How VCs Look at Customer Success: The Key to Growing and Protecting Your Revenue

Baiyin by

When you boil it down there are really three ways to grow an enterprise software recurring revenue business:

  • Acquire new customers
  • Renew existing customers
  • Upsell existing customers

You may be hitting or exceeding your new bookings goal every quarter, but if you stop paying attention to #2 or #3, you’re going to have what VCs call a “leaky bucket problem.”

Unless you’re retaining and getting more revenue out of the new customers you close, you’re never going to reap the full benefits of being a recurring revenue business. Worse, you’re also not going to have a sustainable business model. Especially as your business enters the growth stage, when sales efficiency starts to slow down and new customers take up more time and resources to attain.

That’s why at OpenView, retention rate both on a total dollar and cohort basis is a key metric we pay close attention to.

We generally like to see enterprise and SMB-focused companies achieve more than a 95% and 85% retention rate (respectively), and when upsells are included, the dollar retention rate should be around 110%. See the chart below from this year’s annual SaaS Survey from Pacific Crest and David Skok, which OpenView also contributed to:

Annual Net Dollar Retention from Existing Customers

Annual Net Dollar Retention from Existing Customers

The Goal Isn’t Just to Avoid Churn, It’s to Grow Revenue by Adding Value

There are many reasons why customers churn:

  • The customer hasn’t been properly onboarded and may be using the product incorrectly
  • The customer’s needs have changed
  • New product features haven’t been adopted
  • Other users in the organization haven’t been properly trained
  • The internal champion has left

That’s just to name a few.

So what can you do? And whose responsibility is it to do it?

Unfortunately, your sales team is not the solution. They aren’t equipped to prevent existing customers from churning (and that really shouldn’t be their primary focus).

Your existing services or support teams likely don’t have all the answers, either. For one thing, they’re often far too reactive rather than proactive — better suited to handling complaints and trouble tickets than reaching out when the phone isn’t ringing. For another, they aren’t always built for selling renewals and upgrades.

As a result, many SaaS companies are investing in an entirely new function — Customer Success.

So, what’s “customer success” all about? While it’s tempting to reduce its role in an organization down to churn avoidance, I believe a better way to think of it is as the protector and grower of your revenue.

Who Needs Customer Success?

I would argue that almost all enterprise software businesses need some form of customer success. But to what extent?

A Customer Success function is particularly important for companies with software products in nascent or disruptive industries that require a lot of evangelizing and education. In these situations, the sales team will most likely have successfully sold your product to the one individual within the organization who is an out-of-the-box thinker, or particularly tech-savvy. It’s now your Customer Success team’s job to make sure the individual is properly onboarded, sees the ROI in the software, is able to get the rest of the organization onboard, and is continuously communicating feedback.

To do that, some companies have equipped their Customer Success team to run organization-wide training sessions, user conferences, and empower the internal champion for upsell opportunities.

What is Customer Success Responsible For?

The evolution of enterprise software businesses has lead to an increased need for Customer Success teams in several ways. For example, moving from perpetual license models to monthly or annual SaaS models causes sales teams to face renewal cycles at a greater frequency.

The rise of continuous development delivery models also requires companies to inform and retrain their customers on new product features and capabilities more often.

As a result, in many ways, your current revenue is at “greater risk” of churning. However, customers aren’t just willing to continue paying when they see the value of your software, in many cases they may actually be persuaded to pay more.

Customer Success teams in SaaS businesses are now responsible for the majority of the customer experience — from a pilot to full contract implementation to renewal and beyond — and for ensuring that the customer’s needs are proactively, holistically, and consistently being met.

I’ve heard from various Customer Success leaders that they can tell whether a company will renew or even upsell within the first few months of software implementation. This goes to show how critically important a well-structured and positive onboarding experience is, not to mention full visibility into that process. This is the point during a customer’s life cycle where you have their full attention and you’re getting invaluable information on their usage and needs. Use it well.

Customer Success Should Be Data-Driven

In order to gauge “customer health,” your Customer Success team should pay close attention to user-related data. You should be able to track how each of your customers is using your product.

Is the organization using it “correctly”? How many times are people logging on? Has there been a drop off? Who are the heaviest users of the product? Which parts of the product are users spending the most time on? Are they running reports?

You should also be able to track metrics outside of your software. How often are your customers calling support? Are your customers paying you on time? All of these pieces of data, if tracked correctly and concurrently, will give Customer Success clues as to where to spend their effort and time — whether that means preventing churn by being proactive in mitigating problems or identifying upsell opportunities.

In addition to tracking your customers, it’s important to track your Customer Success team’s performance by monitoring such metrics as:

  • Dollar and account churn
  • Onboarding rate
  • Product adoption rate
  • Customer satisfaction scores

By strategically and proactively putting a strong Customer Success infrastructure in place, you’re making a strong investment in your company’s future. The more successful your customers are, the more they’ll drive the success of your business.