If you are in the tech space in the Midwest, you not only know of Bill Godfrey, but you may have been lucky to reap the benefits of his counsel. He is not merely a substantial investor in SaaS companies in Indiana, but he is also a valued advisor about how to make key early-stage decisions that will impact the success and future valuation of a company. He knows what he knows based, in large part, on his own experience as a software executive at Software Artistry, and then again as Founder and CEO of Aprimo. Software Artistry was acquired for $200 million and Aprimo was acquired for $525 million, giving Bill the personal expertise in building companies with strong valuations.
Regarding the strategy and financial model for Customer Success, Bill has some keen philosophies and insights about why and how to do it right. (Spoiler: Getting the model right can result in those subscription services being valued at the same multiple as the subscription software.)
The following is the first (of three) parts of an interview with Bill about his personal experiences as an executive building an expert services division. The second part of the interview focuses on Bill’s assessment of the current state of Customer Success. And, the third part offers his counsel for current SaaS companies trying to reap the true value of an expert services team.
Give us your thoughts on the formative years of Customer Success, and why it didn’t really work at first.
Every SaaS company knows the importance of recurring revenues and negative churn. To protect this nest egg, most software companies have created the role of account management, which is often disguised by calling it Customer Success. Account managers have strong relationship skills, but typically lack deep product expertise and best practice insights. Their incentives and quota goals make them sales people in their customers’ eyes. This incarnation of account management is not what customers need, and it makes customers feel like they’re being nickel and dimed for every services request. Account management as a function is also a serious drag on a software company’s profitability because it becomes a large cost center. These economics make it very difficult to scale account management headcount. This whole model is just broken and suboptimal.
How did you adapt at Aprimo?
At Aprimo, we initially did the Account Management model and experienced all these frustrations. By listening closely to our customers, we innovated and created a Customer Success team that delivered expert services on demand for a subscription fee. Our customers absolutely loved it because they always worked with the same expert resource who provided on demand, just-in-time consulting, and their costs were predictable. We took all the friction out of the relationship. We quickly realized that, for many of our customers, our Customer Success managers could perform the role of account management. Securing renewals and upsells became a by-product of assuring their ongoing value attainment using our solution. And our customers were more than happy to pay us an annual subscription fee for these expert services. Within a few years, our Customer Success team was contributing $6-7 million in ARR at a 40-45% gross margin. These economics enabled us to scale our staffing and capacity model to keep pace with our growing customer base. Customer Success was a profit center and not a cost center. And when we were acquired, we got the same valuation multiple on our subscription services ARR as we did on our software subscription ARR.
In your experience both as a software executive and now as an investor, what do you regard as the essential priorities for an effective Customer Success model?
“Having lived in the B2B software application world for 25+ years, I have a philosophical belief that software left to its own devices will atrophy and die on the vine.”
The goal of all SaaS companies is the same: to grow as rapidly as possible. Having a negative churn rate is a big part of making this happen. In my experience, this absolutely requires selling a “solution as a service” comprised of both software and expert services. Customers typically end up wanting more expert services, not less, which can contribute to expanding your ARR per customer.
I think it’s perfectly fine for early stage and scale up companies to calibrate their pricing model for these subscription services to be at break even. I know there’s always concern about pricing being too high, which could create friction in the buying process. However, I think it’s more important to get everyone in line with your full solution offering from the start, and enthusiastically share that value proposition. Honestly, most experienced buyers expect this now, and you win credibility and trust points by proposing a solution with built-in, continuous best practices.
To get Customer Success started in that first year, you have to prime the pump with a handful of product experts (two or three), and you’re not going to have contracts to cover that expense. By year 2 it’s profitable, and you’ll never look back.
Lisa Leahy is vice president of sales at Bolstra LLC.