Nov 23, 2021

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Customer Success Capacity Planning and Budget Guide

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Customer Success Capacity Planning and Budget Guide

As a Customer Success leader, do you get anxious at the thought of asking your CFO or CEO for additional headcount? Have you ever been in a position where you’ve had to beg to hire more resources? Even though it’s evident that your understaffing is causing the customer experience to suffer. Your team is stressed and ready to walk away. Customers are complaining about extended wait times and an inability to reach their CSM. You’re stuck in an ongoing loop of unhappy employees leading to unhappy customers.

Advocating for increased budget is a grind that’s near and dear to the heart of every Customer Success leader. Because as a function that’s historically been underfunded and undervalued, getting the resources you need just to stay afloat can be an uphill battle.

And if you’ve spent any time defending your budget requests, you know that emotional pleas don’t tend to go far with CFOs.

This is a lesson Kristen Hayer, Founder and CEO of The Success League, has learned firsthand as a former Customer Success leader, and one that she’s helped countless others confront through her work running a Customer Success consultancy.

In her prior roles as a Customer Success leader, Kristen recalls budgeting negotiations with her CFO: “I’d hear back ‘It’s not in our budget. We’re behind on our sales projections. You can’t have more CSMs. You have to make do with what you have.’ I couldn’t figure out why our CFO was not able to understand that it was our customers who were taking the hit.”

To build a compelling financial case, Kristen knew she had to change her tactics and become more data driven. And by implementing the Customer Success capacity planning and budgeting models shared in this article, Kristen did just that. Using these models, you too can learn how to go toe-to-toe with your Finance team by presenting trade-offs to get the headcount you need.

In this article, we cover:

  • Budgeting Benchmarks: Do They Cause More Harm than Good?
  • How to Perform a Top-Down Analysis for Customer-to-CSM Ratio
  • How to Perform a Bottom-Up Analysis for Customer-to-CSM Ratio
    • Calculating Regular Journey Touchpoints
    • Calculating One-Time Journey Touchpoints
  • How to Build a Customer Success Budget for Headcount
  • Customer Success Budgeting Best Practices and Lessons Learned

After reading this article, you’ll walk away with the budgeting strategies and models needed to have more productive conversations with your Finance team about headcount; no begging required.

*This article is adapted from an in-person workshop presented by Kristen Hayer, Founder and CEO of The Success League, at BIG RYG, ChurnZero’s annual Customer Success leadership summit.

Budgeting Benchmarks: Do They Cause More Harm than Good?

If you’re in the Customer Success industry, you’re probably familiar with these popular budgeting benchmarks:

  • CSMs should manage $1 million to $5 million in Annual Recurring Revenue (ARR)
  • A Customer Success team should cost 5%-15% of total revenue, depending on product maturity
  • All Support teams, including Customer Success, should cost no more than 20% of total revenue
  • Professional Services teams should show a margin of 25%-50% on the services they provide

While comparing your business to others gives you a general indication of your performance, it also sets you up with unrealistic expectations. After all, you don’t really know what’s going on inside another company. Businesses are nuanced with many contextual constraints. What works for someone else may very well not work for you. Because no two companies are exactly alike, nor are the people who comprise them. When pinpointing if a benchmark is well-suited to you, there are many factors to consider, such as your company’s size, industry, maturity, mission, customer base, workplace culture, and so on.

“Benchmarks are helpful in that they show you what other people are doing. They’re terrible in that CFOs and CEOs tend to fixate on the benchmarks they happen to like, even when those benchmarks don’t necessarily fit with what’s going on in your organization,” says Kristen. “That said, you still have to deal with benchmarks because your CFO and CEO are still thinking about them, whether you talk about them or not.”

According to Kristen, one of the best things you can do is understand your CFO’s perspectives on benchmarks before you start building your budget. CFOs are always talking to their peers, researching the market, and reading industry reports. It’s helpful to know what beliefs and concerns they hold so you can position your business case to overcome any objections or generalizations they raise.

Given benchmarks propensity to stir up conflict, are they causing you more harm than good? Is it time you threw them to the wind and went your own way?

Not exactly.

“The thing to remember with benchmarks is they do come from real data, and they do represent industry averages,” says Kristen. “While you may argue that there are aspects of your organization that differ when comparing benchmarks, generally companies aren’t so wildly unique that they can get away with using a number that’s way out of whack. You should be close to benchmarks in some way, maybe on the far end of the spectrum, but you need to be in there somewhere.”

Benchmarks are your friend when used with context. But without context, benchmarks can corrupt.

When demonstrating the budgeting models shared in this article, we’ll be using common benchmarks that you’ve likely encountered before.

The first being a well-known budgeting standard, which is to hire a CSM for every $2 million in ARR. As Kristen says, “It’s a benchmark for a reason. It’s common for companies to land on that average and have it work. But it doesn’t work for every company, and you have to balance it with the journey you’re trying to deliver to your customers.”

With this in mind, let’s move onto our analyses.

How to Perform a Top-Down Analysis for Customer-to-CSM Ratio

Before we start, to perform both a top-down and bottom-up analysis, you’ll need the following data:

  • Customer Segments
    • Revenue by Segment
    • Number of Customers by Segment
  • Customer Touchpoint/Journey Map (also referred to as a Playbook)
    • Key Touchpoints
    • Time per Touchpoint per Customer

To walk you through how to conduct a top-down analysis, we’ll use one of today’s most common Customer Success benchmarks: hiring a CSM for every $2 million in ARR.

But budgeting in terms of revenue per CSM can cause issues. Instead, Kristen recommends looking at CSM workload. For most companies, the closest equivalent to CSM workload is the number of customers per CSM.

Top-Down Analysis Based on Hiring a CSM for Every $2M in ARR
Benchmark: Revenue per CSM $2,000,000
Total Revenue in Segment $18,000,000
CSMs Required 9
Total Customers in Segment 720
Customers per CSM 80

Let’s say you decide the benchmark of $2 million per CSM is what you want to use. You’d then take the total revenue in your segment (in this example that’s $18 million) and divide it by your revenue per CSM ($2 million). This gives you a required headcount of nine CSMs.

Then, you take the total number of customers in your given segment (in this example that’s 720) and divide that by your required CSM count (9). This gives you 80 customers per CSM.

But to emphasize, this is just an example.

“There’s no magic number of customers per CSM,” says Kristen. “It’s unique to every company and every customer segment. Don’t walk away thinking that 80 is the number. It’s not. It will be different for you.”

To take a different approach, let’s look at how to calculate customers per CSM using another common benchmark: CSMs should be 10% of revenue.

Top-Down Analysis Based on CSMs as 10% of Revenue
Benchmark: Percentage of Revenue 10%
Total Revenue $18,000,000
Available Budget $1,800,000
Average CSM Cost $180,000
Available CSMs 10
Total Customers in Segment 720
Customers per CSM 72

 

In this example, your total revenue is $18 million. That means your CSM budget is $1.8 million. Let’s say, on average, your fully loaded cost (that includes salary, variable, benefits, etc.) for a CSM is $180,000. This means you can afford 10 CSMs. We’ll use the same customer segment count as the previous example for comparison. Divide your total number of customers (720) by the number of available CSMs (10). This lowers your customer-to-CSM ratio to 72 customers per CSM.

“What you’re trying to do here is set up the conversation you’re going to have with your Finance team,” says Kristen. “You’re not necessarily agreeing to this calculation. You’re just looking at it because you want to make sure you include other considerations when you go into that conversation.”

The top-down analysis is simple compared to the bottom-up analysis we’ll look at next.

How to Perform a Bottom-Up Analysis for Customer-to-CSM Ratio

Your customer journey will be the foundation for your bottom-up analysis. Before you can begin your analysis, you need to have thought through what activities and events comprise your customer journey. The table below shows a few common touchpoints you may have in your customer journey.

Sample Customer Touchpoints
Onboarding Adoption Expansion Advocacy
Kick-Off Meeting Training Session Business Review Reference Request
Discovery Call Success Plan Review Monthly Meeting User Group Invite
Goal-Setting Meeting Product Announcement

 

Kristen says it’s important to know that when you budget for headcount, you can’t just turn your CSMs loose with the charge of making customers happy. Your measurements of their workload need to be precise. You need to know how long it takes your CSMs to perform specific tasks and activities. This doesn’t mean you need to dictate every single little thing they do. But it does mean you need to know your major customer touchpoints.

“You may think ‘How am I supposed to know what my CSMs do at that level of detail? I trust them to do their job and take care of our customers.’ But here’s the thing,” says Kristen. “You’re not running a happiness team; you’re running a revenue team. The reason that revenue teams get money for their staff is because they can explain at a good level of detail exactly how they spend their money. As a Customer Success leader, you must do the same, and knowing your team’s activities is how you get there.”

If you haven’t gone through the process of mapping your customer journey, start simple with a list of your team’s activities. You can get more elaborate over time.

There are two main types of touchpoints for customers. The first one we’ll discuss is a regular touchpoint which has a recurring cadence. An example of a regular touchpoint is a quarterly business review.

Calculating Regular Touchpoints
Goal-Setting Meeting (Bi-Annual, 2 Hours Each) 0.33
Success Plan Review (Bi-Annual, 2 Hours Each) 0.33
Business Reviews (Quarterly, 3 Hours Each) 1.00
Monthly Meeting (Monthly, 30 Minutes Each) 0.50
Product Announcement (Quarterly, 15 Minutes Each) 0.08
Reference Request (Bi-Annual, 15 Minutes Each) 0.04
User Group Invite (Quarterly, 15 Minutes Each) 0.08
Hours per Customer for Regular Touchpoints 2.36

After you identify your regular touchpoints, you want to break them down by their frequency and duration per customer per month. Using the quarterly business review as an example, let’s say it takes three hours to prep, deliver, and follow-up on the review, on average. In total, that activity takes 12 hours per customer per year, or one hour per customer per month. When you calculate the allotted effort for each activity, you realize the amount of time it takes to deliver your specific journey. Typically, calculating your regular touchpoints is a straightforward process.

But the math becomes a bit more complicated when you calculate the touchpoints that occur only once within your journey, such as onboarding and implementation. This is because you need to smooth that time out across all your customers.

Calculating One-Time Customer Touchpoints
Kick-Off Meeting (2 Hours x 5 New Customers/Month)
Smoothed Across All Customers
0.13
Discovery Call (4 Hours x 5 New Customers/Month)
Smoothed Across All Customers
0.25
Training Sessions (2 Hours x 5 New Customers/Month)
Smoothed Across All Customers
0.13
Hours per Customer for One-Time Touchpoints 0.51

Spreading the hours for one-time touchpoints across all customers assigned to a CSM makes the hours consistent between regular touchpoints and one-time activities, which lets you add them together. For the example shown in the above table, we assume 80 customers per CSM and 5 new customers per month.

To calculate your one-time touchpoints, start by identifying the amount of time it takes on a monthly basis to deliver each one-time touchpoint. Then, take that figure and divide it by the total number of customers in the segment.

“You don’t need to get too crazy or include edge cases,” says Kristen. “Only include your main touchpoints. Most of the time when we perform this exercise with our clients, there are around 20 touchpoints total.”

Once you have your regular and one-time touchpoints calculated, you’re ready to perform your bottom-up analysis.

Bottom-Up Analysis for Customers per CSM
Monthly Hours per Customer for Regular Activities 2.36
Monthly Hours per Customer for One-Time
Activities (Smoothed Across All Customers)
0.51
Monthly Hours per Customer Inbound (1 Hour per Day x 20 Days per Month / 80 Customers) 0.25
Total Hours per Customer per Month 3.12
Total Available Hours per CSM per Month 120
Customers per CSM 38

 

This bottom-up analysis looks at the expected workload of your CSMs and rolls that up into the number of customers per CSM.

Using the table above as our example, you have 2.36 hours per customer per month for your regular activities and 0.51 hours per customer for your one-time activities (smoothed out across the customer base). Next, you want to account for any inbound activities, which can be tricky.

As Kristen explains, “It’s really hard to pinpoint exactly what’s happening with inbound, so you usually want to build in a buffer for that knowing it’s part of the time it takes a CSM to do their work.”

Then, you arrive at the total hours per customer per month (3.12 hours) and you take those total hours and divide it by the available hours per CSM (120 hours).

When calculating your total available hours per CSM, Kristen advises to use a scaled-back number: “You’re not going to have your CSMs actually doing customer work for eight full hours a day. They’re not robots, they’re people. They also have internal tasks like one-on-ones with their leader, internal email correspondence, and company meetings. All of those things take time, and you need to account for that time.”

Kristen recommends dedicating two-thirds of a CSM’s time to customer-related activities and one-third of their time to company-related activities. But as always, adjust as needed for your company.

“Every company has a different culture and different expectations for how many hours a day people should work. Take that into consideration,” says Kristen. “Just don’t make it 100%.”

Getting back to the bottom-up analysis, when you add up the numbers, you arrive at 38 customers per CSM. As a reminder, the same company figures were used for both the top-down and bottom-up calculations to allow for a comparison in outcomes.

Now, remembering back to the top-down analysis from earlier, which was based on the benchmark of $2 million per CSM, you had arrived at 80 customers per CSM. So, the top-down analysis shows that a CSM can manage 80 customers, but the journey you’ve designed shows that they can only manage 40 customers. Kristen says that when you reach this point of variation, you’re ready to have a conversation with your CFO about trade-offs.

“If your CFO is really dedicated to that $2M-per-CSM benchmark, then you have to give up part of your journey,” says Kristen. “That means no quarterly business reviews or quarterly business reviews go to once a year or you scale back the frequency of your customer outreach. Because you can’t have it both ways. You can’t have a robust journey and also have an expectation that’s too high. When you position it this way to your CFO, they see the numbers and understand the model’s inputs. Then, you can start to have real conversations about trade-offs.”

This isn’t to say that your top-down and bottom-up analysis need to match precisely, but one shouldn’t be half of the other. That’s when you need to have a conversation.

Now, that you’ve calculated your journey touchpoints and customer-to-CSM ratio, you’re ready to create your budget.

How to Build a Customer Success Budget for Headcount

To create your Customer Success budget, you’ll need the following data:

  • Customer/CSM Ratio
    • By Segment
  • Sales Plan
    • Number of New Customers by Month; or
    • Revenue by Month and Average Deal Size*
  • Churn Plan
    • Expected Churn by Month
    • Seasonality In Your Customer Base
  • Fully Loaded Staff Cost
    • Salary and Variable
    • Cost of Benefits
  • Onboarding Timeline
    • CSM Ramp-Up Time (to Take on Customers)

*You want to use this number to arrive at the number of new customers per month. Because again, you’re building off the premise that CSM workload most closely correlates to the number of customers, not revenue.

Once you have your data, building your budget simply becomes a math problem. The good news is that you’ve already done the hardest part which is calculating your ratios.

To start building your budget, you want to solve the following equation for each month:

Current Customer Count + Projected New Customers from Sales – Projected Churned Customers = New Customer Count for Following Month

Repeat this calculation for each month for the entire year.

Example of a Yearly Projection for Customer Success Headcount
January February March October November December
Current Customer Count 720 754 787 1043 1095 1146
Projected New Customers 40 40 40 60 60 60
Projected Churned Customers -6 -6 -7 -8 -9 -9
CSMs Today 9 9 10 13 14 15
Onboarded CSMs Needed 0 1 0 0 1 0
Hiring Needs 1 0 0 1 0 0
Headcount Budget 10 10 10 14 15 15

 

Next, you want to look at how many CSMs you have today and compare that against your forecasted capacity data. How many CSMs do you need? What does that mean in terms of your hiring needs?

After that, you need to factor in your CSM ramp-up time to back into your hiring date. You want to have your new CSMs fully trained and ready to take on customers when your Sales team is closing deals.

The advantage of using this model is when Sales doesn’t deliver on their projections – either because they overdeliver or underdeliver – or when your churn fluctuates, you can plug in the actuals as you progress through the year. You can then throttle your hiring based on the budget and actual sales numbers.

“This gives you a lever to pull that your Finance team understands and has agreed to,” says Kristen. “Which makes the conversations so much easier. Instead of feeling the pinch and begging for staff, you say to your CFO ‘We agreed upon this ratio. We’ve hit the point in the year when we need to hire our next person. I’m putting in a req.’”

And there you have it. Using these budgeting models, you can request the headcount you need with confidence knowing that you have the numbers to back you up. And to give you that extra edge when building your business case, in the next section we share Kristen’s best pieces of advice and takeaways for securing budget.

Customer Success Budgeting Best Practices and Lessons Learned

With years of experience negotiating with Finance teams and coaching other Customer Success leaders on how to do the same, Kristen shares some of her best practices and eye-opening lessons learned along the way.

Best Practices

1.  Build a customer-to-CSM ratio for every segment.

No two customer segments are alike. As Kristen says, “I’ve never had a customer who has one segment where the customer-to-CSM ratio is 80 and another segment where it’s also 80. It might be 10 and 50.” Additionally, Kristen advises to not have the same CSM cover multiple segments. The CSM will inevitably blend the journeys which will result in one very muddy journey that’s delivered inconsistently.

2.  Get your Finance team to sign off on your customer-to-CSM ratio before budgeting.

Before you build your budget based on your ratio, review it with your Finance team. You can’t assume that because you’ve followed the model, that your Finance team will approve it. Again, you need to have that trade-off conversation.

3.  Build your budget before you’re asked.

If your company’s fiscal year aligns with the calendar year, you should not wait until January to start building your budget. By October, you’ll have enough data to begin modeling your financials for the upcoming year. “You don’t want to be the last department to get your budget requests in and then have someone tell you there’s not enough left,” says Kristen. Start early.

Lessons Learned

1.  There’s never enough funding to go around.

“It seems really obvious in hindsight now that I’ve been an executive,” says Kristen. “But at the start, I thought that the Finance team’s job was to make sure that there was enough money. I learned that the point of the Finance team’s job is to make sure there’s enough money for important things.” As a Customer Success leader, you need to make your Finance team see what you do as important.

2.  Finance teams don’t like surprises.

When Kristen would go to her Finance team and ask for something unexpectedly, it was looked at as a surprise. “They thought that I wasn’t very good at planning. And I wasn’t; I was winging it,” says Kristen. To improve forecasting, Kristen created a model that let her accurately project staffing needs, as well as dial up and dial down forecasts as necessary.

3.  Excel is the language of finance.

Learning to speak the functional language of other departments is foundational to building strong cross-department relationships. As Kristen recalls, “If I wanted to get the attention of my CFO, I had to put in a spreadsheet.” Present your business model in a format that gives your Finance team the flexibility to play around with the numbers. The more comfortable Finance is with your numbers, the more confident they’ll be making decisions based on them..

Get the Customer Success Headcount You Need Without the Headache

When you’re understaffed and the work keeps piling up, the last thing you want to do is spend your already scarce time begging for additional headcount. By using the Customer Success capacity planning and budgeting strategies shared in this article, you turn your emotional pleas into impartial data. Your position becomes one built on fact, not opinionand you can’t argue with facts.

As you begin your capacity planning, you may want to revisit your Customer Success compensation plans. Learn more about the compensation plans that attract top-tier talent to see if it’s time you rethink your pay strategy.

*In case you didn’t know, this article is adapted from an in-person workshop presented by Kristen Hayer, Founder and CEO of The Success League, at BIG RYG, ChurnZero’s annual Customer Success leadership summit.

 

Presenter Bio:

Kristen believes that Customer Success is the key to driving renewal and expansion revenue, and delivering exceptional customer experiences that produce referrals. Over the past 20 years Kristen has been a Success, Sales, and Marketing executive, primarily working with growth-stage tech companies, and leading several award-winning customer success teams. Kristen founded The Success League in 2015. She has written over 100 articles on Customer Success, and is the host of 2 podcasts about the field: Transforming Experiences and Reading for Success. Kristen serves on the board of the Customer Success Leadership Network and the board of the Customer Success program at the University of San Francisco.

The Success League is a consulting and training firm focused on Customer Success. Their modular consulting approach helps companies transform their customer success programs to create experiences that drive loyalty and maximize revenue.

 


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