Reducing SaaS customer churn while staying cash efficient with John Henwood
How software founders can do both with the right foundations
This is the second part of my conversation with customer success leader John Henwood on how to scale CS at software startups, drawing from his experience at Hootsuite, Productboard, and most recently Writer.
John walks through the common misconception that customer success = customer success management and how debunking this is the key to scaling a capital efficient organization. He also gives advice on the right way to measure capital efficiency for customer success and his framework on how to improve churn.
Growing customer success (CS) and staying cash efficient
Lyndsay I often work with founders who are bootstrapping or generally trying to be cash efficient. How can a founder do more with less when it comes to making CS successful?
John Yeah, maybe ties to one of the misconceptions that I hear a lot, which is that people often think customer success = CSM (customer success manager). CSM is their frame of reference for all of CS, and that's just simply not the case.
Customer success now has matured enough to where it's very multidisciplinary and there's lots of scale-based programs that you need to run to create the foundations of a PLG approach that can scale to tens or hundreds of thousands of users, and you can't keep scaling with CSMs and solving with people.
I would say there's five key pillars to a successful scale customer success strategy.
1) Data. Do you have access to knowledge around customer data to understand what it is that's driving that customer actions? What is predictive of keeping customers and growing customers? So do you have access to that data or the skills in the team? That's part one.
2) Automation. What engagements can you automate to drive adoption? For example, if customer hasn't done X by day 30, they get y engagement, that type of thing. This is really key to help you move beyond just the one-to-one interactions with customers that CSM would do.
3) Content. This empowers that automation. What content can you create? Education, videos. We do lots of webinars and one-to-many programs. We do office hours that lots of people can come to and we get hundreds of people coming to us each week that scales our efforts.
4) Community. How do you find power users or ambassadors who your customers can speak to? Customers want to speak to other people who are using the product and are creatively thinking about the same problems as them. That really helps you scale customer success.
5) Partners. This is when you’re more mature, once you've built your own routines, rhythms and foundations. Service-based partners that may be able to deliver customer experience whether it's support, part services, implementations in a way that is more cost effective than having all of these solutions in house, and can often extend your capabilities.
For example at Productboard, we did lot of implementation work ourselves, but sometimes if the organization is a big enterprise with hundreds or thousands of people undertaking a big digital transformation, we have service based partners who do large agile transformations that goes beyond the scope of the domain expertise we have in our team. We might leverage them to extend our capabilities and scale what we're able to deliver for a customer.
Lyndsay That makes sense. So when a founder has short resources, instead of just thinking if they should add five new folks to their CSM team to improve retention metrics, they can think about the whole system contributing to those factors.
John Exactly. I would think about these factors rather than just thinking, let's go hire five CSMs to solve this. I would think what if we got someone who can leverage skills around the data side, someone can think about automation and you probably want to top these off then with a CSM or CSMs who could then layer in the kind of one-to-one hand-to-hand combat work on top.
When you have those foundations in place, it actually elevates the CSMs you have because it means that the work they do with customers is going to be the more strategic work every time they engage. It's on the high value actions that they are empowered to deliver good experiences for customers too.
How to measure customer success efficiency
Lyndsay Let’s talk about the right way to measure this efficiency in customer success. Is dollars per representative the best metrics?
John It's definitely one of the most common ways that people think about it. I think one of the reasons for that is that it's really measurable. I can tell exactly that we got a million dollars of ARR per CSM or $2 million. And there's lots of benchmarks around it, which also makes it one that people gravitate towards.
Similarly, I would say people gravitate towards NPS for those same reasons, it's very measurable, lots of benchmarks, but in terms of describing the outcomes or the efficiency of the team, it has holes in it.
I would think about what is the actual impact or influence per CSM/program you’re running on gross revenue retention, net dollar retention, and lifetime value? Because you could have 3 million per head and think you're efficient, but if your team is at the same time not performing against those metrics, it's not efficient.
You may have one CSM to $800,000 ARR, but they have 250% net dollar retention when we run that model. And in that case I say that that's actually fairly efficient. Again, there's other factors that go into it.
So I'd say by itself in isolation, no. But if you layer in with other metrics, then it can be valuable.
Lyndsay So you need to see the value that CSM can bring to that customer or set of customers as on top of that amount.
How founders can improve churn
Lyndsay What advice would you give to a founder who's focused on improving churn?
John I'd say probably three things. Really simple kind of first principles, but it, it's really important. The first is you just have to really deeply understand your customer. I can't over index on the value of speaking to and understanding your customers.
Do you have the right listening mechanisms in place across the business, across the whole customer journey to actually understand across the segments of customers that you work with, where are customers getting tripped up? Where are the bright spots? How do they feel? What do they love most? Where do they feel there's opportunities? And again, understand that across the key, the journey that's really critical.
The second is going back to whether you know who your right fit customer is? And so how do we make sure we bring in customers who are more likely to be able to be successful? Again, I would make sure I'm very clinical in analyzing all of our churn.
You can do that through quantitative analysis, but also qualitative. I would interview any customer that's churned and deeply understand what was the path that led them to churn. What is it about them?
Something happened from the time they started when they were probably excited about the product to when they decided to leave. I would be pretty obsessive about trying to understand those root causes.
And then lastly, if we're trying to impact churn, I would really strongly think about my pricing and packaging back to bringing in the right fit customers.
Do we have the right pricing and packaging? So if we have a very complex product, it's very long time to value and we've got a 7-day trial, maybe we shouldn't have a trial. Maybe we're forcing people into a decision too soon. Maybe it should be a free product that has thresholds in which by the time you get over those consumption based thresholds and initial base value, then you become a paying customer, right? Do we have the right plans lined up to the value the customers are expecting from that plan? That would be a really important piece I would say can influence your churn.
So all those things, you’ll notice they’re outside direct control of customer success, but those are where you're going to get most leverage. Customer success in of itself will not dramatically change your churn unless we fix some of the foundations as a whole go-to-market organization.
Lyndsay Yeah, I couldn't agree with that more. There's so many threads to it!
Anything else we should talk about that we haven't covered?
John I would just say building customer centricity and customer obsession into everything you do. As a CEO, this means building that voice of the customer into your all hands, sharing successful customer stories, customers who are failing and why. I'd ask my other execs as well, what customers have you spoken to lately?
What customers are you speaking to as a CEO or as a head of product, head of sales, even head of marketing. It really takes everyone to be very obsessed with the customers, to truly feel their pains. And it just speeds up your decision making because you understand very intuitively what they need, how to go build for them.
As much as you can, build customer obsession throughout their business, again, it sounds easy, sounds obvious, but so few people do it as a real point of intentionality.