In the only podcast dedicated to the ‘Subscription Economy’, hosts Tom Krackeler and Rachel English talk to innovators, entrepreneurs, and analysts about the business shift towards recurring revenue.
Guest: Dhaval Moogimane, Partner at Waterstone Management Group.
Tune in and learn why customer success is integral to your SaaS recurring revenue business!
Tom Krackeler: Dhaval, can you tell us a little bit about the Waterstone Management Group?
Dhaval Moogimane: Waterstone is a boutique advisory services company. We exclusively focus on working with tech companies and their investors. About 50% of our business is with enterprise software companies. One of our big focus areas is really helping them grow and capitalize on growth by taking advantage of some of the market disruptions. If you think about the last couple of years – the whole evolution of cloud and the movement to subscriptions has been a significant disruption in the market particularly for tech providers who have been around for over 20 plus years selling and delivering services in the traditional way.
We’ve actually had the opportunity over the past several years to work with a number of these companies to really transition and change their operating models to become more subscription- centric and more cloud focused. We help them with redefining their offerings and changing their pricing models, but most importantly we’ve been working with them to change their operating model to really be successful as a subscription company. People thought of subscriptions as a pure pricing change but it fundamentally changes the way you do business and I think that’s a recognition that’s quite prevalent today but it’s a change that’s hard to accomplish.
Rachel English: You mentioned you work with these technology companies and I know that you’ve noted their recent focus on customer success. When did that trend emerge and what do you think brought it about?
Dhaval Moogimane: Arguably, the notion of customer success has been around forever. Everyone wanted to be ‘customer first’, etc. Historically, the balance of power between a tech provider, particularly an enterprise tech provider and their customer tended to tilt towards the provider. Because, as a customer, if you put in a large amount of dollars for the license fee upfront for hardware or software, your incentive to switch gets lower. Even if you did switch, the economic implications on that provider was minimum – 70 to 80% of the revenue had already been gained through the initial license sales.
Today, that has fundamentally changed. What we’re seeing is a real interest in customer success on account of two fronts:
1) Traditional legacy tech companies have fundamentally evolved a model to sell more subscription offerings. So, their revenue mix is changing – 50 to 60% of their new bookings is around subscriptions and it’s a recognition that to operate as a subscription company, they need to engage with customers through their life cycle.
2) Pure play SaaS providers, when they started out 3-5 years ago were heavily focused on the acquisition of new logos. And maybe mid market and SMB. Now, as their revenue base grows, as their revenue mix is almost 70- 80% existing base against new logos, as they’re attacking and trying to get into the enterprise segment, their recognition of the importance of customer success has also gone up. The confluence of both those trends over the last 2-3 years has really created this momentum around customer success.
Tom Krackeler: That’s definitely true. It has been accelerated through traditional tech companies but one of the things that we observe here is looking across media, industrial IOT, energy, cars – there’s a lot of shift in business model and in technology that’s happening. It’s making companies rethink not only how their entire order to cash system flows but also how they understand who their customers are and how they engage with them. If you look outside of where things started and software as high tech, what are you observing in other industries that either follow that parallel or is maybe a little different?
Dhaval Moogimane:If you think about hardware companies, they previously sold endpoint devices as a product. Now it’s all being delivered as a service. I can buy ties on a subscription today. I can buy razor blades on a subscription today and so there is no real end to where the subscription business model can go to and any business that moves to a subscription business model ultimately needs to make sure their customers are happy. I completely agree with you that while it might have started in software, there is a clear trend that this is going to be much more prevalent and much more pervasive across industries.
Rachel English: Coming back to customer success, there are new teams that are just starting out. What’s your advice on what they should tackle first?
Dhaval Moogimane: It’s a fallacy that customer success is an organization. You need people that are focused on customer success, but I don’t think we can narrow this down to a responsibility of one organization within the company. New customer success teams or new customer success executives should start with and end with – What is the experience that I’m delivering to my customer? Is it the exemplary experience that I want the customer to have? If I’m starting out within a company as the Head of Customer Success, the first thing I would do is to be very thoughtful and very clear in defining the experience that the company wants to deliver to their customers through the life cycle..
Tom Krackeler: I so strongly agree with that and you then have to have a really deep partnership with your product organization, with your marketing organization, because that end-to-end experience is going to be owned by different groups in the company. It has to have a meeting of the minds. A customer success team that does not liason across the entire company is not going to be successful.
Dhaval Moogimane: That’s right. It also comes down to making sure that the experience you want to deliver to the customer is clearly defined and all the functional areas are working in concert to deliver that experience. Everything from pre-sales to sales to services need to be managed. Customer success as an organization has an important role to play but they need to establish the operating models and norms so the other organizations actually deliver the overall experience.
Tom Krackeler: Peter Thiel, a well known startup founder and investor says a startup should be able to answer the question ‘What important truth do you know that very few other people would agree with?’ Dhaval, you are in the management consulting business and you give lots of high level advice. What is the piece of guidance or advice or strategy that you would give either a company that’s going through this transformation that very few other management consultants would recommend?
Dhaval Moogimane: Today, most CEO’s of companies that we interact with recognize the importance of having successful customers. But I don’t believe most companies operate in that way. I also don’t believe that CEO’s and others always recognize that their companies don’t operate in that way. It’s a hard change especially for companies that have been very successful in the past doing what they were doing. The transition from where you were to the transition to where you need to be is a very difficult change. It’s going to take time and operational focus to get it done. Asking some fundamental questions will really help you:
What is the value of your install base worth if it was a separate company? How successful would it be?
Do we celebrate loud enough? Many companies have gongs and different mechanisms to celebrate a new deal. How often do we celebrate high level revenues and upsells in that same celebratory manner?
Do we balance what we invest in new features with what’s required to keep our customers happy? How are those trade offs being made?
Tom Krackeler: One of my favorite things to look at is looking at the net retention business. You see some, like Zendesk that are running at 20 – 25% growth just in net retention of an existing install base. Those are the business models that get me excited because it basically is a culmination of everything you were just talking about. How do you make your customers successful? Giving that end to end experience so they are natural vectors that will drive them to grow with you over time. That’s my favorite thing when somebody unpacks a company’s S1 or some of their financial statements. That’s one of the first things I always look for.
Rachel English: We’ve been talking about how far customer success has come over the past few years. Curious if you’re up for giving us a peak into where you think it’s headed? What are the emerging trends you’re seeing? What are the new customer success initiatives and changes we’re going to see in the next year or two?
Dhaval Moogimane: We expect to see a greater emphasis, a greater recognition of the value of the retained base, and the retained revenue. That’s going to be critical. As soon as that happens, we’ll continue to see the evolution of the customer success function. I do think that the role of the Chief Customer Officer is going to be more material and more consistent in the industry. I also think that ultimately there needs to be a tie in into that role of actual revenue assignment.
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