Written by Haresh Gangwani, CEO of Bolstra
As the “Regulator of Risk” and “Master of Measurement”, a CFO may need to be convinced of the revenue reality of Customer Success. With growth ultimatums and pressures to demonstrate real ROIs, there’s a “show me the money” mindset that should be honored. In a subscription economy where existing customers are your bread and butter, this task is pretty straight forward.
Consider 3 irrefutable bases for chartering and supporting a Customer Success team:
- Existing customers have an ultimately higher value than new acquisitions
- Loyal customers feed the funnel for growth
- Customer Success expert services can (and should be) monetized
Let’s take a look at the numbers.
The Value of Existing Customers in Total ARR
There are plenty of stats out there that assert the bottom line value of existing customers. Over time, they represent as much as 70+% of Total ARR. Let’s just take a quick look at the math:
In the calculations above, COMPANY has an Existing Annual Recurring Revenue (EARR) of $0 and generates $1,000,000 in New ARR (NARR) in Year 1. This illustration reflects a 10% churn rate and a modest 20% growth rate.
By year 5, EARR represents 67% of Total ARR, and by year 10 EARR represents 74% of Total ARR. Notice, too, that NARR becomes an increasingly smaller portion of Total ARR over time.
The Value of LOYAL Existing Customers
The illustration above represents a company that may not have a well-heeled Customer Success team, and is accepting 10% churn and 20% growth rates. Consider what happens to that same company when a Customer Success team gets to work and is routinely delighting existing customers. Churn rates drop and these delighted, loyal customers expand AND refer. The math on this is downright exhilarating.
In this illustration, churn rates are at 0% and growth of new business is increased to 30%. By year 5, EARR represents 68% of Total ARR and by year 10, EARR represents 75% of Total ARR. That’s significant. But, the more powerful calculation is what happens to Total ARR. In Year 5, Total ARR is 43% higher (than the previous illustration), and by Year 10, TOTAL ARR IS 118% HIGHER!
All of this is possible when a Customer Success team is at the helm creating referenceable customers. While Customer Success resources are NOT sales people, they are clearly responsible (directly or indirectly, depending upon your charter) for account growth and referrals. Consider this alternative view of your opportunity funnel.
Monetize Customer Success Teams
So, you get the value of your existing customers and how Customer Success teams can (and should) be held responsible for delivering a consistently superior experience so that they grow and refer new business.
But, there’s more. This is where it gets good. Spreadsheets that show potential revenue streams is one thing, but actual billable services are another.
Monetizing Customer Success – turning the team into a profit center rather than a cost of doing business – is the linchpin in this equation. Customer Success Managers are (should be) solution experts whose services can be monetized. While there’s a lot of moving parts to fully monetizing a Customer Success team, there are some basic guidelines to keep in mind:
- There is a direct correlation between gleaning value from existing customers and hiring the right team of people to ensure those customers remain loyal and referenceable. These “unicorns” with solution expertise, strong communication skills, and consultative mindedness aren’t easy hires. Investing time in getting this right is the first step in being able to monetize their expertise.
- Recognizing the full scope of your solution – beyond a tool or single service – is foundational in developing a menu of offerings your customers will pay for. Customers buy because they have a business need you can meet. Identifying what services you will “give away” in an original sale, and which you will package and offer through a subscription or retainer requires keen capacity planning.
- Capitalize on the relationships. Loyal customers who are fully adopting your solution and retaining your expert services are not only revenue sources, but also intelligence for how your solution is actually used. Use the best of your customers to inform your strategic growth: updates, new solutions, diversified service offerings, etc.
The Monetization equation isn’t simple, and often involves being agile in determining how best to continue delivering real value to your customers. In spite of the challenges, developing a solid expert services team can yield an additional 10% of recurring revenue to your top line.
CFO’s are on the line to meet revenue generation goals. While they may have different KPIs than their marketing and customer-facing counterparts, they should be aligned in their organizational vision for growth. Recognizing the revenue value in ARR and account growth, and developing a plan for monetizing CS services provide the “aha” for chartering Customer Success. Lincoln Murphy punctuates these value opportunities and posits some additional ones. Regardless of which justification you land on, it’s time to embrace the revenue realities your Customer Success charter will bring to your business.