The Role of Customer Success in Enterprise Software - 7investing
7investing

The Role of Customer Success in Enterprise Software

October 5, 2021 – By Samantha Bailey

Not too long ago, software was sold with perpetual licenses. Often, software was bundled with hardware. In some cases, an annual maintenance contract was added to the perpetual license, which provided the buyer with software updates and patches. This sales motion meant significant upfront costs for the purchaser. Every few years, a new major upgrade landed, and the whole process repeated itself.

Subscription software changed all this with the arrival of the Software as a Service (SaaS) sales model. Customers now pay for the software they use, on a monthly, quarterly, or annual basis. They always had access to the latest version of the software. And with cloud delivery, there are no upfront hardware costs. In a nutshell, companies went from spending on Capex to just budgeting software use under operating expenditure.

However, in the SaaS model, clients can terminate a software contract if they don’t get the value they expected. And that would mean a loss of revenue (unlike perpetual licensing, where almost all of the payment is upfront). The implication means that the software should solve the customers’ problems; it needs to deliver on the promises of the salespeople. And that’s where Customer Success came into play.

Today, Customer Success plays a critical role in software adoption. It plays a vital role in the SaaS land-and-expand model. In this interview, 7investing Lead Advisor Anirban Mahanti chats with Customer Success Manager Kyle Holden. Kyle is a senior customer success manager at Okta (NASDAQ: OKTA), where he works with enterprise customers ranging from 5000 to 25,000 employees. In this chat, we cover various topics, including:

  • The origin of customer success

  • How customer success has evolved

  • How customer success works with sales & marketing and product development teams

  • The importance of Dollar-based net retention (DBNR) and how investors should think about DBNR for large vs. smaller enterprise software businesses

This is a fascinating conversation that enterprise software investors shouldn’t miss.

Timestamps

00:00 – Introduction

08:39 – The Role of Customer Success in Enterprise Software

13:58 – The Origin and Evolution of Customer Success

21:23 – Where is Customer Success on an Income Statement?

25:29 – Dollar-based Net Retention in Enterprise Software

Transcript

Anirban Mahanti  0:03

Hello, everyone, I’m 7investing lead advisor Anirban Mahanti and today it’s my pleasure to have Kyle Holden. He works at Customer Success at Okta (NASDAQ: OKTA) and he’s been in the industry, let’s say, in the thick of it in the field, working in software as a service. And he has basically worked in customer success, which is what we’re going to talk about today, for over eight years, since 2013. He cut his teeth at a company called Relias, which is an e-learning company, for about four years. Then he spent some time at Cisco (NASDAQ: CSCO) and in an enterprise search company, which you didn’t name, but let’s assume that it’s an enterprise search company. And now at Okta, which is an identity and access management company.

He’s based out of Raleigh in North Carolina. And I’m going to actually pass it over to Kyle to tell us a little bit first about his background, education, work experience. And then a bit about his investing to hear a little bit about how he got started investing, what did he learn from where, and where he’s at, before we sort of jump into the meat of the matter, which would be, we talk a lot about customer success.

And this is going to be a very important conversation for anybody who’s investing in enterprise software, especially in software as a service, because there are a lot of numbers that are thrown out like dollar based net retention or customer churn, or net expansion rates. What do these mean, and why are they important. We get the perspective from a person on the ground, who works with large customers, customers who manage a large number of employees. Over to you, Kyle.

Kyle Holden  2:05

Thank Anirban. Thanks for having me on, I appreciate the opportunity to share. Yeah, I’ve been in customer success for eight years. I’m a native of North Carolina, I was born and raised on a farm in eastern North Carolina. I studied Biomedical Engineering at North Carolina State. I only stayed in medical engineering for about 10 months. It was not what I thought it was going to be. Four years of education to 10 months in the field it was. You can tell Maxx that it just, biotech, medical devices, it was great from the outside but once I got on the inside just not the field or the profession that I wanted to get into.

But really to be honest with you, I kind of stumbled into enterprise software, and customer success. I got on board with an e-learning LMS company based here in “Cari” called Relias. They were actually a portfolio company of Vista Equity Partners. Two companies got acquired and merged into one, to former Relias in 2012. And I joined Relias in the support organization in 2013. Within six months was on the customer success team and did that for three and a half more years at Relias. Really just cutting my teeth in customer success. Back then customer success was really about maybe two or three, three or four years old. So it was one of those fields where we were all kind of learning. And I was there when Relias got sold by Vista to Bertelsmann, which is a large media conglomerate out of Germany. So I got to see kind of the private equity model over to the conglomerate model.

And a few years later ended up going to Cisco worked in their IT security, enterprise software security program for 18 months. Left Cisco went to enterprise search company called Lucidworks. They actually compete with companies like Elastic (NYSE: ESTC), Coveo, Sinequa. I was only there for a handful of months before finding my way to to Okta. Which, funny enough, I heard about Okta through an investment newsletter that I subscribed to back in 2017, when I was at Cisco. And I kept hearing customers talk about this company called Okta and their identity being managed there. And so it just kind of came on my radar, and then finally landed a position in customer success at Okta. And today I’m a senior customer success manager working with enterprise customers ranging from five to 25,000 employees, global companies. So yeah, that’s kind of my background in customer success.

You asked about investing. I came to investing like probably most people, which was kind of through the value side, the the Ben Graham, Charlie Munger, Warren Buffett side of the house. And to be honest with you, a lot of it really started with dividend growth investing. I was at a place in 2015, where I was looking to take this cash flow I was generating through my profession, turn it into some type of income. I was like I’m working for income, how can I take this this energy that I’m earning and turn it into passive streams of income that I can build from there. So it started with dividend growth investing kind of evolved into value investing as I got and started reading more blogs and investor newsletters. And then from value investing, I started to realize that there’s a lot of companies that I just really don’t understand. I mean, I’m looking for these, these really like, I guess you could say, blemished pennies, and it just wasn’t really what I was most interested in.

So that kind of evolved into compounders. Really, really high growth companies like SaaS businesses. And over the last two years, I have kind of evolved and branched out into learning more about the crypto space and what’s going on and in that industry. Specifically Bitcoin and what’s happening in the underlying blockchain technologies. But SaaS is really what I’m most interested in. Enterprise software and kind of what’s happening in that space. And it just seems that, at least with what I’m seeing in the investing world, that as SaaS continues to pave the way when it comes to how to operate a business. There’s a lot of other industries that are starting to switch to this software type model. Because I understand the long term implications of what it can mean for investors, but also for their business with locking up revenue and contracts and the ability to grow relationships with customers. So that’s how it’s kind of evolved over time. I think some of it has to do with with the industry that I work in. So maybe I’m a little biased, but yeah, that’s a little bit about my background.

Anirban Mahanti  6:33

Kyle, that’s fantastic. One of the things I say is that, once an engineer, always an engineer. In certain educations, engineering is one of them, it’s not just a specific discipline, right, that you learn.  You learn a lot of other skills that are widely applicable. And I tell people, if you’ve got a PhD once, and most people would only do a PhD once. But if you’ve got a PhD, then you’ve basically got an ability to think. If you completed the degree. Then that is something that is applicable in many different domains, right?

We don’t realize, but a lot of education actually transfers over, skills transfer over. And of course you learn at the job. And I’m not saying that education is essential, if you look at some of the great entrepreneurs, they didn’t have an education, but they have educated themselves in other ways, right? I mean, so education is important. A degree per-se, is not necessarily important, but what you learned is kind of important.

Love the journey, everyone, including myself, we all start there, because that’s what I think is most in your face, right? What is known as deep value, which is like, trying to find, 50 cent dollars, right? That’s what a lot of people do. And very quickly, people realize that even the great Warren Buffett no longer invest that way. That was his early days of investing when he was looking for cigar butts, basically.

So that is fantastic. Let’s jump into the meat of the matter, which we want to talk about. It’s gonna be hard but let’s try to do top down. So for our listeners, can you set the stage as to what is customer success? And basically say in the context of an enterprise software company what is the role of customer success? What is it? Why is it important? What does it do?

Kyle Holden  8:39

Yeah, totally. And I think when we get into some of the history of customer success, and how it came to be, what a customer success manager does, we’ll make a little bit more sense. So the easiest way that I’ve been able to describe what a what a CSM is, a customer success manager is, is we’re essentially a personal trainer for software purchasers. That’s what we do. An executive, a company, comes to a software vendor to an enterprise software company and is looking for a product because they’re hoping that that product will solve a specific business solution or provide a certain business solution, a certain business outcome for their organization. And so they buy that product. Our goal in customer success is really just to act like a personal trainer, right?

So let’s say somebody gets out of the hospital, and they go directly into physical therapy, professional services, if folks are kind of wondering where Customer Success lives within an organization. Professional Services is almost like a physical therapist. They do really good work, but they’re not supposed to be with you forever. They’re supposed to solve a very specific problem. And then they’ll pass you off to, and you’ll be outside of the physical therapy realm. In many cases, you’ll leave and you’ll go to a gym, they continue your training rehabilitation. In many cases, you’ll pick up a personal trainer. That’s what a customer success manager does. We work with executives, Chief Information Officers, Chief Technology Officers, Chief Information Security Officers, or CISO’s. To help make sure that the product that they purchase for the problem they’re trying to solve actually get solved with the platform.

And our role is designed to help them navigate that journey from A to Z and turn any potential mountains in that process into molehills. What we’re trying to do as CSM’s is also connect these executives, these businesses with potentially other businesses that have solved similar problems. So we’re trying to create some thought leadership there to help them solve these problems in a collaborative fashion, using the software that they purchased from our organization.

So really we’re helping drive outcomes, you could think about what we do, as the same thing that a financial advisor is trying to do for a client, they’re trying to get them from this point, to a point in the future where maybe they have some financial independence, they can buy that house, they always wanted to buy, they can retire when they wanted to, maybe earlier and they wanted to. Our goal is to work with executives to help them solve really critical business challenges within their organization. Some of that can lead to cost savings for the organization, some of it can lead to opportunities for them to drive additional revenue. Some of it could be they’re just wanting to enhance the customer experience. They want to differentiate in themselves in the market in terms of customer experience. Our goal is to help drive that that value with the product they purchase from us.

Anirban Mahanti  11:23

Fantastic. I love that analogy of personal trainers. I think maybe before ask the next question, just a clarification. So professional services, that could be outsourced as well, right? Typically, it could go to a an IT services firm, but typically Customer Success is internal. Is that a good generalization?

Kyle Holden  11:45

Yeah, in most cases, professional services, sometimes you will have it in house. But a lot of times as organizations get larger, it is very hard for them to rely on their internal sales and professional services team to continue driving growth at that level. Even if you think about Cisco. And I think you can find this in the in the annual reports, 85% of Cisco’s revenue comes through channel partners, it doesn’t actually come from their field reps. And same thing happens as these channel partners will not only sell the product, but also offer professional services.

Customer Success is a little bit different. In most cases there’s a very high percentage of Customer Success professionals that are housed within the company that built and service the software. You are starting to see Customer Success teams pop up in channel partners. Partners are starting to, or distribution partners, are starting to offer CS services, CS-like services, but for the vast majority of organizations, especially companies that are small, small enterprise companies, as well as growing into mid cap, mid sized enterprises, customer success, that motion is going to be in house 99% of the time.

Anirban Mahanti  12:56

Right, and for some time. It makes sense when you’re talking about a large company with lots of sales then you have got, since you’re using channel partners, you might as well also use them potentially for customer success.

Give us a little bit of, take us down the memory lane sort of thing. Tell us, because the software has undergone I guess over the last decade or more a lot of change that’s gone from, maintenance and perpetual licenses to sort of this annual cadence or maybe whatever, two years, three years whatever is the license contract. We’ve gone from people having this software, which then you’d buy upgrade packs, or you would not. But you’d have a perpetual, you’d have a maintenance pack assigned with it. Versus now where you basically always have the up-to-date version of the software, but you pay on a regular cadence. So there’s been changes to how software is sold and how software is distributed. Where did Customer Success originate from? And how has it evolved? Just your viewpoint of that?

Kyle Holden  13:58

Yeah, well, I mean, if you really think about software, software originally started with hardware, you can’t put software on nothing, right? So back in the 70’s and 80’s. Originally, organizations were selling hardware and software was bundled into that hardware. Organizations got access to the software as part of their hardware bundle. And as that continued to get progressing grow, obviously software became a bigger part of buying hardware. And eventually what ended up happening is that organizations didn’t want to have the Capex expense, the overhead of just buying a ton of hardware. That’s where the term “shelfwear” came from. There were a lot of organizations that will buy all this hardware and would buy the software licenses for that hardware. But then it would just go on a shelf because they didn’t have anybody to help them successfully deploy it, get value out of that hardware.

And so I think back, and in terms of customer and or at least the the SaaS model. So the way that software used to be sold is that you would buy, if anybody remembers this maybe like with personal computing, you would buy a computer, and then you would buy Windows 95 licensing for that computer. And then when Windows 98 came out, you had to buy another license to upgrade to the Windows 98 operating system. That is how companies sold software back in the day back in the 90’s in the 2000’s. So companies will have to make this really high upfront investment to buy these, essentially these versions of software to run on the hardware that they had purchased from whoever Cisco, Microsoft, Apple, whoever it was.

There were companies that started doing subscription-type models, the most famous one is Salesforce (NYSE: CRM). And I think some of that is because of the type of software that Salesforce offers. Salesforce is an enterprise software, not a vertical specific software. So it really touches so many parts of the market. But I think where the shift really started to happen where folks stopped buying perpetual licenses, and they had to buy new licenses every time new versions came out. And they made the shift to subscription based software. I think the financial crisis in 2008 really helped with that. Because a lot of companies got really conscious about their balance sheet, they got really conscious about their financials and making these large upfront investments in software. And then that software and hardware living on a shelf, and not actually getting used for four or five years. And then a sales rep comes back in four or five years later, and is like hey, give me a whole lot more money for this new version we just came out with. Companies just realized that they were wasting a lot of money on stuff that they weren’t using and weren’t getting value out of.

And so the model that Salesforce kind of pioneered is an enterprise software company with their CRM tool is really what companies started to shift to after 2008 and 2009. Because in terms of upfront investment, software as a service is not nearly as expensive as perpetual licensing. Now the problem, the problem that is presented is that sales reps can not just come into an organization, sell this massive software package, and then leave for four or five years, they could take their commission and leave and go to the next guy, and get another contract, go to the next guy.

Software presented this really interesting dynamic where if the customer was not getting value out of the software package they just purchased from you, they could cancel their contract in a year or two and say, hey, we’re going to go somewhere else, we’re gonna we’re gonna take our services elsewhere, this wasn’t a valuable use of time.

And the problem there is that sales are designed to go find new business, that’s what the sales team is designed to do. So who was going to help them get value out of the software. I’ve talked with colleagues about their experiences in the past. And I asked them, I was like, when you bought software in a in the 90’s, and the 2000’s, who’d helped you, outside of professional services helping you originally get it set up. If you had use cases, or you had strategies that you want to solve with software, who was there to help you kind of navigate and pursue achieving that outcome? And their response to me, it was, well, we tried to reach out to our sales rep. But they can only help us so much, because they were focused on the business. Professional services, we had to pay for that. So in many cases, we had to get on Reddit forums, or go talk to other colleagues. And in many cases, we had to figure it out ourselves through documentation, etc. It wasn’t until the customer success manager emerged on the scene in the late 2000’s, early 2010’s that that problem for organizations was really fixed.

And so it was the shift from perpetual licensing, where customers will only buy software every four or five years to you sign a multi-year contract, and you get access to that software, all of the version updates, all of the new stuff, all the new functionality that comes with that as part of your contract, you don’t have to buy that as an extra, as an additional thing. That is what a lot of customers really started buying into, but they needed somebody that could help them see success with it, otherwise they were going to cancel that contract and go somewhere else.

Whereas with perpetual licensing, you’ve already made the investment. There’s nowhere to go, like you’re you’re stuck with it. So you either buy the next thing. And in many cases, like when the next thing came out, you couldn’t talk about what you just bought five years earlier, because that was outdated. It was done with, there was no, you had to you had to move on to the next thing. And for compliance reasons a lot of companies were forced to buy whether they wanted to or not. So there’s a long history there. But I think the financial crisis really helped accelerate SaaS, not only a business model, but as a financial model for organizations. And Customer Success really grew out of that.

Anirban Mahanti  19:21

Fantastic. I think one of the biggest things SaaS did is changed how the spending worked, right? Because you didn’t have upfront spending, which required a lot of people to think, Oh my gosh, I have to spend, several million dollars to buy this thing instead now it became a several $1,000 thing, which is just recurring. For the companies too it meant that over the long term, let’s say 10 years, they actually ended up making more money because they were taking less money up front, which is fantastic.

But, the term that I’ve heard, including some CEOs make to me, is, like they use this Savanna model from when we as humans lived in the wild, the model was like, you have hunters who go and hunt for new things, or, the big meals. And then you have gatherers which basically who gathered the fruits and vegetables and things like that. But I’ve always looked at customer success as people who are, exactly as the name says, they help the the customer succeed. And if the customer succeeds, then they are likely to renew. So it’s basically a retention play. At the same time, they’re likely to use your other products, because they just love what you’re offering them, right. So if you can make them feel successful, and they are solving their problems, becoming more productive, getting more value out of what they have spent, they’re likely to, channel more dollars to you.

I guess the thing that I would like you to maybe do a little bit of a dive on, this is from an investor’s point of view, is where does Customer Success show up on an income statement? Is it part of sales and marketing? Is it part of cost of goods sold? Or do you just disappear somewhere else on the line? Where are you guys sitting in the income statement?

Kyle Holden  21:23

Yeah, so it shouldn’t be a complicated question. Technically, customer success should live in the cost of goods sold, right there with support. We’re a part of the product. So when a customer signs a contract with an organization that has a customer success motion available we’re a part of that motion. We’re just as much of that motion as, as the platform they’re using as a support organization, they call into technical support. So we technically should live in cost of goods sold.

The reason it’s a little bit more complicated than that is it depends on the philosophy of the company and where they’re at in their growth cycle. So some Customer Success organizations, especially organizations that are a little bit smaller, and maybe they’re either trying to justify their place in the market, they’re trying to hit certain metrics so that they can look good to raise money for venture capital, etc. They may compensate Customer Success managers, not only on product adoption, but on identifying new business opportunities within existing accounts. Customer Success is compensated on identifying and helping drive new business, technically we could be listed in sales and marketing from an accounting perspective. And they may also want to do that, because if they can list us in sales and marketing, they can end up driving up gross margins for their software platform, which really, which really looks good in the private market to venture capital, private equity, etc.

So we should live in COGS, in the cost to get sold. But depending on where an organization is in in their growth cycle, you may find that we’re listed in sales and marketing. It’s not always easy to parse out. Normally, you might have to reach out to the CSM on LinkedIn, to find out how they’re compensated if they’re willing to share that for you to kind of get an idea of where they might live in that organization.

Anirban Mahanti  23:10

Okay, so this is fantastic insight. And the reason I say this is fantastic insight is, let me put my investor hat on. We talk about these dollar based net and retention numbers, right. So dollar based net retention, a very high level calculation. From the customers that I have today, which were there with me a year ago, how much did they end up spending this year versus last year, and you just measure the percentage increase. So if you say 120%, that basically means that that customer group that you retained, so that you basically taken out churn, but then upsell and churn is taken out, is 20% basically means 120% means to 20% more sales from the same group.

Now, I’m a big fan of simple models, right? So let’s assume what Kyle just told us that let’s say that you should live all in cost of goods sold. That means theoretically speaking, if we had sales and marketing equal to zero, and you had no new sales in this particular year, where you had 120% dollar based net retention, then you effectively got 20% extra growth with no additional sales and marketing line. This is theoretical, because of course eventually you’re gonna run out of customers that you can upsell to, but the point is that the model then is very profitable, right? Because you had let’s say gross margin of say 80% and sales and marketing is a huge expense for many companies, right?

Similarly, if you say put all of that number in front of simple modeling point of view in sales and marketing you could again make the same argument. Saying Okay, now your gross margin has actually gone up, so that gross margin went up from maybe 80% to maybe 85-90%. So you look like a very high gross margin business. And then you could say, Well, okay, I could do the same thing and get rid of the sales and marketing team fictitiously for one year, and just spent on customer success, and I still got 20% growth, right?

So I think in a way, a lot of times this is the hidden profitability of software models, right? I mean, in steady state these things should be cash flow machines. So I mean, if you want to make a comment on that, feel free, because as I said I have abstracted the idea.

Kyle Holden  25:29

I think even just at a consumer level, I remember when Amazon Prime was $99 a year, and now Amazon Prime is $129 a year. So like they have driven essentially 130% growth in terms of annual subscriptions on what consumers pay for Amazon Prime. That’s also only what customer success is within an organization. You mentioned the hunter gatherer model. I’ve heard that, but I’ve never heard it inside of customer success organizations. Normally the way within an enterprise, and I don’t know why, I’ve always heard it from the outside, but not not inside of the circles.

Generally, the way we look at I guess the the hunter gatherer model is we look at it as, “land-adopt-expand-renew”. Where sales is responsible for landing, customer success is responsible for adoption of the platform. Through that adoption, if the customer is having a good experience, they’re solving use cases, they’re finding value in the platform. In many cases in our daily, weekly monthly interactions with customers, we help them solve those use cases, other use cases pop up.

And that is where the expansion piece comes from, is we identify other use cases that we can help solve, we pass that back to the sales organization to see if they can help drive the sell of that new use case. Whether the customer is going to buy additional bandwidth for a usage base product, or whether they’re going to buy additional seats for a license based product. And then ultimately, if they’ve had a really good experience or solving these use cases, and the product is essentially paying for itself, that’s where the renewal comes in. And the customer ends up renewing, at the same rate they’ve already renewed at, or they’re buying additional products, which is where that dollar base net retention rate comes into.

I think folks don’t, and I kind of saw this when I was at Relias, and I learned a lot as a portfolio company of Vista equity. In that organizations that are a little bit smaller, that really haven’t hit that that billion dollar run rate yet. Net retention is an important number, and you want to see that grow. But in many cases, revenue growth is what is what is most important. I mean, if you have $250 million in ARR, but sales is bringing in $50 to $75 million in ARR every year sales is really driving the ship. Where it starts to shift, and where Customer Success really becomes important is when you start getting to a billion dollars, but you’re still running at at 120% net retention rate, where your customer success organization and the folks that are working behind the scenes that are a part of the cost to get sold, not sales and marketing. Those folks are driving $200 million a year plus, in additional revenue. Well if sales is only doing $50 to $75 million in revenue, your customer success team actually drove more revenue for the organization than the sales team did. And were a lot cheaper than the sales and marketing expense.

And so it’s not that we’re competing with sales, it’s just that as an organization is starting to scale and it’s starting to get to really high revenue rates, the existing customer base actually becomes your largest revenue driver, not new business, it doesn’t mean you don’t go after new business, you’re still going to expand there. But your existing customer base actually becomes this really profitable and prosperous fruit bed that if you can continue to drive use cases, helping them solve their business outcomes, what they’re trying to accomplish with a software platform, that that base can actually drive your revenue 15-20-25% annually for 5-10 years, if you continue to solve these use cases for them.  Without new sales, without new businesses, new logos coming into the organization. So it’s a it’s a really powerful model, once you start to see what happens is organization starts to scale.

Anirban Mahanti  29:07

Fantastic. And the important point here, we note that a retail company, if it could grow at 10% or 15%, that would be regarded as fabulous, right? So you’re getting like a 20-25%, maybe 15 to 25%, somewhere in that range from customer success. And I love the point you made about billion dollars.  It’s like $100 million dollars of ARR is sort of what I regard as the numbers you need at the bare minimum to sort of, think that you’re scaling, right? But you need a billion dollars to really actually start making the sort of the customer success really start counting at scale, right? 20% of that is $100 million, as you point out. So that’s a great point to have.

So in terms of how sales and marketing teams versus customer successes, and so on, so how’s are these evaluated in organizations? And I guess maybe part of this could be, is there a difference in how I guess what you’d call a good company that has a good land and expand motion versus maybe not so good land and expand motion, right? Is there a difference in how they treat the various teams and how those teams play with each other. Because you need the different parties to talk to each other in a seamless way. Can you expand on how these things are viewed internally, from the viewpoint of what is an ideal land and expand motion or land expand company versus, not so ideal case. You don’t have to name names, but just if you could just broad strokes.

Kyle Holden  30:55

Yeah. And that’s why I say Customer Success varies across organizations based on where they’re at in their growth cycle, the size of the company, just their philosophy. What you’ll find, and there’s really kind of two ends of the spectrum, you’ll find some organizations, especially folks who are looking for professions, they’re trying to break into customer success. You’ll find companies that will use the term customer success as a cover for someone who’s basically an inside sales rep. Really what they’re they’re wanting to CSM to do is to operate almost like an inside sales rep to help their field account executives sell more product.

But then you’ll have other companies that use customer success as a cover for technical support, where they’re really looking for somebody who’s coming in, and there’s going to do nothing for a customer except for reactive technical support, break-fix. They’re not focused on strategy. And so obviously, as customer success has evolved, I think early on, there was a lot of, especially in organizations, there was a lot of friction between sales and customer success, with customer success coming in to take our roles, like how do we how do we play together. Ultimately, sales and customer success are two sides of the same coin. Sales is heads, we’re tails, their tails we’re heads. We’re two sides of the same coin. The goal is to work together. So sales lands the opportunity, they’re the ones out, prospecting, looking for new business, showcasing the product showing customers what’s possible, putting together POC’s, proof of concepts, to show customers what they can potentially accomplish.

When that gets passed internally, then it passes into the customer success organization to help make true on what sales promised the customer. So right, you have to have this alignment where sales can’t over promise on what the software can do, because customer success can only deliver so much based on what the platform can do. So you kind of have to have this symbiotic relationship. Because if we can deliver on what sales promised. Let’s say sales under promises, and we can over deliver, well, that’s a great recipe for the customer looking for additional use cases. Then sales can drive additional business with that existing customer. And it’s so much cheaper and a lot easier to drive new business with an existing customer than it is to go find a brand new customer to sell into. And so we’re really two sides of the same coin.

But once that customer comes into the organization, customer success managers act like the, I know we’re in football season, American football season here in the US, it just started last night. We’re like the quarterback of an account. So our entire role is to work directly with the executives with exec sponsor, the buyer, the person who signed the contract, the person who bought the software platform to help them realize that value. And our goal is to coordinate internally, the organization’s we work for with professional services, with support with product, with sales, with executive leadership to make sure that we can get the right resources, the right assets, in the right place, at the right time to help that customer realize the value that sales ultimately showed them that they could accomplish.

And so that’s kind of how we work within an organization. A lot of times you’ll have a renewals organization that does, they get involved towards the last six to nine months of a customer’s contract? So they come in to help negotiate the contract? Do they want to negotiate new terms? Are they wanting to add new products, which would be expansion, that’s when they get involved, but for the most part it’s really sales and customer success working together to help deliver on promises? So they can continue to grow that partnership with customers?

Anirban Mahanti  34:25

I love that explanation. I was gonna ask this. So because Customer Success is working close to the customer, right? Do you end up sometimes finding use cases that your company that you’re working for could solve but hasn’t yet solved? So basically feeds into the R&D pipeline in some way?

Kyle Holden  34:43

Yep, we find that all the time. In many cases, you end up running into use cases where we find a product deficiency or product gap that gets passed back to our product team. If it gets evaluated that it’s affecting enough customers and we think that it should be addressed in a timely fashion, in an urgent fashion, it’ll get put into the R&D roadmap, the next sprint cycle, and you’ll see it come to fruition for customers. In other cases, customers, and I’ve been a part of these over the last year with customers that I work with, where we work together with customers to do customer advisory boards to find out what customers want out of our platform that it doesn’t currently deliver.

And that helps inform product roadmap decisions. Those decisions by product are not made in a silo. In many cases, they’re driven by the desires, needs of customers. Whether it’s short term needs, medium term needs. Sometimes customers will have some insight into where the platform, where the product should go over the long term. A lot of times executive leadership kind of plays a role in driving that vision.

But yeah, we sit right there seeing like, here’s a use case we could solve, we can solve 80% of it. But here’s 20% that maybe we need to bring a partner into, because maybe a partner has a piece of functionality or a product that fills that gap that we currently don’t do. Either we’re not planning to, or it’s not in our roadmap yet. Sometimes it helps us get a gauge for, do we need to make an acquisition into that new market segment? Because we need to solve that. Yeah, we sit on the front lines with customers, and are a part of those discussions in real time.

Anirban Mahanti  36:23

This was a fantastic conversation. So maybe I’ll ask you to summarize, instead of me trying to summarize. What would be the three things with a little bit of an investor hat, right? So when you look at an enterprise software company, and you think about customer success, and sales and marketing, and all those beautiful numbers that we get a lot of these non-GAAP numbers that people are sometimes cynical about. But I say that every number tells you a story, to some extent, or the other.

What are some things that you could think, and maybe if you wanted to even go further to, distinguish between, say, if it’s a mid-cap with an ARR, let’s say in less than $500 million, or whatever you want to use as a cutoff, and these are things that are interesting to look at. Doesn’t have to be a recipe as such, but this will be interesting and why? Versus a billion dollar plus or a $10 billion company, like a Salesforce, and this is what I would look at, because this tells me something. And I’m putting you on the spot, because this was not on the script or scripted questions.

So again, I’m just interested, as a professional person on the ground, what are the things that you see, and what do you make of it?

Kyle Holden  37:35

Man, three things. That’s a tough one. Well, the first thing, just from a customer success perspective, we are tightly tied to that dollar base net retention ratio. So anytime that you see a company that is succeeding in a very high level, with a high dollar base net retention ratio, some of these companies, and in terms of like excellent, like world class companies are going to be at 120% or higher. So companies that are doing, I mean, I think Snowflake (NYSE: SNOW) is 150-160%, they are doing a really good job. The customer success teams, that is a direct reflection of how well the customer success motion is operating within an organization.

In terms of being able to evaluate whether Customer Success motion is I mean, the dollar based net retention ratio is really going to tell you a lot there. You can look at Glassdoor reviews, to see how folks, how do past Customer Success managers or even current, rate their current company. Because generally, the customer success organization, if you find through Glassdoor reviews that the reviews are really high for a period of time from CSM’s, and now they started to trail off, something might be happening within the organization that doesn’t show up in the financials yet, but it probably will want some of the remaining performance obligations start. The deferred revenue, as they used to call it start kind of coming off of the off of the books.

Some of that could be, and I’ve seen this, where organizations really start struggling to land new business and they, whether it’s because the product isn’t as good as it should be, in many cases that is what drives it right. It is very hard to compete as a number three or a number four product in Gartner’s Magic Quadrant, with the number one leader. It’s very hard, because most of your conversations with customers are always like, yeah, but such and such as doing that, like you’re always like competing. So number one is really hard to compete there.

But a lot of times when organizations are struggling, especially when they’re making trying to make new cells, they will push that on the customer success managers because we’re working directly with the executives. And a lot of times you’ll start seeing at least from the inside, you’ll see the CSM’s comp change from license adoption and success of the platform to our comp will start changing to where we get compensated based on new business. So they start pushing some of the sales motion expanding the sales force with internal folks, that might be an indicator that the platform is not operating or is not doing what what the product team says that it should be doing. So that may show up with some Glassdoor reviews, if you start seeing CSM’s is complaining about how their comp structure has changed.

But for the most part CSM ‘s are right in the middle of everything that’s going on in technology, we’re working with executives that are trying to pioneer digital futures, trying to change the landscape for their end users, for their internal workforce. They’re trying out new security postures, we’re getting to see all of that real time. The ransomware attacks that people hear about in the news, we see it impacting our customers, like we see our customers having to fight that, deal with it, how they’re protecting themselves from it. We’re seeing them make, all the blocking and tackling of what an investor may see in a 10k or for from an annual presentation. We’re on the front lines, working with customers to help them solve those problems.

So it’s, it’s been an amazing profession. It’s great working with the executives that I’ve had a privilege working with. But it’s just cool to see what companies are doing across the landscape, the innovation that’s going on, how companies are trying to use different software platforms to disrupt their competitors, or just disrupt the landscape. It’s been it’s been great.

So that wasn’t three. But it was I mean, really like, it really just boils down to one if you want to know as an investor how well a CS organization is doing at a company. And it’s not always a reflection of CS. In many cases, it’s a reflection of how well that company is executing on their product platform. CS just kind of serves that wave, we can, we can drive some additional value alpha out of that. But the number one thing to pay attention to in terms of effective CSM teams is that dollar base net retention ratio.

Anirban Mahanti  41:56

Yeah, I mean, ultimately, you might have the best CSM team, but if you have don’t have a good product, it doesn’t work. If you don’t have good R&D, then alpha doesn’t work. And ultimately, as you said, if you’re the number three, or number four and the Fortune 500 is looking to buy, well if I’m Fortune 500 why am I going to buy number three? Unless you’re number three? Why wouldn’t I buy number one? Right?

So by being number one actually the horse has bolted and has a leadership position, it’s difficult at that point to catch up to that. They need to make several mistakes is what I say. It’s common to think of, Oh, that’s a smaller company or whatever, it’s a smaller company for a reason. And if you innovate and do something completely different, yes, you can become a leader in some other Magic Quadrant. But in this Magic Quadrant, it’s sort of taken unless these guys kind of falter, is what I think

And I guess the only thing, while you were speaking, the thing I was thinking about is, when you have this transition happen between, when the CSM gets pushed to make more sales, that actually might not even be a reflection of, it might actually be a reflection of the TAM, maybe the TAM, total addressable market, is actually not as big as was made out to be. And therefore you need to either move into adjacent areas to sort of expand the TAM, or you need to do something. And that’s where your sales and marketing is not landing new sales, and therefore you’re basically now more reliant, more and more reliant on customer success.

Kyle Holden  43:23

And what you’ll find a lot of times is that when that shift happens, customer success managers actually lose their reputation with the customer as an unbiased voice as a strategic consultant. Because a lot of times executives will be very honest with us about what they’re trying to accomplish, because they know we’re not trying to sell to them. But the moment that we get into emotion where we’re being asked to sell into an organization, and I get it, some organizations have to go through that. It’s just my opinion on how I think a CS organizations should run, we end up losing some of that trusted advisor reputation with organizations. But I hadn’t actually thought of, maybe the TAM was a lot smaller than executives originally estimated. That’s a new one. I haven’t thought of that. But I’m going to pay attention to that as I look at a company’s now, it’s interesting.

Anirban Mahanti  44:13

Kyle, thank you very much for spending time with us. I know it’s Friday evening for you which means I’m impinging on your weekend time. Thank you very much for sharing your thoughts. We love at 7investing, talking with people on the ground, people who are in the know, people who sort of are in the thick of it. Because I can read the 10-K and the 10-Q and there’s only so much you can learn from the 10-K and 10-Q. And those are all very nicely crafted, right? They’re crafted by experts and then crafted I guess, looked over by lawyers. So it’s good to know what’s happening on the ground, it gives you a broader perspective as well, not just about a particular company, but about the broader area. So thank you very much for sharing and, sharing your experiences, your thoughts and what’s happening on the ground.

Kyle Holden  45:00

Yeah, thank you for having me on. I appreciated the opportunity Anirban.

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