The Real Reason Your Company Invests in Customer Success

The Real Reason Your Company Invests in Customer Success

Customer Success is there to make your customers happy, right? No. It’s actually not even to make customers successful. Let me explain.

The people in charge of your company – the Executives, Board, and Investors – want to improve a metric called NRR (Net Revenue Retention or NDR, Net Dollar Retention, if you prefer) for one very simple reason: it plays a direct role in the value of the company.

What is NRR?

NRR is the percentage of revenue retained from existing customers in a defined time period, including Expansion, Contraction, and Churn.

NRR is a relatively simple metric to understand, but actually quite complex to implement in practice.

To keep it simple, you take the amount of revenue from your current customers at the beginning of a quarter (or whatever time period) and you subtract any revenue lost through customer churn (full cancellations / non-renewals) and contraction (discounts / downsells), and add any revenue from expansion sales that happens over that quarter, to end up with an updated dollar value to end the quarter.

Then you mathematically calculate the difference between the revenue at the beginning of the quarter and the revenue at the end of the quarter to figure out how much revenue you retained, “net” of that expansion and contraction. If you added more than you lost, you will have “retained” greater than 100%.

You want NRR to be over 100%, because that means – in theory – you could turn off new customer acquisition and the company wouldn’t just continue to generate revenue, but would actually grow. Talk about efficient growth! Thus the premium placed on NRR as a valuation metric.

In this simplistic view, revenue from any new customers that come in that quarter wouldn’t be included in NRR for that quarter, but would be in the starting amount for next quarter.

NRR is often referred to as the “North Star” metric for SaaS and Subscription companies as, simply put, higher NRR = higher company valuation.

Four Ways to Improve NRR

To improve NRR, you generally need to do these things:

  1. Improve Customer Retention. That is, reduce “logo” churn or, put another way, keep customers from canceling or not renewing. NRR is reduced by whatever revenue customers take with them when they leave. They also take any future revenue – including potential increases – and whatever it cost to acquire and serve them to this point. While valuable to know, these are generally not figured into NRR.

  2. Decrease Contraction. It’s one thing to keep customers from canceling, but if you do that through Discounts and Downsells, such that they end up paying less to remain a customer, your revenue is lowered even if your retention rate is protected. Contraction at Renewal is a massive drag on NRR that is often hidden by “great” customer retention rates or “below average” churn.

  3. Increase Expansion. Getting customers to stay longer and not decrease spend is a good thing, but to really accelerate NRR growth, you need to get a large subset of those customers to also increase what they spend while they stay longer. World-class companies experience exponential expansion in account value across a large swath of customers, leading to NRR of 120% and higher, while companies with NRR hovering at or below 100% are generally only experiencing incremental expansion and usually from a smaller subset of customers, barely offsetting (if at all) the revenue lost through churn and contraction.

  4. Mobilize Advocates. While customer advocacy doesn’t roll-up directly to NRR, the effects of it absolutely can and will. The Social Proof created by customer advocates can work to make new business sales more efficient, reducing Customer Acquisition Cost (CAC) for net new customers, but also for Expansion among existing customers. Additionally, Social Proof from customer stories, case studies, and the like can be used to drive both the breadth and depth of customer adoption, decreasing time to first Expansion and increasing the number of expansion opportunities across a customer lifetime, doubling, tripling, or more the customer’s lifetime value.

Hacks and Tricks to Improve NRR

There are many ways you can try to accomplish those four things.

You can build cancel flows, run “switch to annual pricing” programs, raise prices, hire Retention specialists, create a Growth Team to chase upsells, hire Account Managers to periodically check in with customers to make sure they’re going to pay their bills and stick around, etc.

Customer Success isn’t Hacks and Tricks

In fact, it’s fairly common to see companies employing several of those tactics at the same time and calling it “Customer Success.” But let’s be clear; This is NOT Customer Success. And the resulting impact on NRR is generally not significant nor sustainable.

Rather than being “Customer Success”, this is a haphazard blending of disparate tactics that produce uneven and generally less-than-ideal results.

Any time I’ve heard someone say, “Customer Success doesn’t work,” this is what they did.

THIS – whatever THIS is – didn’t work.

They didn’t actually try and fail at real Customer Success.

Customer Success is the Key to Consistent NRR Growth

The definition of Customer Success is when customers achieve their Desired Outcome through their relationship with our company.

What’s been proven time and again to be the most efficient way to consistently improve NRR is ensuring customers achieve their Desired Outcome. That is, ensuring customers achieve their goals while having an Appropriate Experience (AX) in doing so.

The goal of lowering contraction, improving retention/reducing churn, achieving exponential expansion, and engaging a steady stream of customer advocates on a consistent basis is rarely going to be achieved in spite of your efforts. It must be a deliberate action.

And this is where real, operationalized, modern Customer Success Management comes in.

Unsuccessful Customers don’t grow NRR

You see, unsuccessful customers – those not achieving their Desired Outcome – tend to not stay as long and will generally not increase their spend with us.

To get them to stay a little longer (it’s usually just prolonging the inevitable), discounts and downsells are used, leading to contraction. And unsuccessful customers generally won’t advocate for us either; often they’ll do the opposite by leaving bad reviews.

So companies want to consistently improve NRR and the most efficient way to get that result is real Customer Success that is built around the customer achieving their ever-evolving Desired Outcome.

Head of Customer Success and NRR

So the purpose of Customer Success – from the perspective of your leadership, board, and investors – is to consistently improve NRR. Don’t get it twisted: This is why your company is investing in Customer Success and this is why you and your team are employed there.

As Head of CS, it’s critical to not lose focus on this. If you start falling into the trap of, “we’re only here to make customers happy” or just to “serve customers” or “CSMs shouldn’t be commercial,” you’ll end-up misaligned with your leadership.

Among many other things, this will hurt your ability to advocate for your team and secure the resources you need for your CSMs to thrive. Ultimately, misalignment with your leadership will cost you your job.

Customer Success Managers and NRR

As a CSM, while your day-to-day will be focused on making your customers successful by ensuring that they’re on track to reach their goals (customer happiness – beyond a smile and friendly banter – should NEVER be your focus), it’s always good to keep in mind WHY what you do matters to your company. Why your company is investing in what you do. Why they’re investing in you. Why you have the job you have.

Remember, the purpose of Customer Success is to consistently improve NRR, and it does that by making sure customers achieve their ever-evolving Desired Outcome

About Lincoln Murphy

I am a world-renowned Growth Architect, Consultant, Author, and Keynote Speaker and have helped drive exponential growth across the entire customer lifecycle for more than 1000 companies worldwide I wrote the Customer Success book which you can buy at Amazon. If you need help growing your company or would like me to speak at your event, please contact me. Also, connect with me on LinkedIn or follow me on Twitter or Facebook.