Listen: Next in Tech | Episode 69: Customer success: Keys to the subscription transition

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Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast with the world of emerging tech bits. I'm your host, Eric Hanselman, Chief Analyst for the 451 Research arm of S&P Global Market Intelligence. And today, we'll be discussing customer success with Senior Research Analyst, Bruce Daley. Bruce, welcome to the podcast.

Bruce Daley

Great to be a part of it, Eric.

Eric Hanselman

Well, great to have you, and what we're talking about today is something that, I guess, to my mind, is really an extension of a lot of what we've been talking about around customer engagement, customer experience and maybe driven by some of the changes that are happening in the market. And before we get too far afield, I first want to touch on really what's customer success, what's it all about and how is it related to customer experience.

Bruce Daley

Well, let me answer that question, first of all, by talking a little bit about where customer success is. So right now, I really believe that customer success is somewhere in the collective unconsciousness of the IT industry. So you see it popping up all over the place. You see it popping up in presentations. You see it popping up in sales literature. You see it popping up actually in S1s and annual reports.

And really, what that indicates to me, Eric, is that the industry really has settled on exactly how it defines customer success and what it is. So when you're asking that question, to some extent, we're anticipating where the market is headed. But that being said, I would say, in general, what customer success is all about is providing a new kind of customer experience that really focuses more on the concerns that customers have once they purchase a product.

And it's interesting that the shifted business model from on-premise perpetual based pricing has really facilitated a change in risk. So vendors now are taking on a lot more risk than they have in the past in terms of their customers being successful in implementing their products. And consequently, that's really driving demand for this nascent new market.

Eric Hanselman

Now that's interesting. The SaaS angle is something that I think is a really fascinating part of this because it's really that business model that's changed. I mean, the typical transaction, CRM was sufficient because the only real goal was to get the customer to buy. And then they've bought, and then there's a long period before they're going to buy again.

But with subscription models, we're now in a mode in which we've got to keep people renewing. And in order to do that, they've got to be successful over and over and continue to be happy. That's really a pretty basic change in dynamics, yes?

Bruce Daley

Well, that's a very insightful observation, Eric, and that's absolutely correct. But there's an additional component to it, and that is there's a financial reward that investors place on renewal revenue. So at the moment, and I know you're familiar with the M&A space, but maybe just to touch on it briefly, most companies are bought on the basis of profitability, and investors assign different weights to different types of revenue.

So service revenue typically tends to be low, but subscription renewal revenue typically tends to be high. So service revenue may be anywhere around the range of 4x EBITDA, but subscription revenue is 12x EBITDA. And sometimes, recently, it's been even higher. So consequently, investors are placing more of a premium on that type of revenue. And consequently, a lot of the initiative in this market is being driven from the top down.

Eric Hanselman

So fundamental motivations in terms of getting this done because it's a metric that, in fact, investors are looking at heavily.

Bruce Daley

Yes. And why $1 is still $1 from a cash flow perspective, in an exit, if you have lots and lots of renewal licenses, you could have a valuation for your company that's 3 or 4x as big as if it was all new sales.

Eric Hanselman

I mean, churn has always been a concern. But now, in a subscription model, that really is the one thing that organizations are trying to hold off and hold at bay at all cost.

Bruce Daley

Well, exactly. And some of the leaders in this space have said to me, "Well, I started this company because I had another company, and what we found is that we had developed a leaky bucket. So we kept adding more and more revenue into the top of the bucket, but it kept leaking out the back."

Eric Hanselman

And at a point at which investors are in the markets are sensitized to those kinds of numbers, that makes a real difference.

Bruce Daley

Yes.

Eric Hanselman

I guess, from a market perspective, I mean, is -- it sounds like this is a new market as opposed to an adjacency, per se. Is that the case? What's your take?

Bruce Daley

Well, it's one of those things that people have been working extremely hard for 10 years to be an overnight success.

Eric Hanselman

Well, and I guess -- well, that's the question. Are they getting to the point where the market is mature enough for there to be overnight successes? Or are they still going to be cranking away at it for a while?

Bruce Daley

Well, our research seems to indicate that this market is really Crossing the Chasm from the historic Geoffrey Moore perspective that, so far, most of the customers, when we look at the customer base of companies like Totango or companies like Gainsight or companies like ChurnZero, what we see is that they have, for the most part, predominantly cloud-native SaaS companies. And most of those are actually coming out of the Silicon Valley.

But what we're seeing is that, on the other scale or the other side of the fence, companies are hiring customer success executives without having customer success teams in place. So we think this is part of this big push from the top down, and that the investors and owners are saying to executive management, "You need to do a better job with renewals."

Renewals are saying, "Okay." They're going out and they're hiring a customer success czar to be in charge of those efforts. And they are -- then they're going out and are actually building the teams. And so as a consequence, what we see is demand is starting to build up on the more mainstream part of the marketplace.

Eric Hanselman

So that sounds kind of like that's putting the cart before the horse. Or is this something that, because it's an executive-level imperative, that's actually a reasonable way to go about it?

Bruce Daley

Reasonable or not. I just think that's kind of the way the market is approaching it. It's -- I think it really kind of lends itself towards one of the challenges that this market faces, Eric, and that's digital transformation. And that, interestingly enough, a lot of these companies are purveyors of digital transformation. So they're selling digital transformation.

But an unexpected consequence of that is that these technologies are starting to erode the organizational barriers within their own organizations. And so a lot of the opposition to customer success initiatives is not based on the maturity of the technology. It's really based on what applecarts are you upsetting internally.

Because if you were going to do a full implementation of customer success, what you really would do is you'd have a small group focused on new sales and a very large group that's focused on renewals. And so, to a certain extent, what that really does is it evolves the barriers between sales, marketing and customer support.

So obviously, those are pretty well entrenched, not only organizationally, but also in people's minds. So that is really -- it's the people, Eric, I think, that are really slowing down adoption of this particular technology.

Eric Hanselman

As the sticker on the box says, some silo busting required, and that's -- I guess, we see that in so many aspects of digitization because we're starting to meld together teams that didn't actually operate together fully.

As you said, normally, it was sort of sales would be pitching the client over the wall to customer support. Customer support would really only be engaging when there was a problem as opposed to the customer success model that's really tending that customer throughout that life cycle.

And I guess, that seems like that changes some of the time lines of the relationships with customers, in that the organization now winds up being a lot more tied in. There's got to be that handoff from the selling process into that initial onboarding, that first experience. And yet, it's also extending that relationship for a much longer time period.

I mean, hopefully, I guess, from a subscription perspective, hopefully, forever, but that's a sequencing that, I guess, as you were pointing out, most organizations aren't really structured to do. How do they cope with that?

Bruce Daley

Well, I think you bring up a really good point. It's really more about marriage than dating. So organizations have been great at dating. They've been great at showing up the door with flowers and being on their best behavior and taking the customers out to the nice restaurants. But then once things reach a certain point, they tend to ghost them and they tend to disappear.

Eric Hanselman

So we need to get ghosting out of the customer relationship.

Bruce Daley

That's right. I hate to bring up the C word. But yes, it really requires a greater level of commitment.

Eric Hanselman

Well, that's ain't -- that's a pretty significant transition when you start thinking about what organizations have to do. I mean, there's always, I think, been lip service paid to dedication to customers, but so much of that is typically upfront. We're going to design a product or a service or a capability that meets customer requirements. Then they're going to buy it, and then off we go.

And we'll continue to kind of listen to them about what they want, about features and functionality, and those sorts of things that are going to grow the product as we go along. But it's not a direct engagement. It's not the marriage part. That's the -- it's the sort of the, hey, we'll call you and maybe see you next month sort of thing. The long distance relationship, I guess, of customer interaction.

Bruce Daley

Well, you're totally right. I mean, customers say that they put their clients at the center of their relationship, that they're customer first. But many of them also take their contact centers and outsource them halfway across the globe, so that when the customer has a problem, they call them, right?

A lot of this really, Eric, is about creating a customer-centric organization, and that's a big shifted mindset and it has to go way beyond just paying lip service to this idea. Now I know you've had a long career in technology, and I have, too.. I think throughout my career, at least in software, what I've seen is a lot more busted projects than projects that were successful.

There's projects that are very, very successful, but that's definitely the minority. Then there's a lot of projects that kind of link -- that limp along, and then there's a bunch of projects that are just complete bust. And sometimes, you even see about them in the newspaper. So what this really is going to go a long ways towards addressing, and I think that's particularly true with the onboarding space.

And some of the vendors who specialize in that, like Baton or GuideCX, is that they are going to address what I think has been the #1 in software throughout my career, and that is busted implementation. So now that the vendors really have an incentive to try and bring best practices to the customer, to try and help them through the digital transformation, to try that and get them to realize as much value as they possibly can out of their software, because when it comes to renewal time, that's when it's really going to count.

Eric Hanselman

When Sheryl Kingstone has been on, especially the last episode we did with her that was talking about digitization of customer experience and some of the customer SAT pieces and customer engagement channels, she was making the point that one of the big things about digitization is that you've got to ensure that you do have much tighter integration for the various engagement channels. And -- but that was all on the upfront side. It was the purchase. It was the delivery, but it really wasn't the ownership for the long term.

Do the kinds of things that one would be doing for organizations that were doing the first stages of the digitization journey, the fact that they can integrate, they can blend channels, all of the customer engagement pieces, whether or not that happens to be web, e-mail, text, phone, call center, all the various pits and pieces, is the knitting together of that a good entree to this? Or is this really a journey that's got to do substantially more to realize real benefit on the customer success side?

Bruce Daley

Well, in my opinion, it's even more leverageable. All of that integration that Sheryl was describing is even more leverageable in this particular space because customers know a lot more about their customers than they do about prospects. And consequently, they're gathering a lot more information, like usage of the product. They're gathering information from sources like S&P about what changes are taking place in the organization from a personnel perspective or a financing perspective.

And so consequently, what you're seeing is that, in addition to having all those channels to engage a client, what companies are doing, and really at the heart of customer success, is the idea of monitoring customer health. So what they're doing is they're keeping track of a number of metrics, and they're sort of seeing who is struggling, who is having problems with his implementation, who stopped using the software, who is not really getting as much value out of the product as they could.

And they're proactively reaching out to customers, not in a direct sales situation, but reaching out to them to help them get more value from their products. And so all of these channels just facilitate that process, but at the heart of it is really this idea that we have to be concerned about our customers after the sale.

Eric Hanselman

And that's a big step for many. Well -- and it sounds like -- so you were talking about some of the perspectives that you've been working on in your research. What are you touching on? And what are those things? I mean, what should our clients be looking for in terms of getting a better understanding about where we are with customer success, where it fits in the market and where they should be headed?

Bruce Daley

Well, we've been trying to look at this market through a number of different lens, Eric. So one of the ways we've looked at it is, as you know, we've got a number of customer surveys, and we've been asking some very specific questions about customer success to try and take the temperature of the market.

Now in addition to that sort of looking backwards, we've also been looking forward by doing market sizing. So we have gone out, talked to all the vendors, made estimates about what we think the revenue is, check that with them and then use that to make projections about where we think the market is headed.

In addition, we've also taken the time to go out and actually interview, one-on-one, a large number of the players in this specific marketplace. And as a consequence, I think we've got a pretty well-rounded look at the market, which is part of the reason that I think we're really #1 in customer success among analyst firms.

Eric Hanselman

Well, a good place to be, especially in a transition for something that is as fundamental to the way in which we're typically looking at that next stage of engagement. I mean, everybody is looking towards that shift towards subscription models.

And as you pointed out, there's a lot of valuation from the markets and investors about making subscription models work. Everybody wants to go there when were -- Mark Fontecchio was talking about how the automotive industry is trying to turn itself into a subscription model and some of the challenges that exist there. But really, organizations have got to get the fundamentals right in order to master it.

Bruce Daley

Absolutely. And you know what? You're going to be glad to know, Eric, that we're eating our own dog food.

Eric Hanselman

I mean, please. I don't know. I'm not looking at that in -- now the glass , don't drink that, but...

Bruce Daley

Not a dog guy, I take it. Well, in any event...

Eric Hanselman

No, I am a dog guy. That's why I don't want to eat the dog food.

Bruce Daley

Well, in any event, and sort of the [ standing check ] to all the other research we're doing, we've been reaching out within S&P Global, which, as you know, is an enormous company. And we have found a number of people who have customer success in their title.

So we're working with them to really understand where the market is based on their journey and the journey of other customer success practitioners. So we're spending a lot of time talking to customers, so that we're not, in fact, drinking the vendor champagne.

Eric Hanselman

Well, hopefully, that's a good place to go and one that's worked. So what should organizations be considering? What are the first steps that they need to be looking at in order to really get to a better footing around customer success? I mean, beyond reading the research, what kind of pieces -- is this part of a natural flow in the digitization journey? What are the steps?

Bruce Daley

I think it really starts at the top of the organization and that you need an executive who is willing to make a commitment to transforming the organization and putting this customer exactly at the center of the organization, and that is going to be a difficult task, Eric.

It's going to involve changing people's responsibilities. It's going to involve, really, changing the way that companies fundamentally look at customers. It's going to involve cultural changes. And so consequently, I think that for CEOs to educate themselves about what exactly does this mean and to talk to their peers and try and understand, well, what are the most successful practices that people are engaging in, because another aspect of our research is we obviously look at tech leaders versus tech laggards.

We look at digital transformation leaders versus digital transformation laggards, and those are 2 different groups incidentally. And what we're seeing is that the companies that are both digital transformation leaders and tech leaders are enjoying a lot more benefits from customer success than companies that lag in either of those 2 areas.

Eric Hanselman

It's worth the investment to get to that stage where you got the digitization -- the digital capabilities to be able to move this forward, to give you the agility, to be able to fire on this and hopefully to do the silo busting that you're identifying before.

Bruce Daley

Now no one can predict the future, obviously, Eric, right? But I think from an investor's perspective, this is a very attractive marketplace. And in fact, at least within my coverage area, there's one area of it, specifically onboarding, that we think is going to grow faster than any other part of the software business.

Eric Hanselman

Interesting. And that, basically, front-end capability, is that one of those things that can be carved out without upsetting the applecart too much or maybe shifting the applecart a little bit without knocking any apples off?

Bruce Daley

Bingo. That's exactly why onboarding, it seems to us, has already crossed the chasm and, in fact, appeals to mainstream businesses as well as to cloud-native SaaS businesses because you don't really need to reinvent your sales and marketing organization. You can just concentrate on getting customers to adopt your products.

So that's politically pretty neutral. But at the same time, that's completely dependent on new customers, right, and that's really a fundamental difference between the larger customer success market and the onboarding market. So what feeds the onboarding market is new customers, but what sustains the larger customer success market is existing customers.

Eric Hanselman

Yes, a good point. If you don't have that steady stream of new customers, onboarding is going to eventually fade a little bit. And yet you've still got to maintain those customers. You've got the core piece of customer success.

Bruce Daley

Yes. But I think the companies really need to look at that, not so much as maintaining, but really more as an opportunity because it gives them the chance to cross-sell and upsell into their existing installed base, and there's a number of advantages to that.

First of all, you're dealing with people that already know you, so you don't have to go through that first state sort of stage of the sales process. Second, the other advantage to it is that, unlike new sales, existing sales occur on a regular basis, at least in the subscription model.

So you know exactly when you can expect the revenue from people. And so there isn't as much discounting. There isn't as much uncertainty in the pipeline. And that's part of the reason, Eric, frankly, that investors prefer this type of revenue to other types of revenue.

Eric Hanselman

Lower cost of sales. Yes, good things.

Bruce Daley

And more predictability, more dependability, so that they can turn around and in their financial projections represent them more accurately to their masters.

Eric Hanselman

And I think one of those things that digitization gives us because we've got the visibility, we're accumulating new data, now we can understand what that direction looks like. And we can do prediction, as you were saying, and have greater reliability in the overall operations of the business. Living the dream.

Bruce Daley

Living the dream. But beyond that, what I find really interesting is the unpredictability of it. Now to some extent, the customer success market is an unintended consequence. It's a black swan. It isn't something that anyone really planned or anyone anticipated or anyone expected. It is a situation that's come up that really is a profound driver of change. And yet, it's something that no one really intended.

Eric Hanselman

The byproduct of that shift towards subscription, but in that shift, looks like a lot of shift is intact. But we don't really know what all the follow-on pieces are that are going to be caused by that change.

Bruce Daley

Yes. And that's one of the beauties of this job is that I get to see the forest while everyone has their face planted close to the tree.

Eric Hanselman

Well, this is fascinating stuff and, especially in shifting markets, a lot of things that we're looking at. But we are at time. Bruce, thank you very much for all of these insights. I hope the -- our listeners will check out a lot of the research and get to a point in which they understand what these shifts to customer success is really driving, can do for them. So thank you.

Bruce Daley

Well, thank you for having me. And by the way, my brother, who's a television reporter said, "Bruce, you've got a face for podcasting."

Eric Hanselman

Well, we may be doing video in here. So maybe makeup artist, maybe in your future, we'll see.

Bruce Daley

Good. I'll schedule an appointment with a plastic surgeon.

Eric Hanselman

Here we go. Well, many thanks. That is it for this episode of Next in Tech. Thanks to our audience for staying with us. And thanks to our production team, including Carolyn Wright, Caterina Iacoviello, [ Ethan Zimman ] on the marketing and events teams and our studio lead, Kyle Cangialosi.

I hope you'll join us for our next episode where we will be discussing robots. Ian Hughes is going to be back to dig into a lot of things. We started now, geez, probably about 6 months ago, talk about robot applications and a lot of what is a subject that I think gets misunderstood in terms of its real practical applications. But I hope you'll join us then because there is always something next in tech.