In the 12th edition of Leaders of Growth, Arthur Nobel, Principal at Knight Capital, had an insightful conversation with Dan Steinman to delve into the importance of Customer Success in the SaaS world, and how important this organization becomes as a company scales.
Dan is a Customer Success Expert and Chief Evangelist at Gainsight. He is an expert in aiding the expansion of small private companies to get them ready for a public offer or for acquisition, and he has worked with a number of startups in Silicon Valley to help them reach successful exits.
Tell us about yourself and how you entered the world of startups.
When I came to Silicon Valley, about 35 years ago, and I did my first startup, I realized how great it was to join a small group of people who are good at what we do and share the same laser focus. It’s about figuring out how to get things done. I love patching things together, building something, and making things work.
I started doing startups back in 1997, and I lived through the dot com phase in a startup. So, my first experience was everything that you can possibly experience in a startup company: The euphoria of incredibly fast success, and then destruction. But I fell in love with startups. You learn a lot, even if they don't always have a great exit.
You’ve joined very early on in some companies, and you’ve stayed very late. Could you paint a picture of how a company develops over time?
Although I’m really fortunate to have had three good exits, I’ve done eight startups. One of the things I’ve learned is that failure is a much better teacher than success. I learned way more at the companies that didn't have a great exit. You’re better off taking risks and failing in the eyes of your next hiring company, than if you stayed at Google or HP for too long. In Silicon Valley, we love people that are willing to take risks because that’s the startup mentality.
A growing company is just as stressful as a failing company, or maybe even more so. Once you get something good going, you have an obligation to shareholders and to employees to keep it going. That means a constant evaluation of your organization’s leadership.
We get fooled by the great successes of founders who take their companies public, and we think that’s the way the world works. In fact, those are the anomalies. Most successful companies do not have a founder as a CEO when they go public, and it’s even somewhat rare for the founder to still be at the company when they go public, because of so many changes. The skillset to get something started is way different than the skill set to run a big company.
What would be some of the questions you recommend asking to make sure someone is the right person for the company’s next stage?
That’s the zillion-dollar question. I think what I would look for is self-aware people. Arrogance kills companies, especially at the highest level. If you are sure you’re smarter than the rest of the world, you’re going to find out in a very rude way that’s not true. You’re way better off approaching what you’re doing with humility to see the market, recognize how much control you have over it, and how much you can do with the things you have control over. It’s about finding the right intelligent but humble and self-aware people.
"Every SaaS company today is getting some level of pressure from the board to start moving their business to a consumption economy because that’s the future."
Switching to Customer Success, could you paint a picture of how you’ve seen this discipline develop over time?
Customer Success came about mainly because Marc Benioff decided the subscription model was a good pricing model. Although he was right about that, his mistake, the same mistake that so many other early-stage companies have made (and still make today), was believing that all it takes is to have a good-enough product for customers to use and see the value behind it. B2B software is complex. Adoption is not a natural thing for a human being. VCs in Silicon Valley figured out pretty quickly that churn was the killer of companies. Therefore, they started to require, even at Series A, a Customer Success vision and even a leader already in place.
Some CEOs and founders still decide they don’t need Customer Success because they never needed it before. I think that’s because CEOs over 50 years old most likely grew up in the enterprise software days, when we sold our product, collected all the money upfront, and never worried much about whether our customers used it because we already had the money. But now, even the most viral B2B software product has a considerable Customer Success team.
You need to do two things to make sure software is adopted: First, making sure the renewal happens, and second, being able to raise prices. If your customer is not getting enough value from your product, you can’t raise prices, or they’ll churn the next time they get a chance to. If your customers get a high level of value, not only will they renew their contract and buy more from you, but they will also stay with you if you decide to raise prices.
I think CS has evolved to become a must-have and a strategic differentiator. Today, CS is not only about customers not churning but about customers buying more and faster. You need to accelerate everything that raises Net Revenue Retention (NRR), which has become the most important and valuable metric in the SaaS business. That’s all driven by Customer Success.
The subscription economy has driven the need for Customer Success. In the next economy, the consumption economy (customers only pay when they use the product), every penny of revenue will be driven by CS rather than sales. If my customer uses my product more today than yesterday, they will pay more today. Every SaaS company today is getting some level of pressure from the board to start moving their business to a consumption economy because that’s the future.
"The most important intersection at your company is the intersection of your product and your company, and the people who understand what’s going on at that intersection are your Customer Success people."
Would you say that this could be a disruption for SaaS in a way?
Yes. I love this evolution because this is the way it should be. If I don’t use your product, I shouldn’t owe you anything because my product is no value to you. That’s the model that most of the world has lived in forever. Subscription is the anomaly. Now, software is slowly moving to the real world.
Considering the investment and the onboarding process that big players require, how do you see big companies being influenced by a consumption model?
One thing that big companies have to think about is why we charge for onboarding and services. This used to be (and still is) the most significant source of revenue and profits for big companies. They do services to make money. But a SaaS company doesn’t do services to make money but to increase lifetime value. Otherwise, you’re wasting resources and becoming a services company, which isn’t nearly as valuable as being a software company.
I think we have to look at services differently, and you have to look for aspects of your pricing model that are consumption-based. Otherwise, you run the risk of being left behind. For example, at Gainsight, we realized we had some leverage on the number of customers that a company was managing using our software. That should’ve been our pricing model. You buy our software to help your customers, so we should be able to charge you per customer. As you grow your number of customers, our price goes up. We get more because you’re getting more value.
Many companies struggle to identify what value they essentially provide. Sometimes, they can assess it qualitatively, quantitatively, or another form. What are your views on this?
I think it’s dangerous how many companies don’t know the actual value their product can provide. Most companies would do well to hire a third party to talk to their customers and figure out if they’re getting value and from what part of the product they are getting the most value.
We all want to get to the point where the service is so essential and integrated with so many other systems that it’s almost impossible to rip out. But most of us are not so lucky, and we have to work hard to figure out the real value that customers are getting, even more in a consumption model.
Product-market fit means something different today than it used to be. A Series B investment should be more about ensuring the company understands customers’ value. Product-market fit is measured by usage, not by value. We should probably change it to value-market fit as opposed to product-market fit.
To wrap up, is there anything else you’d like to share?
The future is moving towards consumption, and you have to look at CS as you look at sales. It’s not optional. The temptation to treat customer success as an expense and lower the cost is very high. Don’t get caught in the trap of reducing the cost too much because that can certainly lead to failure. You have to treat it as a revenue-driving organization, which it is.
Click here and head to the Leaders of Growth podcast if you want to listen to the full interview.