Jan 7, 2022

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How to Transform Customer Success Into a Profit Center with Metrics and Forecasting

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Customer Success represents a large source of revenue-generation for SaaS businesses. Though Customer Success was originally regarded as a post-sale cost center, you can flip its narrative with the right metrics, positioning, and forecasting strategy.

In this article, we cover how profit centers and cost centers differ, as well as how Customer Success teams can position themselves to be viewed as a profitable function by:

  • Emphasizing their value with the right metrics
  • Increasing their predictability with leading indicators
  • Growing their organizational trust with forecasting

This article was adapted from a portion of ChurnZero’s BIG RYG session “Customer Success as a Profit Centerpresented by Matthew Brown, Director Customer Enablement, Solink. You can watch the full recording on-demand which also includes advice from Aclaimant’s Parul Bhandari and Red Canary’s David Epperly.

What’s the Difference Between a Cost Center and a Profit Center?

Cost centers do not directly generate revenue for the business. As they incur a cost to operate, their aim is to decrease those costs and maintain their budget while increasing organizational efficiencies and value. Typically, their scope is more limited and operations more stable and straightforward as they’re not responsible for profitability.

Profit centers directly generate revenue for the business with the goal of increasing net income. They are a performance-driven unit that’s focused on maximizing profitability. As they, too, incur a cost to operate, profit centers look to reduce inefficiencies while also expanding activities that grow the bottom-line.

Whether Customer Success should own the renewal and/or expansion is a debated, and nuanced, topic in SaaS. Customer Success teams that own one or both of these revenue sources get viewed as a profit center by the business. While Customer Success teams that do not, often face the challenges that come with being marked as overhead. Here at ChurnZero, we’re huge advocates of Customer Success owning the renewal, and when conducive to the business, expansion as well. Regardless of where you stand on the issue, it’s undeniable that perception in business matters, a lot. If you’re not actively working to shape your organization’s perception of Customer Success, you risk letting those who are less informed about your function decide its worth and contribution.

In the section below, we outline three strategies that every Customer Success team can use to increase their perception as a profit center.

1. Choose Metrics that Emphasize Your Value

When people think of top-line growth, they often think of Sales. But Customer Success? Not so much. The SaaS world is increasingly recognizing Customer Success as an essential function to the business. But this designation often comes with the singular purpose of protecting the bottom-line.

“I don’t see it that way,” says Matt Brown, Director Customer Enablement, Solink. “I see Customer Success as the most cost-efficient way to increase your ARR.”

Matt advises that if you’re building a Customer Success organization, you want to position yourself as a profit center. Revenue-driving teams are granted higher visibility that allows them to impact the business in a greater fashion.

But if you’re viewed as a cost center, you’ll always face the scrutiny of cost cutting. This perception is why Customer Success individuals are often earned, whereas salespeople are given.

“If you operate Customer Success as a business and start thinking bigger and ‘outside the box,’” says Matt, “you can elevate the conversation to the upper-management level and become a strategic department, not just tactical.”

Changing the perception of Customer Success within your organization starts by evaluating your metrics. “Your metrics matter and how you position those metrics matter,” says Matt. “That’s what I mean by thinking ‘outside the box.’ What you measure and report to your leadership team and your board really does make a difference.”

In the table below, Matt breaks out Customer Success metrics by the value they communicate to the business.

Good Better Best 
  • Net Promoter Score (NPS)
  • Customer Satisfaction Score (CSAT) / Customer Effort Score (CES)
  • Customer Churn Rate
  • Renewal Rate
  • Customer Feedback
  • Product Usage
  • Customer Lifetime Value (CLV)
  • Tactical Outcome-Based Metrics (Think: How “X” Impacts “Y”)
  • Health Scores
  • Revenue Forecasting (Renewals, Expansion, Upsells, etc.)
  • Gross Revenue Retention (GRR)
  • Net Revenue Retention (NRR)
  • Earned Growth Rate / Ratio

 

Now, it’s worth noting that none of these metrics are “bad.” Every metric in this table is a useful performance indicator regardless of its value designation. The point isn’t to stop tracking those not considered “best.” Every team needs to be aware of their churn rate, product usage, and so on. Rather, as you begin to develop your team into a profit center that adds exponential value, you want to focus on activities that affect metrics in the latter two buckets.

2. Get Predictable with Leading Indicators

After reviewing these metrics, you may notice they share a common trait (or downfall) in that they’re all lagging indicators. Customer Success teams tend to overfocus on lagging indicators, such as renewals and customer satisfaction metrics, which can lead to unexpected churn when a customer’s health isn’t as strong as expected. So, how do you increase predictability and move from lagging to leading?

Matt recommends identifying what actions Customer Success does to contribute to or influence lagging indicators. Then, break them down by key touchpoints in a customer journey for best results. As you go through this exercise, ask yourself:

  • What actions does my team take to increase implementation satisfaction scores?
  • What actions does my team take to increase product engagement? Does a lack of product engagement correlate to an increase in churn?
  • Does a QBR identify user feedback that drives end user engagement and renewal?
  • Does the increased use of features increase speed to secondary revenue?
  • Does additional training lead to more sophisticated feature use?

Answering these questions and identifying how Customer Success influences lagging indicators gives you the ability to forecast performance and revenue. Being a source of trusted projections and customer information affords you the credibility needed to elevate Customer Success within the organization.

3. Grow Organizational Trust with Improved Forecasting

You’re likely familiar with the traditional sales funnel, or a variation of it, shown below. At the top of the funnel, there’s awareness and leads. At the middle of the funnel, there’s marketing-qualified leads and sales-qualified leads. At the bottom of the funnel, there’s opportunities and customers. The goal of the sales funnel is to get a customer to purchase and grow revenue.

Now, when thinking about how you can move from leading indicators to forecasting, Matt recommends visualizing the sales funnel on its side and duplicating the flow.

Here’s a similar, more detailed depiction of the horizontal funnel.

Image Source: Winning by Design, Julie Weill Persofsky

Referencing the diagram above, Matt points out that when you flip the sales funnel on its side, you see that the funnel starts to expand once you move past the commit stage. “Your sales funnel ends at the commit stage,” says Matt, “and that’s where the Customer Success team can lean into how they can start to forecast for earned growth.” For each point of conversion, you want to think about the levers you can pull to influence those in the post-commit lifecycle phases.

Developing forecasting capabilities doesn’t happen overnight. But you can start to test and tweak the percentage likelihoods based off every action your team takes to get to a place of predictability.

Flex the Power of Customer Success as a Profit Center

As Customer Success takes on greater ownership of revenue and improves its reporting and forecasting abilities, it will shed its cost-center label. Being the central driver of Net Revenue Retention – a metric that’s gained massive attention from executives and investors in the last few years – Customer Success is establishing itself as profit center in many organizations. By increasing predictable revenue with accurate, trusted forecasts, Customer Success will truly flourish as its influence, esteem, and relevance soars throughout the business.

Many of the trends that are transforming Customer Success into a profit center are already underway. To learn how Net Revenue Retention, digital transformation, and the rising prominence of Customer Success will shape the year ahead, check out our blog on where Customer Success is headed in 2022.

 


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