• Read Time 15 min
The indispensable role of Customer Success in B2B SaaS with ChurnZero CEO You Mon Tsang
From optional to all-important, Customer Success has come a long way in the last decade. And all signs point to continued growth. What makes us so sure of this during these times of considerable ambiguity?
For starters, the CS role has earned its rightful spot as one of a startup’s first ten hires. VC and PE firms now ask founders about the metrics owned by CS teams, specifically NRR and GRR, within the first ten minutes of conversation. Satisfying expectations for those numbers is an investment non-negotiable. CS is also making its way into academic curriculums with universities offering graduate certificates in its discipline. There are more CS job postings than there are qualified candidates to fill them (see point above)—a hiring trend predating the great resignation, which has only intensified demand.
We’ve said it before, and we’re willing to bet that we’ll say it for years to come: there’s no better time to be in CS.
To dig into what makes CS indispensable to SaaS, ChurnZero CEO You Mon Tsang joined the Digital Disrupted podcast. In the episode, You Mon covers the gamut of Customer Success insights—from defining its (oft-misunderstood) purpose, seeing what a day in the life of a CSM looks like, knowing when to add CS to an organization, handling tension with sales, and more.
Tune into the conversation or enjoy perusing the transcript below.
Note: this transcript has been lightly edited for clarity and concision.
Paul: We’re going to talk about what is being described as the No. 1 emerging job role in business today; one that’s grown tenfold in the last 10 years. To understand why, here’s a little thought exercise. Think about all of the transformative purchases your companies made recently. I bet most, if not all, of them were based on a subscription. I’d go even further to say that somewhere in your business you’re probably already thinking about how you can launch your own subscription-based service to take something you’re already doing or maybe something new and extend it through an as-a-service delivery model.
There’s a good reason to do it. It lowers your customer’s upfront expenses. It requires them to spend less capital to get innovative and risky projects kickstarted. But it also helps your business by giving you a constant, predictable revenue stream, making your business more predictable and getting rid of that quarterly boom-and-bust sales cycle that I’m sure we’ve all experienced. If you haven’t experienced it, I wouldn’t wish it on my worst enemy.
But it’s not all sunshine and rainbows. The threat of an as-a-service model is that the cost to the customer of churning to a new supplier can be dramatically lower. The switching costs are lower, bringing with it a new set of disciplines and KPIs we need to master if we’re going to retain those clients and keep that predictable revenue stream.
To talk about what needs to change and to offer his thoughts on how you can do it, we’re joined by You Mon Tsang who founded not just one, but four successful software companies, including Biz360, Engine 140, and Milktruck, before going on to found his latest business ChurnZero where he’s CEO and founder.
The lightning round
Paul: Before we jump into the topic of Customer Success and what seems to be this booming role at the moment, we play a little game called “the lightning round.”
What would people say is your superpower?
You Mon: My superpower is a very dull one which is I’m a continuous detailed planner. You can always rely on me to do that for family events, for work, for college events. I’m amazing at that.
Paul: You love a good list, is that when I’m here. That is a sensational power, especially in this world of short attention spans and TikTok videos, someone who can actually concentrate and get through a list as a good thing.
Paul: What’s the most disruptive technology of all time?
You Mon: There are so many great things to choose from there. One thing I think about a lot, and maybe this is my logistics brain, is the cargo container. The box that costs just a few thousand dollars that moves things around from ships to trains to trucks. It has transformed the way we trade and work with each other all over the world. It’s an amazing technology and so simple.
Paul: What’s the best quality a leader can have?
You Mon: When I think about being a leader, it’s all about how do I get my team to succeed. It’s about clearing obstacles and designing pathways for them to get to success. If you do that, you’re going to be a great leader.
Paul: What’s your advice to people starting their careers?
You Mon: If you can, think about getting as close as you can to innovation and/or growth. Companies that are innovative, companies that are growing, that’s really where the good energy is, that’s where all the learning is, and also the opportunities. Growing and innovative companies have a lot of opportunities to learn and to get responsibility, so do that.
Paul: What’s the first word that comes to mind when you think of as-a-service model?
You Mon: Accountability. If you’re delivering something as a service, whatever it is, because [the customer] can switch, you better do it right. You’re accountable every day, every month, every year. However often your renewal cycle is, you’re accountable.
Paul: If you could use technology to solve one world problem what would it be, and why?
You Mon: I’ve had this conversation with my son. If you can somehow—this is of course magic, although maybe it’s not magic—[achieve] near zero-cost renewable energy. It reminds me of the movie “Back to the future” where the doctor comes back with the Mr. Fusion reactor. If you get that near zero-cost renewable energy, it solves everything. It solves climate change, it solves food, it solves water. My goodness, let’s do that.
The entrepreneurial journey
Paul: Tell us a little bit about your background as a serial entrepreneur. Is that something you set out to do when you were in college?
You Mon: No, actually. I come from an immigrant family. I knew I had to work hard but it never occurred to me to really own my destiny in that way. I’m just lucky enough to get into software, and that’s a longer story. Once I got into software, it became clear to me that it was something that if you have the gumption, a little innovation, and a lot of hard work, you can get there. I just happened to be in Silicon Valley at the right time, just as the internet was growing. I was lucky. I happened to be in the right place at the right time. I saw the opportunity and decided to become an entrepreneur. I love the energy. I never went back. I never will go back. I will always be an entrepreneur.
Paul: That’s incredible because it’s easy to dismiss just how challenging it is to stare at a blank piece of paper, and it’s usually an empty balance sheet, and go ‘I’m going to start something.’ It’s a reason why a lot of people when they begin to think through the process of starting their own company, it’s a reason why they do a U-turn and run away because it can be pretty daunting.
You Mon: Make a list. Make it as small as you can. Do little things. Then all of a sudden, the ball starts rolling and you get some momentum. That’s really what building a company is, doing little things repeatedly adds up.
Paul: Albert Einstein said the eighth wonder of the world is compound interest.
Defining the what and why behind Customer Success
Paul: Let’s jump into the topic of Customer Success. I first heard this term—I even remember where I was—I was in a cafe in Cupertino, that’s about 10 years ago, with the CEO of Ansys, and I remember thinking at the time when he was talking about customers. He said we need Customer Success managers. I’m like what are you talking about? I had never heard the phrase before. Of course, he was ten years ahead of the curve. This was back in 2013. I do think it’s worth starting by putting some definitions in place, starting with what is customer success.
You Mon: Customer Success is the team that once you turn a prospect into a closed-won deal, and they become a customer, Customer Success takes over. They’re the proactive team. When someone uses your product as-a-service, paying every month or annually, you need to make sure they’re successful or else they will churn and go away. Customer Success is the team that makes sure customers are onboarded and welcomed, that they are adopting the service and product the way you expect them to, that they renew at the right time, and maybe even expand.
It’s different from customer support which is inbound: I have a problem right now, I need to talk to someone to solve that problem. Customer Success can do some of that, but it’s really focused on being more strategic, more outbound, following you through your journey on your way to having success with your product.
Paul: Customer Success also sounds like it has some of the attributes of a salesperson’s role. Would you say it’s somewhat of a hybrid role?
You Mon: It is. When your friend was looking for a Customer Success manager, the challenge he may have had, which we have today, is salespeople are born one way and customer service are born another way. To combine customer-centricity with commercial benefits is rare in a typical human being. For Customer Success managers, when you’re hiring your first few, you feel like it’s hard to find that person. But to your point, there’s a little bit of customer-centricity, there’s a bit of a commercial aspect to it, and together into one group or even one person.
The day in the life of a Customer Success manager
Paul: Walk us through what a day in the life of a Customer Success manager might look like.
You Mon: Let’s say you wake up and oftentimes there are probably one or two emergencies you have to deal with. The customer has a critical project where they’re using your product or service to help achieve that, so you need to help them. It’s not a support ticket issue, maybe it’s higher level than that and you’re going to help them get that done. That’s No. 1.
Paul: That could be something like usability. How do I do this?
You Mon: Yes, it’s like my manager asked me for a metric that I’ve never heard of before, but I know your system does it. Can you help me get that metric? That’s just an example. There’s a bit of a firefighting, on-demand part of it. Let’s say at noon, you take a look at your list of customers and you find that sales has closed a new customer. Your role is to make sure that [the customer] is scheduled for a welcome call. Make sure you understand why they bought your product or service and then you put them into an onboarding process.
Let’s say in the afternoon, you have a renewal conversation. You think this person has done really well with your product or service so maybe [you pitch them] the deluxe version of your product. You have the bronze and it’s time to go to silver and so you have that conversation. That’s the commercial part.
Then, you end the day [by checking customer health scores]. You have a customer who has been with you for months and their adoption isn’t quite what you want it to be. If you don’t get on this by month six, then bye-bye. Let’s say they have an annual contract. By month 12, they’re going to leave. If by month four, they haven’t had the traction, you find a playbook for [a customer] who’s having adoption problems. [You run the play.] Maybe you invite them to more training or offer a consultation. Anything you can do to get those folks adopted.
During the course of the day, you’re introducing new customers, fighting fires, getting an upsell, and making sure customers adopt your product.
Paul: It sounds like it indexes as a role far more proactive. Even the reactive stuff tends to be higher order, more strategic reactions versus technical reactions.
Demand for Customer Success professionals is at an all-time high
Paul: What surprised me about this as I was doing research for the show is some of the statistics. This is literally one of the fastest-growing jobs. I would have thought it’d be big data, etc. But it’s one of the most in-demand jobs at the moment, to the point where universities are now running graduate certificates in this discipline. Why do you think it’s taking off in the way it is right now?
You Mon: The endpoint for this is that a typical company will have as many Customer Success managers as they will salespeople, or even more at some point. There’s no end in sight for where CSMS are.
Why has it taken off? I think taking off is the right metaphor. It’s an airplane taking off. It’s been on the tarmac, then moving slowly on the runway, then accelerating. Now you feel the lift-off. We’re in that magical time where the airplane is lifting off.
The reason is that it’s taken a while for companies to move to an as-a-service model. We moved into as-a-service—whether it’s software, content, food—then the pricing models follow, then the service models follow, and then the best practices follow. It’s just taken us that long to make that transition. When best practices finally follow, and it could be 10 years after the move happened, that’s where CSMS came in. We now know churn is really important. Revenue retention is super important. Boards are asking for it. Investors are asking for it. Now we need Customer Success teams.
You can do the math. If I have a $100 million company and I need Customer Success managers—let’s say on average I need one for every $2 million in business—then I need 50 CSMs.
If I’m a growing company, like ChurnZero, we’re hiring CSMs for every X dollars of new revenue. As we grow, and hopefully we’ll grow forever, guess who we’re hiring forever? CSMs. Now at some point, I might actually choose to not get as many new sales; that can stabilize. But what doesn’t stabilize is my revenue and my growth. I will always be hiring CSMS.
Paul: Due to that proactive, fairly intensive engagement, the span of control of an individual CSM in terms of the number of clients they can manage at once is going to be limited. There’s only so much bandwidth they can have.
You Mon: Right, and technology helps. People turn to us to help them go from having one CSM manage $1 million to $1.5 million or from $2 million to $3 million. You can certainly get a lot of efficiencies. But there still is a math issue and a math problem.
The tension between sales and Customer Success
Paul: As sales moves away from a push model—now customers intuitively know what they want, they start Googling it and they’re buying versus being sold to—how does it change things like contract extensions and upsell opportunities? Do you see some tension evolving between sales and Customer Success teams?
You Mon: A big topic of conversation at almost every Customer Success conference I’ve gone to is the relationship between sales and Customer Success. There are many ways to do this. There are many ways to win. But where you stand as an industry is sales is really good at taking something from nothing or just a glimmer of a fit to a closed-won. Sometimes it’s inbound. But even if it’s an inbound interest, you’re rooting out other buyers or influencers, you’re managing the budget, you’re managing legal, you’re managing procurement. So, there’s really a lot that goes into selling. When you get into the Customer Success side, it’s about delivering value. They’re very different.
Now, where I see sales and Customer Success often conflict is [deciding] who owns the renewal, the upsell, and the cross-sell. An upsell would be buying more of the same, maybe more users. A cross-sell would be another product, it’s a little different. Those are the lines people draw to see what stays in Customer Success to own and what moves to sales. I see a lot of different ways to do it. I don’t think there’s a perfectly right way but we have that conversation all the time.
Paul: That’s an important point: there’s no right way to do it. It’s a matter of matching process and policy to your particular situation. And while it’s been around for 10+ years, it’s early in its integration into standard operating models for businesses and business processes. We’ve got to feel our way for the next couple of years before the right way or the path of least resistance emerges.
You Mon: Even in more established departments like sales and marketing, you find roles where people [debate] where things should belong. Like sales development reps, should that belong in marketing or sales? Does product marketing belong on the product team or the marketing team? There will always be a pull of best practices back and forth, and that’s OK.
Proving the business value of Customer Success
Paul: You’re talking about a pretty expensive resource. I’ll play devil’s advocate. You told me I need to hire salespeople because I need salespeople. You told me I need to hire support people because someone has to support the customer technically. Now, you’re telling me I need to add a third headcount. Headcount is expensive. Someone has to pay the bills. How am I going to measure these expensive resources to work out if I’m getting value? What are some of the metrics that a Customer Success team needs to be aware of? How should they be held to account? How do you know if you’re successful or not?
You Mon: You bring up a really good point. Chief customer officers (CCOs) own the Customer Success department. I’m encouraging [CCOs] to think more about what you’re talking about which is the impact on the bottom line.
Let’s do the math for a second. Let’s say, to make the math easy, it costs $100K for someone to manage $2 million of business. That’s 5% of revenue. I’m not even counting support or the cost of goods. So, what’s that 5% giving me? It better give me at least twice that in revenue retention. The AB test is if I had no CSMS, what’s my retention rate? My retention rate, to make the math easy, is 80% with no CSMs. Then if I add CSMs, it better be 90%, or else the math doesn’t work. You have to start thinking about it that way in order for you to even have a grown-up conversation with the other C-Suite executives.
Let’s say you pass that bar, what are the metrics that really count? I’ll start with a bottom-line metric and then there are two major metrics that feed into that bottom-line metric. In the end, the bottom-line metric is net revenue retention. What that means is that, of all the revenue that a cohort of customers enters the time period with, what do they exit with? Let’s say you enter with 100 customers who use your product or service. Five of them churn, so you’re at 95%. But of the 95%, a lot of them buy more. They expand their footprint with you. They buy 15% more, so your net revenue retention is 110%. You as a group are growing your company without the help of a single new customer.
NRR is a term that’s getting very popular now in Customer Success. If you can get your NRR above 100%, that means you’re expanding your current base, overpowering the churn that happens, and adding growth to your company. NRR is the bottom-line number that everybody should be focusing on. Investors do and VCs do as well.
Then, I would encourage folks to think about two major metrics that add to it. One is gross revenue retention (GRR). It takes out expansion. In my example before, you had 100 [customers], you lost five, so your GRR is 95%. With NRR, you can sell more, but if you’re losing too many customers, you’re hiding the loss. You have to think about GRR. That’s when you have a healthy base.
The other one is earlier in the cycle. If you’re selling something that takes a year to renew, you usually focus on Net Promoter Score (NPS) as well. It gives you an idea of if a customer thinks you’re valuable. [The scoring scale ranges] from negative 100 to positive 100. You want to, of course, be in the positive, but the higher it is, the better off you are. It gives you an early warning signal on the health of your customer base on the way to a good GRR and then on your way to a great NRR.
Knowing when to add Customer Success to an organization
Paul: How soon in an organization’s growth cycle do they need to think about adding a Customer Success team?
You Mon: I’m a big fan of Jason Lemkin of SaaStr. For those of you who’ve never read his pieces on LinkedIn and SaaStr, he’s a great resource for all things SaaS and all things about as-a-service. He has a great quote on that: a CSM should be a single-digit hire, which means that they better be employee one to nine. I would actually argue that a CSM comes before a support person. Because CSMs can do the duty of support temporarily for your 10 customers. But they can also have more strategic conversations as well. That’s a great rule of thumb for hiring new CSMs.
Customer Success teams won’t survive on customer happiness
Paul: The general sense from the negative side of the house perceives Customer Success as the happiness team. They see it as being a pretty fluffy role, almost the Pollyannas of the internal organization. Thoughts?
You Mon: The CS team is two things. One: they’re the closest to the customer. If you’re starting up new ventures or new services within the company, you’re trying to find product-market fit. Your CS folks are the ones who are going to tell you what’s wrong and the gaps.
Are they a happiness team? I understand that there are some who have built out the CS team that way, but you’re not going to win. You’re not going to deliver the revenue retention that’s needed. You’re not going to claw back discounts that were given by the sales reps. You’re not going to be bold and ask for renewal. You’re not going to be bold and try to get somebody to really love your product when they have told you that they’re not getting any use out of it whatsoever. If your goal is to make them happy at all other costs, you will not be a successful CSM. That team will not meet its mark and all the bad things will happen after that. The worst is that the company implodes; the best is that you replace the whole team with folks who are more strategic in thinking.
Paul: Tell me about ChurnZero. What was the inspiration for creating it?
You Mon: ChurnZero is a Customer Success platform. We sell to Customer Success teams. My third startup was acquired, and I became the CFO of a publicly traded company. I had all this unbelievable technology to service prospects. If you came to my site and opened my email to my webinars, I knew exactly what you did. I would score you and pass you over to sales at exactly the right time. Once we closed them, they got passed over to the Customer Success team. Then guess what? Hey CSM: here’s your phone and here’s an email. Go get them. Go make them happy. Go make them successful. Go get the renewal. I just thought that was crazy. We threw so much tech at understanding prospects and we have no tech to understand customers. I knew that was wrong. It was something that I had the capability of fixing, so I’ve spent the last five years building out the product and the company. Now, we have over 700 customers and we’re growing quickly by helping them do Customer Success. It was a real pain. I couldn’t believe what was happening and that’s why I started ChurnZero.
What’s next for Customer Success?
Now that you’ve gotten a look at what Customer Success is and why every SaaS business needs it, you might be wondering what the future holds for this fast-growing function. Learn the three Customer Success trends to look out for in our blog, “Where is Customer Success headed in 2022?“