18 Jan, 2021
Customer Success. Is it replacing Sales and Marketing? Over the last few years Customer Success has emerged as a key function in most technology organisations. Customer Success is eclipsing Sales and Marketing functions as the key driver of customer revenue. Why has it suddenly become so important? CLOUD TRANSFORMATION To understand the emergence of Customer Success we must first understand the impact of cloud models on technology vendors. Cloud transformation has impact in three areas: SOFTWARE ACCESS. Software is accessed through a browser and either runs in the public cloud, like Salesforce for example, or is run on a private cloud. The end customer does not run the software on their premises. LICENCE TERMS. End customers no longer pay a one-time license fee for the software installed on their premises. They pay based on usage. This can be either subscription-based or consumption-based. Subscription models (like Salesforce) are paid for over a period for an agreed level of usage. Consumption models (like AWS) are paid for based on actual use. CUSTOMER INVOICING. Revenue is billed by the vendor (or the reseller) based on customer usage over the period to which the customer has committed. New billing processes are required so that regular invoices can be produced. These three transformation areas rolled together drive significant change for the Sales function in a technology vendor. Broadly we can view the impact on the Sales function as being in two areas: Sales Compensation and Renewals. SALES COMPENSATION Salespeople have traditionally been paid as a percentage of deal value. And for software vendors deal values could be large, as one-time on-premise software purchases were invoiced up front. However, deals for cloud software are invoiced based on annual subscriptions or based on actual consumption. It’s not one big sale, but a series of commitments by a customer, over time, with the possibility that the customer might not renew. Vendors must adapt their sales compensation models, increasing commission percentages for cloud revenues, to balance the sales commission opportunity. This is particularly important for ‘transitional’ vendors, who are growing cloud revenues to replace legacy on-premise offers. Sales commissions for cloud need to be at least as attractive as they have been for on-premise offers in order to drive sales focus on cloud offers. RENEWALS AND CUSTOMER SUCCESS Historically the Renewal function in a vendor organisation was low profile, and as a result was often outsourced. Renewal revenue was generally from maintenance contracts which ensured customers had access to customer support in the event of problems, and to latest software upgrades. In the cloud model all this changes. Renewals become front and centre. Failure to renew a cloud subscription means that the vendor loses of all the revenue associated with that customer. And all of the Sales and Marketing investment that might have been put into winning that customer in the first place. Growing a business based on annuity subscriptions entails customer retention, as well as adding new customer names. Furthermore, customers will only renew and increase usage of a cloud solution if they are getting value. So the vendor now has a vested interest in ensuring that the customer is maximising value from the software. Customer experience and customer success have a direct revenue impact. SALES VERSUS CUSTOMER SUCCESS As vendors began to see the importance of cloud renewals and customer experience, the shape of the Sales organisation changed, and the Customer Success function was born. The Sales function has become fully focused on ‘Net New’ customers, adding new names to the customer list, or expanding into new parts of existing customer organisations. Sales is compensated for new Net New deals and is paid commission based on customer commitment. The Customer Success function owns renewals, which are just as important as new sales. Customer Success is not about calling a customer just before a renewal is due. Nor is it about customer service, dealing with issues, which is a reactive process. It’s about proactive and consistent account management over the course of the subscription term, to ensure that the customer is maximising value from the vendor’s software. HubSpot's VP of Customer Success, Eva Klein, says that ‘Customer Success helps customers get maximum value out of a product or service, working closely with sales, marketing, and product to achieve that goal.’ Customer Success is compensated based on customer retention (reducing ‘churn’), on increasing software usage, and on customer satisfaction (CSAT). This can only be done by understanding the goals of the customer, then helping the customer get the most value out of the software in relation to those goals. In the cloud model, because customer retention is as important as Net New sales, the Customer Success function is as important as the Sales function. Annuity subscription businesses simply cannot grow without both in place. MICROSOFT EXAMPLE Like many large software vendors who have transitioned to cloud, Microsoft has invested heavily in building its Customer Success function. Field Sales teams are focused on the ‘land’ component of a sale, winning the customer, then the Customer Success team owns the ‘expand’ component, to drive consumption and renewals. The compensation models have adjusted to support this model. Field Sales are typically compensated on year one Annual Contract Value (ACV) and Customer Success are compensated based on growth in consumption. The consumption ‘growth curve’ for Office 365 is very different to the consumption growth curve for Azure. Azure is a platform, and it typically takes time for end customers to build and scale solutions, so the Azure consumption growth curve is longer. Compensation models have been adjusted for this. KEY TAKEWAYS • The Customer Success function is as important as the Sales function for a company building an annuity subscription cloud business. Both must be in place. • Customer Success is not the same as Customer Service. Customer Success is proactive and is focused on maximising customer value, based on customer goals. • Customer Success is measured and compensated based on customer retention, on increasing software usage and on customer satisfaction. Understanding cloud partner programs is complex and challenging for most technology vendors. At Kovendi we have the insight, experience and expertise to help you. Get in contact if you want to know more.