“Strategy Without Tactics is the Slowest Route to Victory…
Tactics Without Strategy is the Noise Before Defeat.” – Sun Tzu
Achieving the Ultimate LTV
Review & Gain Consensus – What Are the Numbers Today: (Gross, Net, etc…)
- Define how they are measured
- Agree upon what they are now
- Establish what needs to be prioritized
- Focus on:
- Dollars First
- Logos Second
Step one is all about the numbers as they are today. You need to look at Churn, both Net and Gross, as well as the components contributing to each. As an example for Tailwind: What percent of your lost revenue is due to accounts leaving? What percent is a function of ACV decreases? Then look at Headwind: What is the percent due to expansion? What is the percent resulting from pricing increases? What percent can be attributed to Upsells? There is no need to try to understand the root cause. You just want to understand the numbers as they are today.
Optimize Valuation – Establish How Much Should be Invested & Where
- Retention Costs: CRC ratios
- Expansion Costs: CEC ratios
- Upsell Costs: CUC ratios
Although not necessarily a budget in the traditional sense, establishing initial values for Cost Ratios is critical for building out a Customer Success team. It allows you to determine headcount, strategy, processes / plays, and determine the amount of face time that is possible to spend with your customers. It will also provide a means for establishing what level of CSMs are needed and how this will change based on where future growth is targeted. This approach will provide a starting point for achieving your long term cost structure and enable you to create a roadmap for getting there. Finally, this cost structure will enable you to go beyond understanding CSM headcount to when an investment in assets, such as software, should be made.
Create Segmentation: (Customer – Not Sales)
- Some customers are more valuable than others (Always)
- Segments drive spend, which drives your tactics
Customer segmentation for CS needs to be different than Sales segmentation for several reasons. Sales customer segmentation is often created to optimize Sales tactics. Examples would be industry, region, or Ideal Customer Profile (ICP). Although CS may use some of these dimensions, such as ICP, their requirements are significantly different. One that stands out immediately is that once a prospect becomes a customer, specific things are known. This includes ACV, Use Case etc. Additionally, CS segmentation should start out simple and evolve over time, as more information is gathered. For example, if initial segmentation is based on ACV and headcount, it will often evolve. As data shows the need for new segments based on additional dimensions (firmographics), CS needs the ability to adjust without Sales needing to do the same.
Identify What is in Place – The As-Is
- Processes & Plays
- The Good stuff
- The Bad stuff
- The Gaps
- Metrics in place
- Process performance
- How many
- What expertise
- Their passion
Once you understand the internal performance numbers, it is time to look at what you have today. What processes have you got in place? This includes those within CS (support, onboarding, renewals. etc.), as well as those between CS and other organizations (Sales, Engineering, Product, etc.). This is also when you look at the metrics for both CS and other related organizations. Final is a review of the existing CS team. This goes beyond headcount to getting a sense for abilities by listening to customer calls, or having one-on-ones with your team.
Determine “The” Customer’s Definition of Success
- How is it measured?
- Are they achieving it?
- Do they recognize that they are achieving it?
- Can you influence it?
The name “Customer Success” suggests that you have decided to take an “Outside-In” view of what drives your company. That perspective is defined by what is important to your customers. This is how they define success, how it is measured, and how they will recognize the value that you have provided. Assuring that the customer receives this value, and that it is recognized is core to Customer Success. To do this, you need to understand the customer and the personas that exist within their organization, and how they define and measure success.
Identify the Greatest Opportunity to Increase LTV
- Value vs. Investment
- Retention (Least Expensive)
- Expansion (Retention x 2)
- Upselling (Retention x 4)
Since LTV is calculated by taking the product of Average ARR and Gross Margin divided by Churn, LTV optimization is driven in large part by Customer Success. To decide how to best optimize this, we need to consider several factors. Customer Success and the cost of the work that is done to renew customers (CRC) is COGS, which lowers Gross Margins, decreasing LTV. At the same time, retention is inversely proportional to churn and as such improves LTV. The Expansion (CEC) and Upselling (CUC) costs are not COGS, and they also affect LTV, but the cost of both exceeds CRC. Understanding these cost structures, and how they are impacted by ownership and responsibility (CS vs Sales) needs to be understood and defined to maximize LTV.
Create Customer Personas: The Renewal & Expansion Team(s)
- Who are they?
- Who is the decision maker(s)?
- What are their individual definitions of success?
- By Persona
- By Segment
Since Net Churn is the most common measure for the contribution of a Customer Success organization, understanding who is on the customer’s renewal and buying teams is critical. These teams consist of users, administrators, economic decision-makers, and often members of executive management. Understanding who these people are, how you get access to them, and how you assure they recognize the value your company adds and the value your company can provide going forward is critical to your mutual success.
Your Company’s Vision of Success for the Customer
- Articulate the “Master Narrative”
- Create the “Value Path”
- Identify the “Next Step” that provides value to the customer
- Use your company’s vision to define Customer Success
Delivering the value your customer invested in – driving “Time to Value” is critical for CS for obvious reasons. One is that it enables you to establish your credibility and value with your customer. With this credibility comes the opportunity to help craft the customer’s perception of what the next point of value, or next outcome is. When you are able to do this, you have created a vision in their mind of what is next as well as how it is achieved. This is of immense value to your company. It allows you to differentiate yourself from your competition (your solution is not their solution). It also provides you with a logical path for the future and your growth of ARR.
- Understand the “As-Is” and enable your team
- What doesn’t need to be done?
- What can/must be done by others?
- Who do you need on your team to succeed?
- Are there imbalances in how work is distributed?
- Identify the options for possible solutions
- Health Scores
- Tools… etc.
- Assess risk & cost associated with each option
- Decide on your best option and make it happen
- There are always 10 things to do today… pick one
- Pick One
- PICK ONE
- Define metrics
- They let you know if you’re doing what you said you’d do?
- They let you know if your tactics are working?
Execution is where the rubber meets the road. It is why CS exists! However, without the eight steps above, errors in execution can and will be made. Although you may be able to make progress with a different approach, it will be suboptimal. At the same time, once the eight steps are done, there are several critical things that need to be handled to optimize execution. Without understanding what the As-Is looks like, it is very difficult to move forward. By understanding the “As-Is’, you are able to identify what doesn’t need to be done (Muda), what should be done by others (Muri), and where imbalances exist (Mura). By understanding this and eliminating it, your team will be enabled to move from the “As-Is” to the “Should-Be”. In this process, in addition to identifying how it can be done, you need to assess the risk associated with each possible approach. The biggest risk, however, is the lack of focus. Focus drives results or quickly lets you know if your actions are not effective.
Assess the Effectiveness of Your Actions:
- If not working… Go back to Step 9
- If it is working… Go back to Step 7
- Take the customer to the next level of value
- Monetize based on the value provided
In Customer Success, we talk a lot about the customer journey, and we should. However, looking at it in the historical fashion as a journey with a logic endpoint of Sales and conversion to a customer is a mistake. Although this may be the starting point, there is no logical end to the journey. As a matter of fact, if there is, you’re probability of success as a company is greatly decreased. In today’s competitive world customers, their expectations, and the markets you serve are constantly evolving. Customer Success’ job is to make sure your company evolves with them.
Tom Lipscomb is a Bay Area Executive who has spent his career helping companies around the world deliver products and services that contributes to their Customers’ Success. He has always lead organizations with the understanding that, as Peter Drucker says, “Value in a service or product isn’t what you put into it, It is what the client or customer gets out of it.”