This article will explain why customer success works well for product companies.
Customer success is a synonym for customer value creation. People buy products and services for one reason: They need the value they will get from purchasing and using what you are selling. The sooner they start receiving value, the longer they will continue receiving value and remain customers.
The opposite of remaining a customer is leaving or churning. According to Lincoln Murphy, the leading Customer Success expert, “Churn is just a symptom of an underlying disease. That disease is that our customers are not achieving their Desired Outcome.”
What Does It Mean When a Customer Churns?
To better understand churn, here are some critical churn statistics from Small Business Trends that you should keep in mind about the importance and impacts of customer churn rate:
- 65% of a company’s business comes from existing customers.
- The probability of selling to an existing customer is 60-70%; The probability of selling to a new prospect is 5-20%.
- 80% of your future profits will come from just 20% of your existing customers.
- A typical American business will lose 15% of its customers each year.
- The average repeat customer spends 67% more in months 31-36 of their business relationship than in months 0-6.
- A 5% increase in customer retention can lead to a 25-95% profit increase.
- A 10% increase in customer retention levels results in a 30% increase in the company’s value.
These statistics create a compelling case for reducing customer churn and time to value to reap the benefits of selling additional products, new services, and capabilities for existing products.
What Is Customer Success, and Why Is It Critical?
According to the Customer Success Association, “The mission of Customer Success is to increase sustainable proven value for both the Customers and the Company.”
According to Gainsight CEO Nick Mehta:
“Customer Success is the business methodology of ensuring customers achieve their desired outcomes while using your product or service. Customer Success is relationship-focused client management that aligns client and vendor goals for mutually beneficial outcomes. Effective Customer Success strategy typically results in decreased customer churn and increased upsell opportunities.”
The early roots of the Customer Success profession were in the software industry. According to the Customer Success Organization, here is a summary of the three earliest documented cases where customer success took hold.
- 1996-1997 – A CRM Company called Vantive: John Luongo, Vantive’s CEO, had encountered a very innovative usage of his company’s application by a customer and wanted to bring that innovation back to Vantive. The newly hired Head of Service created a new department called Customer Success and began introducing the team to prospects before the signing of the contract. “This Customer Success team will ensure you’re successful in using Vantive. And their compensation is based on your success.”
- 2004 – Siebel On-Demand: Bruce Cleveland became the General Manager of the on-demand subsidiary of another CRM company, Siebel. After a thorough look through his new organization, he realized that while he felt confident of the Sales team’s ability to bring in new business, no one was explicitly responsible for retaining and expanding the customer relationships post-sale. Bruce recognized that the customers who realized the most value from using the company’s application were the least likely to churn. So, he created a new organization responsible for increasing the customer’s usage of the application feature set and, thereby, the value to the customer. He also named this new group of roles the Customer Success Management team. (Oracle acquired Siebel in 2006).
- 2005 – Salesforce and “Customers for Life”: In 2005, there was good and bad news at Salesforce, a software-as-a-service CRM business. The good news was that the company acquired new customers at a stunning rate. The bad news was that customers were churning in horrific numbers. Like Bruce Cleveland before them, Salesforce’s executive team quickly realized that bringing in new customers couldn’t be the end of the story and that there was no way to add enough new customers to survive if they were leaving in more significant numbers.
How Salesforce’s Challenge Led to the Rise of Custom Success Teams
Salesforce didn’t invent Customer Success (CS) as a new profession, but the company quickly built what was then the largest CS department in the industry. The group was (and still is) called Customers for Life. While it was not responsible for renewals, upsells, or cross-sells, it was explicitly chartered to address customer retention by increasing user adoption.
Today, businesses all around the world use customer success teams! And the reason is straightforward:
- People buy products and services because they need and want the outcomes achieved from using their purchases.
- Suppose the desired outcomes are achieved or take too long to materialize. In that case, the buyer will be satisfied and may not approve the purchase, fully use it, buy services and parts, or recommend the product to their friends and associates.
- The seller incurs all the costs associated with acquiring and setting up the customer, and they will not achieve their desired long-term payback from a happy user.
- Therefore, the astute seller will do everything possible to ensure that each sale results in a successful buyer who will use, upgrade, recommend, and buy more products with minimal additional selling expenses.
- Remember, besides software businesses, customer success works well for product companies.
As my British friends would say at this point: “And Bob’s your uncle.”
[“Bob’s your uncle” is a phrase commonly used in Ireland, United Kingdom, and Commonwealth countries that means “and there it is” or “and there you have it.” Typically, someone says it to conclude a set of simple instructions or when a result is reached.]
No matter what you call it, customer service is all about solving people’s problems as quickly and inexpensively as possible. For example, someone calls your helpline and says:
- “My drive motor will not turn.”
- “I have a bearing that is red hot.”
- “I ran out of drive belts, and my last one just broke.”
- “My new robot was delivered today, and I need it installed and programmed because I have a production bottleneck that needs to be cleared.”
On the other hand, customer success (CS) involves actively promoting the business’s value proposition. Subsequently, customer success teams lead the three stages of the product lifecycle: adoption, expansion, and renewal.
3 Stages of the Product Lifecycle
The product lifecycle includes adoption, expansion, and renewals. Let’s dive deeper into each stage:
Adoption
A customer buys your product or service to get value from it. Therefore, adoption includes installation, commissioning, training, and consulting to help buyers achieve their desired business outcomes. These activities may be performed by the service department or the customer success manager (CSM) assigned to the customer in simple and non-technical onboarding.
For example, if you sell a CNC tool, the buyer may justify it by projecting producing 100 pieces of part XX-YY-ZZ per 8-hour shift. The quicker the tool produces 100 pieces per 8-hour shift, the happier the buyer is. Getting to the desired outcome involves two sets of actions:
- The machine must be installed, calibrated, and run.
- The operator must be trained to program the part, set up the fixturing, and be certified to operate the tool safely.
The quicker these two steps are completed, the sooner the buyer starts paying back their investment. This is called “time to first value.” After a learning curve, the machine routinely produces 100 parts per shift.
Expansion
Once the shop hits its desired outcome, the team wants to push more parts through the tool. There are a few ways to accomplish this:
- Work more hours
- Program additional parts
- Reduce the cycle time of the initial part
- Reduce unscheduled downtime
- Reduce set-up time
Maybe expansion can be accomplished using only what the company initially purchased. But sometimes, the company must purchase a new software module, additional hardware, or other equipment sold by the OEM (e.g., a robot for loading and unloading the tool).
The customer success manager (CSM) is generally responsible for helping the tool owner expand the tool’s capabilities beyond the original purchase. These days, CSMs carry a quota.
Renewal
In many cases, the tool is not sold outright but placed on a subscription contract, where the “owner” pays the seller a fixed price per unit of output. When the contract expires, the CSM ensures it is renewed without gaps or downtime. The CSM has a quota and earns a commission.
According to the Technology Service Industry Association (TSIA), the percentage of customer success organizations with these charters is:
- Adoption – 72%
- Renewal – 79%
- Expansion – 40%
The order differs from the one used above because most of TSIA’s clients provide their hardware and software products on a subscription basis, and renewals occur more frequently than expansions.
What Do Customer Success Managers Do When Not Focusing on Adoption, Expansion, and Renewals?
The customer success manager (CSM) ensures the relationship’s health. Depending on the amount of business between the parties, the CSM may meet (in person or virtually) weekly, bi-weekly, monthly, or quarterly. The quarterly business review (QBR) is a mainstay of almost all CSM/customer interactions.
In these meetings, the CSM discusses customer satisfaction, outcomes, technical issues, and how other customers are using their tools in ways that may benefit the present customer. And they try extremely hard to quantify the value the buyer receives as often as possible.
I have a good friend who is a CSM. He visited many of his large customers at their facility about once a quarter and scheduled phone meetings. If a customer has a service incident, my friend is immediately notified. He then contacts both the assigned technician and the customer.
While he tries not to be a pain in either’s butt, he makes sure he knows of any issues that will affect the customer’s health score. And my friend has channels into the organization beyond what the technician can tap into so the customer gets the best service possible no matter the internal obstacle. The technician appreciates the effort because she wants to satisfy the customer, and the customer is thrilled because tool downtime is minimized.
Comparing the Customer Success Model to a Standard OEM Customer Approach
Most OEMs and dealers assign new customers to their aftermarket service group. This group typically only makes money when the product fails. When the product is back in working order, the group dispatches a technician or spare part and sends an invoice.
The customer never “feels the love” from the seller because the service technician is only there to fix something.
They rarely have the time to build the relationship that happens when someone calls to ensure things are going well or share a new idea. The salesperson only calls when they think the customer is in the market for another tool. The challenge is for the CSM to not appear to be stalking or spamming the customer but to ensure that each call adds value for the customer.
This approach is working very well in many businesses. While TSIA focuses on technology companies, including both hardware and software manufacturers, its membership includes medical device, computer, industrial, and heavy equipment manufacturers. Almost any company that makes, sells, and services a product that includes a computer chip qualifies for these categories.
TSIA recently published a report that states that although only 49% of customer success organizations monetize their CS offering, those who did yield these results:
- NPS increased 22 points
- Dollar Expansion Rate increased by 10%
- Dollar Retention Rate increased by 2%
Also, these businesses have a solid list of loyal customers who are willing to serve as references or even demo locations.
With results like these, is the customer success approach right for you?
Conclusion
Because customer success works well for product companies, you should consider creating a customer success organization if your product lists for at least $50,000 unless your business loves chasing new customers to maintain current sales and growth.
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization create more value for your customers, please contact us or check out some free articles and white papers here.
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