy tension to drive and inform product decisions, but from the different perspective of ensuring the customer’s success in adoption, usage and expansion.
Segment Customer Success for different customer tiers
Consider your customers arranged in a pyramid, as below. In particular if you have an explicit tiered offering — you’ve already decided not all customers are created equal.
You should have different levels of customer success for each tier.
Each row on the pyramid has a different expected churn rate —you may retain 90% of enterprise whales, 80% of mid-market, 70% of SMBs. Churn will vary if you contact different customers with different frequencies.
For the longer tail of lower-value customers, you can’t afford to pick up the phone — but still want them to renew. Here Customer Success blurs with customer marketing, utilising 1-to-many channels such as email and webinars to automate customer success.
With a tiered / segmented offering, a key goal of customer success is to set customer expectations successfully according to their tier.
Separate from Sales
Most Customer Success people are not salespeople, and don’t want to be — they need to bring Sales in to take over or assist when the time comes for renewal or upsell.
The minute you start trying to sell something, you’re viewed differently by the customer — no longer included within the same discussions, etc. Companies want their Customer Success reps to be viewed as trusted insiders.
The delineation between hunter and farmer is getting clearer in the SaaS world — selling more to existing users is very different from knocking down doors to new prospects.
The value of Customer Success to Sales is to vastly reduce the cost of repeat and expansion sales to the existing customer base.
Customer Success vs. Account Management
Asked how Customer Success relates to the role of Account Management, Dan wished we could get rid of the title. “Nobody ever knows what it means. Managing accounts, or closing sales?”
Part of the role of Account Management can be handled under the acquisition/onboarding part of Customer Success.
Customer Success vs. Growth
Coming from a Growth perspective, Dan’s portrayal of Customer Success focused on activation, engagement, and in particular retention got me thinking about the overlap between Customer Success and Growth.
Dan volunteered that the job of Customer Success is to surface feedback, not try to solve problems from a product perspective or build product solutions.
When to implement Customer Success software (Gainsight etc)
To address this, Dan posed the question: “What does the scramble look like at your company when the CEO says ‘I’m going to visit customer X’ — what do I need to know?”
Other factors are i) how many customers do you have, and ii) do you have more than 2–3 people managing your customers.
The ultimate question is consistency. When you’re starting out, 1–2 people within the company will be able to score the health of all customers consistently as red/yellow/green based on likelihood to churn. As the number of customers and people managing them grows, it becomes impossible to score all customers consistently.
Hiring for Customer Success
One of the best profiles for a Customer Success person is someone who was a salesperson and really wants to change careers. These people have lots of the needed skills —the ability to read people, etc.
However, in contrast to a typical salesperson, they have to be able and willing to go deep on being a product expect as a user — developing workarounds etc.
Dan shared the following 15 traits he looks for in great Customer Success managers:
Of all the 15 traits, Dan highlighted domain expertise. At Marketo, the Customer Success team had to be marketing experts themselves. Many questions had nothing to do with the product, but were domain questions about how to be expert marketers — “what’s the best subject line” etc.
Calculating a Health Score
Customer Success should identify and prevent customer churn before it happens.
The Health Score is how Customer Success operations are measured. Each customer is assigned a score, updated as frequently as data is available. Scores can be simplified to red/amber/green, and should indicate the likelihood of that customer churning.
We should first understand why customers are churning, then determine an algorithm that calculates a score indicating the likelihood of future churn.
(“We didn’t have enough money” is not a reason for churn — if a customer is genuinely driving ROI then they won’t churn due to cost.)
Start offline
Some people within the building know what a successful customer looks like. Design an algorithm with their input, run it manually on 20 customers and see if the scores seem right. Find the signals that work, then work on automating the data once you’ve found those.
Inputs to the health score can be:
- Date-driven events that occur periodically or at set times (e.g. billing renewals).
- Data-driven events that could arise at any time based on how a product is being used, support requests from the customer etc.
At Gainsight, 60% of the health score comes from product signals — most of that from usage of two features that provide the most value. ~5% of the score comes from NPS. (NPS is a good indicator of average customer sentiment, but less indicative of individual customers due to patchy response coverage etc.)
Other possible inputs
- How does the customer respond/react to marketing messages? Open vs. click vs. delete vs. unsubscribe?
- Customer community — are they asking or answering other people’s questions?
Tell the customer their health score(!)
Dan evangelised revealing to the customer their health score in their quarterly review. The natural reaction is to want to increase it, as well as curiosity of what the benchmark is. This provides an opportunity to prompt the customer to improve their score — utilise unused licences, pay invoices on time etc.
How much customer success can be automated?
Imagine that with a perfect product, neither support nor success are required(!) The product installs itself, communicates its own value, reacts automatically and intelligently to varying patterns in usage etc.
In reality, we need customer success to cover the gaps.
Customer Success has it’s roots in the earliest stage
After his talk, Dan and I discussed the parallels between the Customer Success function within established companies, and the hunt for product/market fit that forms the entire mission of early-stage startups.
In early stage startups, the whole team should focus on providing success to their first few customers in order to ensure they’ve found product/market fit, and earn those invaluable happy reference customers/case studies. As the company scales, the Customer Success function provides the natural home for much of these efforts while the rest of the company scales up.
