SaaS can achieve better customer outcomes more efficiently by taking a product-led approach to customer success, driving savings and freeing up CSMs to focus on higher value activities.
We believe that the impact product-led growth has had on acquisition and conversion can be replicated for customer success, regardless of whether the business runs a PLG or sales motion. Having interviewed a number of founders and product leaders in SaaS we’ve identified an opportunity for SaaS businesses to put greater emphasis and accountability on the Product function to drive success for customers, freeing up the time of CSMs to focus on more strategic topics.
The way technology businesses operate has advanced over the last twenty years just as quickly as the technologies themselves. Product and Engineering functions have evolved into nimble teams since the publishing of the Agile Manifesto in 2001, both in terms of how they deliver software through continuous development and also in how they conduct customer research through continuous discovery. In parallel, we’ve seen software businesses adapt how they sell to and support their customers to reflect the dynamics of recurring revenue models. We also witnessed the rise of the Customer Success (CS) function to address the acute challenge of churn that can kill a recurring revenue business. More recently, B2B SaaS has taken inspiration from B2C, focusing on the user and leveraging the product itself to acquire, convert and grow customers through product-led growth. As we write this, generative AI dominates mind-share and businesses scramble to determine its implications for their competitive position and their customers.
CS functions have proven that they can address the acute risk of customer churn; the focus of the function now shifts to operational excellence and taking greater responsibility for account expansion. But customer success, the outcome, should not be the sole purview of a single function. In particular, we believe a much greater role can and should be played by product management in delivering success through the product itself. We are not suggesting that CS can be replaced by product but rather that CS can be amplified by making the product a comprehensive tool that delights our customers.
What’s the point of Customer Success anyway?
Salesforce first identified the need to invest in ‘customer success’ to reduce churn, which at the time was running at 8% per month1. The profitability of recurring revenue businesses depends heavily on their ability to keep and grow customers to recover their cost-of-acquisition and deliver a profit. This means winning a customer is the start of the journey, not the end. Customer success as a philosophy has been transformational for recurring revenue businesses, with the function called CS delivering much of that impact. But the genesis of the function was reactive, required to solve the immediate pain of churn, and an existential threat to the viability of the burgeoning Salesforce.
According to the Technology & Services Industry Association (TSIA) benchmark data, 90% of CS organisations focus on driving adoption, 80% on retention, and 62% on expansion. The expansion charter has been increasing year-on-year, a trend we expect to continue. Top CS teams focus on driving the highest possible value out of their product as possible. They concentrate on improving customer health through proactive engagement, leveraging their domain and product expertise, and everything they know about the customer such as adoption, support tickets, engagement etc. They do this knowing that healthy customers are more likely to renew their contracts and spend more.
“Product complexity drives the need for Customer Success. B2B software is complex because the problems we are trying to solve are complex.” - Dan Steinman. Dan expands on this by explaining that driving behaviour changes in users is tough, especially when the product is complex, and that is why CS exists.
The below table summarises the three Types of CSMs2 as defined by Balderton, which we’ve added a fourth to, the Value Manager representing best practice.
The huge investments made into the function, however, make us uneasy as technology investors due to its labour intensity, and shifting of responsibility from Product to a new function for driving success. It is fundamentally a people-led solution to coping with complexity and driving the required behaviour changes. One motivation for this research is reflecting on what the world might have looked like if Salesforce had not turned to a new labour-intensive function to solve their problem, but had instead turned to existing functions, in particular Product and Engineering.
We are not alone in wondering whether the CS function is always the answer.
“Building a huge CS team is a cathedral to product failure. The size of the support team is an indictment of the design debt you are working through.” - Richard Valtr, founder of Mews.
Occasionally these views bubble up into public view; in Amp It Up, Frank Slootman3 dedicates an entire chapter to exploring whether you really need a CS function, or whether all functions should take responsibility for ‘customer success’. In Frank’s view CS isn’t accountable for anything.
Kayak, a travel and hospitality meta-search engine took a particularly radical product-centric view of the world to customer success. They intentionally operated without a customer support function and would route all customer contact to the engineering team, so that they would feel the pain of their code going wrong, understand directly from customers what issues they are having, and hence stop what they are doing and fix the issue in the product4. Similarly, at Profitwell acquired by Paddle, they required product managers to do most of the first-line non-technical support
“because these are the folks ultimately in charge of scheduling and prioritizing, they can leverage these conversations as further opportunities for customer development.” - Facundo Chamut, Paddle CPO.
It’s this philosophy of thinking product first, people second that we are advocating for, particularly when one considers the costs involved with providing support through people.
Case study: The Snowflake way
Snowflake is a fascinating case study for us to reflect on. We spoke to Harsha Kapre (Snowflake Ventures) and Angus Klein (VP Global Support) to learn more about the Snowflake way.
Snowflake's philosophy and ways of working are deeply rooted in putting customers first, recognising it will only be successful if it makes its customers successful. Although Snowflake does not have a Customer Success function per se, many of the activities typically found in a Customer Success function are distributed throughout the organisation; every function is responsible for delivering on the customer journey.
Snowflake also puts tremendous effort into staying true to its roots of delivering simple, easy-to-use product experiences. It operates weekly releases to make sure customers have the most up-to-date experience possible. If something is broken, it is fixed in the product, and avoids any shortcuts which create technical debt for customers such as papering over product issues with support resources.
Below, we've distilled down Snowflake's approach into five core principles to take inspiration from, which we at Notion Capital refer to as a product-first philosophy.
The cost of success through people
The median investment into CS is around 6%, with top-quartile investments greater than 10%, up to 20%5. Not only is this a very significant investment but it also depresses highly scrutinized financial metrics as the majority of costs will be included in the cost of goods sold. An equivalent investment in the product will be included in operating expenses, and hence will only depress operating profit. Assuming a 10% investment in CS, the median SaaS business will increase COGS by 1/3rd and also depress gross margins by up to 12.5% if it is not coupled with an increase in revenue through improved retention and expansion.
Tracking and measuring the ROI of CS investments is tough, and as far as we know there isn’t a robust and definitive study looking at this. Our assumption is that the ROI is material for well-run CS organizations, there is enough anecdotal evidence for us to believe that. However, beyond effectiveness, what we really care about is whether the levels of CS investment we see are efficient. Our thesis is that if some of that investment was reallocated into product to drive ‘product-led success’ it would drive comparable efficiencies as those achieved by product-led growth.
Given the magnitude of investment CS functions require, and skepticism from CFOs on what they are getting as a return on their investment, there is an early but growing trend towards a self-funded model, where CS pays for itself through expansion and potentially direct charges e.g. for onboarding. This shift is still in its infancy with only 28%6 of CS functions achieving profitability. We do not see this figure improving any time soon, given the cultural challenges and changes in skill required for the shift.
Each year the TSIA assesses the priorities of organizations based on research inquiries from their members. It’s very telling that of the top ten inquiries, the majority have little to do with directly improving outcomes for customers - most are concerned with improving the operational excellence of the function or supporting its cost base. One may wonder what proportion of the 6% to 10% investment in CS is actually driving success for customers vs. required to manage a large complex cross-functional team.
2022 TSIA research inquiries7 Numbers represent the ranking of inquiry
Given the level of investment:
These are the questions we are setting out to answer, but to do so we first need to establish a better understanding of what conditions need to be satisfied to drive customer success.
Setting the conditions for success
“To innovate, companies must know what outcomes customers are trying to achieve and figure out which technologies, products and features will best satisfy the important outcomes.” - Anthony Ulwick.
In the last few weeks, we spoke with several product experts in our network in order to understand what the main challenges they face are when building new products which deliver outcomes customers are trying to achieve. Based on those interviews we identified the following three key conditions.
Under each of these, we’ve identified the key activities required, providing a useful framework to help guide investment decisions and clarify focus across Product and CS teams. In Mehta, Steinman and Murphy’s book ‘Customer Success’ they cover a number of ‘laws’ for customer success. Our framework below is neither meant to replace nor conflict with those principles, but is intended as a more focused lens through which to balance investments between product-led and people-led success.
Product-led and People-led Success: defining a framework for Success
We started this research on the premise that the value delivered by CS teams could be to a certain extent replaced by product capabilities. The interviews with product experts suggested that indeed companies can improve customer success through the product. However, the interviews also indicated that the role of CS is not easily replaceable by product excellence. The extent to which one may be able to rely on the product to drive success will also depend on whether the proposition serves multiple functional areas of a customer or just one function. Multi-department or horizontal solutions will require greater coordination of the customer’s organisation vs. vertical or single-department propositions. This coordination challenge will require people, such as CSMs to orchestrate.
Product-led and people-led success is therefore not an either or decision - they feed off of and support each other. The focus should be on getting the mix right, deploying capital in a way that will be both effective and efficient.
The greatest advances for product-led success (PLS) will be centred around how to drive greater adoption of the features product managers build, keeping complexity under control and hence minimizing the consumption gap. Advances are also likely to be made in the measurement and demonstration of success, but this is where there will be greater limitations on the efficacy of PLS for now, and where CSMs should continue to play a greater role, particularly where it leads to opportunities to up-sell, cross-sell and increase prices.
The table below provides a framework to guide the mix between PLS and CS investments. We believe there are limits to both, and that by combining them and helping both teams work together, a business can drive much better customer satisfaction.
What can we learn from the framework below:
The harvey balls indicate where we believe product and CS leaders should focus on rather than where we believe most SaaS businesses are today.
Conclusion and takeaways
At the heart of our thesis is that business leaders should be making investments which are not only effective at driving customer outcomes, but are also efficient, particularly in the current market. This requires getting the right mix between investments in product and people. We do not believe the CS function and the industry around it can or should solve every customer problem, nor do we think technology alone is the answer. The intention of our framework is to challenge where investments are being made across the three core conditions and nine activities, to drive capital efficiency as well as effectiveness.
Our hope is that the work we have done here, which is the beginning of a journey not the end, will help generate a healthy debate over the merits of investments in CS vs. product for driving customer outcomes. We hope it will focus efforts on addressing underlying issues and complexity in the product, freeing up the time of CS to focus on strategic topics and unlock even more value for customers. More work is needed to uncover the extent to which PLS could be applicable to different businesses, just as product-led growth’s applicability varies across businesses. This question among others is what we plan to explore as we continue to build out our thinking on PLS.
If you would like to contribute your thoughts, share PLS tactics you have seen work or just to get in touch and discuss we would love to hear from you. Please drop us a note using this link PLS feedback.
1 Mehta, Steinman, Murphy, Customer Success
3Slootman, Amp It Up
5 Gainsight Customer Success Index March 2022
6 TSIA, The State of Customer Success 2023
7 TSIA, The State of Customer Success 2023