This week's featured piece is an excerpt from an upcoming article on Business Planning for 2021.
While Product, Engineering, Sales, and Marketing can argue for additional budget that leads to increased revenue or engagement, Customer Success is often tied to financial metrics like “revenue per CSM” or “Customers per CSM” which are efficiency metrics. But if CS continues to be perceived as the department that needs to “be more efficient” it will always lose the battle for more budget against other department leaders.
It’s time to flip budgeting conversations from being around efficiency to being around how the company can invest more heavily in Customer Success to increase revenue.
Part of doing that requires the Customer Success leader to be prepared for the CFO to ask questions about how CS intends to be more efficient, and handle those questions in a way that brings the conversation back to being about investing more in Customer Success.
Here are some of the questions a CFO might use to steer the conversation and how to navigate those questions.
Question #1: “I need you to be more efficient next year, so where are we going to cut costs?”
The Success leader should respond to this question by first recognizing where the CFO is coming from, then showing how increased budget will drive more revenue and explaining why that’s a better option than cutting costs.
Here’s a quick overview on where the CFO is coming from: The Board and the CEO hold the CFO accountable for profitability and, in some cases, overall company growth—so the CFO manages a suite of metrics that allow them to control profitability and growth. And the metric the CFO wants the CS leader to care most about is cost to retain revenue.
CFOs want to see a decreasing trendline on the cost to retain revenue over time, and they typically want CS to decrease costs to achieve that. But decreasing the overall cost to retain revenue doesn’t have to be achieved by being more efficient, it can also be achieved by increasing budget that helps CS drive more revenue.
So an appropriate response to this question could be something like this: “I understand what you care about is making the Customer Success functions more efficient so that we reduce the cost to retain revenue. But reducing the cost to retain revenue doesn’t have to mean cutting costs. In fact, we may even want to increase the cost to retain revenue in exchange for more revenue and profit. I’m going to show you a few options for us to discuss.”
Question #2: “I gave you $x budget for tools this year, where are the efficiency gains?”
The temptation is to respond to this question by examining the performance on “revenue per CSM” or “customers per CSM.” But that keeps the conversation focused on efficiency, and we want to shift it towards investment.
In addition to showing the expense and revenue forecast you created, respond to this question by showing progress in areas of investment. Demonstrate how previous investments have improved overall business metrics, even if the cost to retain revenue remained constant. You might show improvements in:
- Net retention rates (renewals + upsells + cross-sells + expansions)
- Health scores, NPS, or customer satisfaction scores
- New programs launched (onboarding, training, operations and deal desk, etc)
Improvements in the above metrics will impact higher-level trends like the company’s growth rate, portfolio health, or profits—which are all trends the CFO cares about. They also demonstrate how Customer Success isn’t a cost center but instead a department that can drive overall business performance.
Question #3: “What’s your long-term plan to get our cost to retain revenue below x%?”
The best response to this question is to position Success as the key driver of the company’s growth.
There’s an inflection point in a company’s maturity when its growth rate falls below 100%. At that point, revenue from existing customers exceeds revenue from new customers, meaning Customer Success should become the most important lever to build a sustainable business.
If Customer Success is perceived as a cost reduction center, then the business will never invest the necessary resources to maximize growth and retention. For that reason, any discussion about cost to retain revenue must include a discussion about investments for long term sustainability and growth. Customer Success must seize responsibility for influencing and driving expansion revenue (upsell and cross-sell) which, combined with renewals, is called net renewal rate by most companies.
In planning meetings with the CFO, present a plan that shows how Customer Success will drive improvements in expansion revenue. This could include things like adding account manager roles in Success, focusing CS Ops on expansion opportunities, partnering with marketing to drive better Customer Marketing programs, asking better expansion questions during onboarding, etc. Then ensure that Customer Success receives credit for net renewal rate in the cost to retain revenue calculation.
Combining growth campaigns with cost to retain revenue is the best way for the business to both meet efficiency goals while also maximizing revenue and profit.
Top resources this week:
This week's newsletter features posts on:
- The Customer Success Leader's Journey
- Customer Success Management From the Investor's Perspective [Podcast]
- Quarterly Business Reviews Best Practices
The Customer Success Leader's Journey
Here’s a great infographic from Method Garage that walks through a CS leader’s career. It lists out the steps as a CS leader becomes more mature and experienced in their career, starting from the very beginning, “taking the job,” to “focusing on the fundamentals,” “gaining buy-in” by digging into the data and segmenting customers, “operationalizing Customer Success,” and beyond.
Customer Success Management From the Investor's Perspective [Podcast]
In this interview, Rav Dhaliwal, Investor and Venture Partner at Crane (and former Head of CS for Slack - EMEA), draws from his experience to share best practices and pitfalls in building out Customer Success teams.
Quarterly Business Reviews Best Practices
Here’s Diana De Jesus (Enterprise CSM at atSpoke) with a recap of a discussion about the process and details of QBR meetings—including when they’re necessary and when there are better options, front-loading the executive summary, and more.
Success Happy Hour is a weekly newsletter for Customer Success leaders. Each week we feature one digestible piece of advice or a framework from top Success leaders, plus four of the best resources from that week. Subscribe here.