22
Budget: How Much Should I Spend on Customer Success?

The job of the CEO is to maximize the upside while protecting the downside. Depending on the phase of our business, the mix between greed for the upside and fear of the downside can ebb and flow.

The good news is that Customer Success is becoming an important part of the strategy in all seasons of business, good or bad. That said, because Customer Success is one of the newest disciplines in business, we've seen companies consistently make mistakes in planning that come back to bite them. As Albert Einstein famously (but apocryphally) said, “Insanity is doing the same thing over and over again and expecting different results.” This chapter is all about avoiding the same old errors next year. In the following, we list 13 budgeting mistakes to avoid.

Fail #1: Underfund Customer Success

Have you ever shown up for a family dinner late, only to see your relatives smiling and full, their plates clean, and only scraps left for you? Sometimes that's what it can feel like when trying to secure your budget as a Customer Success leader. While prominent thought leaders like McKinsey, Bain, BCG, Accenture, Deloitte, PwC, Gartner, Forrester, and Geoffrey Moore have all talked about the ROI of Customer Success, and while we at Gainsight have shared massive improvements in revenue growth from investing in Customer Success (as discussed earlier in this book), many companies are still underinvesting in the area.

The former investment bank Pacific Crest (which is now KBCM Technology Group) showed that the typical growth-stage company invested 13 points of recurring revenue in Customer Success/Renewals in 2017, which was the last year they published this data. (Note that this metric refers to the “cost of renewal,” which could include the cost of a Renewals or Account Management team as well as CSM.) Anecdotally, we've seen this metric scale down to 4 to 8% as companies grow, but many businesses are at less than 1%, so there is still a big gap. Phil Nanus, who leads the research on Customer Success at the Technology Services Industry Association (TSIA), found that the full range is between 0 and 15%, with the average about 3%. He tends to find that the percentage is lower for larger, scaled companies, with a higher percentage for smaller startups.

In general, Nanus sees CFOs pushing back less and less on requests for CS budget. “I saw 2018 as a tipping point. In the data it was obvious to see that the walls were coming down. We had many conversations with CFOs, and it wasn't necessarily the conversation about ‘Do I need Customer Success?’ I think we've gotten past that. However, the very next question or statement out of the CFO's mouth would be something along the lines of, ‘Well, Phil, don't you dare tell my chief customer officer that we need 2,000 CSMs, because we have 2,000 salespeople.’ They don't want another very large field-based people organization.” Many CSM teams are still trying to carve out their space, and it may not be as large as the space afforded to Sales.

As a positive success story, let's look at customer experience software company Genesys. Lucy Norris, executive vice president and chief Customer Success officer, developed a strong business case for Customer Success. “At Genesys we treat Customer Success as a cost of sales. Our investment there is primarily to raise retention rates and to minimize time to get our customers referenceable. That's the tone at the top, right?”

Fail #2: Stretch Customer Success Thin in Budget

With a limited budget, companies often sign up for more than is feasible in terms of Customer Success. They want a Customer Success Manager for every account. They want to radically improve onboarding. They want to overhaul the entire Customer Experience. Using another powerful—but anonymous—quote from the past: “You and what army?”

You need to be able to give something up if your budget is limited. Rather than skimping on the items that make your team more efficient and effective, we recommend curtailing what you can cover:

  • Maybe CSMs only get involved post-onboarding.
  • Maybe CSMs can't do renewals anymore.
  • Maybe CSMs don't cover some accounts, with a pure “tech-touch” model instead for those.
  • Maybe CSMs need to push more work to Support and Services.

Fail #3: Mixing Entering and Exiting Costs in Budget

Because Customer Success is relatively new, there is a great deal of building to be done. As such, during a year, a lot may change in terms of your cost structure:

  • Team members will be hired and ramped.
  • New clients will be signed and come onboard.
  • New products will be launched.

While you may target 12% CSM cost as a fraction of recurring revenue by the end of next year, it may take starting at 16% to get there.

Fail #4: No Business Case to Support Your Budget

Enough about costs already. Customer Success is not a cost center—it's a growth driver. That's easy to say, but what's your business case?

How much evidence do you have to prove to your (possibly skeptical) CFO that this has an impact? In 2017, did you:

  • Break down a cohort of clients into a “test” (A) and “control” (B) group to compare results when you intervene versus when you don't?
  • Track the key growth drivers from your team—namely:
    • Renewals: At-risk accounts saved
    • Expansion: Upsell/cross-sell leads sent to Sales
    • Advocacy: Case studies and references sent to Marketing
  • Identify early indicators of churn or expansion with statistical validity that your team can act on?

Customer Success pros like Kim Peretti, global vice president of Customer Success: Adoption and Enablement at DocuSign, take this scientific approach to the next level: “We defined cohorts of customers where we had a CSM engaged versus those without one. We found a double-digit improvement in attrition rate with CSM involvement.”

Fail #5: Bad PowerPoint to Support Your Budget

Even if your CFO lives in Excel, your exec counterparts will eventually pitch their plans to the CEO in slides. While it may be trivial, great slides make people feel like the strategy is sound and well thought out. Do you have a Customer Success pitch deck? We'd recommend including:

  • Your charter from your team
  • Looking backward
    • Results from last year
    • Learnings from last year
  • Looking forward
    • Targets for next year
    • Strategy for next year
    • Budget for next year

Fail #6: Customer Success Not Being in the Right Part of the Financials

Is Customer Success cost a Cost of Sales and Marketing (S&M) or a Cost of Goods Sold (COGS)? Is it a revenue driver or a cost center? We did some research and the answer is there are companies out there that put it in either bucket.

No matter what the accounting says, however, there is a fundamental superposition in Customer Success between impacting these two buckets:

  • COGS: Some of Customer Success is inherently part of your core offering. People buy your product or service assuming they will get help. Some of that help might come from your Customer Support, Services, and Training teams. But some may also come from CSMs. The more you have other scalable resources (support, training, professional services, community, etc.), the less CSMs probably do “delivery” work. One way to think about this: If your CSMs were all on vacation for a year, would your clients still be able to get value?
  • Sales and Marketing: On the flipside, much of what your team does is also about revenue. Are they doing work to make sure the client gets enough value to renew/retain? Are they identifying leads for the Sales team? Are they creating advocates for Marketing?

Per Chapter 14: If your type of CSM is “CSM for Value Gaps,” they likely count as COGS. If they're of the type “CSM for Value Delivery” or “CSM for Value Capture,” they likely count as Sales & Marketing.

Fail #7: Hire CSMs with No Ops Support

We remember the days when you used to have to convince leaders to hire Sales Operations. “Why do we need Sales Operations? Here's the phonebook—start calling!”

As they learned the benefits of consistent process, automation, enablement, and data, companies started realizing that Sales Operations is a critical part of Sales. In fact, we recently talked to the president of a rapidly growing public company who budgets 0.2 FTEs in Sales Operations for every account executive.

In Customer Success, we're still in the old “phonebook” world. CSMs work in spreadsheets, live with bad data, have no consistent processes, and get very little training. Meanwhile, their aggregate headcount cost dwarfs a relatively small amount of spend on operations.

Some companies might say, “Oh, we let the CSM team share resources from Sales Operations.” How is that working out? If your job title says “Sales Operations,” it's pretty clear what you prioritize first.

In the last few years, one of the top trends we've seen is Customer Success teams investing in operations.

Fail #8: Not Talking to IT in Your Planning

Per the above, you are likely to have IT needs next year, whether it's:

  • Process implementation
  • Tool setup
  • Systems cleanup

In general, as discussed earlier in this book, we've observed that Customer Success teams don't partner enough with IT—to their own peril. If you have projects next year (surveys, playbooks, onboarding, etc.), is IT aware of them? Are you giving them advance notice on what they need? Oftentimes the limit won't be your budget—it will be IT's.

Fail #9: Not Aligning with Sales and Marketing in Budgeting

What are your Sales team's plans for next year? Going International? Expanding to SMB? Where sales goes, CSM needs to follow. Every new customer needs support from CSM in some way. If you haven't met with your head of Sales by now about next year's plan, you are behind the curve. Where do you need to staff up? Where can you defocus? Is sales reorging? Do you need to? And don't overlook how Marketing will impact your budget next year. Are they hiring someone to support customer engagement or customer marketing?

Fail #10: Not Investing in Developing the Team

So now you have a great budget with new hires, IT help, and maybe an ops person or two. If you're like many CS teams, you'll end up spending all of your precious budget on the business and very little on developing the individuals. Your CS team will be watching the Sales team having:

  • An expensive “kickoff” and maybe even another at midyear
  • Professional sales training coming in
  • Attendance to major sales thought-leadership events
  • Maybe even a full-time enablement resource or team

What about the Customer Success team that's talking to your clients every day? It's not a lot of money, so plan for it upfront. Budget for:

  • Customer Success to be at your Sales kickoff
  • Professional Customer Success training
  • Customer Success conference attendance
  • Building a Customer Success enablement function

Along those same lines, we send AEs all around the world to build face-to-face relationships with prospects and clients, and those costs are baked into the Sales budget. Your CSMs' relationships are equally valuable, and you'll need to plan ahead for the expense.

Fail #11: Not Leaving Room for Experimentation

Let's be honest—very few of you reading this even had “Customer Success” teams a few years ago. The CS space has grown rapidly and no “ways of working” are fully baked yet. Should you tier your customers by ARR? Should you have both CSMs and AMs? In this book, we've presented a number of practices that we've seen work, or that the data shows are commonly adopted, but that doesn't mean you shouldn't run an experiment to test an idea you have. But most CS leaders get to midyear and wish they had the resources to try something new. Maybe you hear an idea from a colleague at another company? Maybe you want to experiment with a new technology? If you commit your annual budget upfront, you will only evolve on an annual basis.

Fail #12: Not Investing in Systems

[Shameless commercial warning] While Customer Success is certainly about People and Process—like all areas of business—it can still greatly benefit from technology. Almost every new business process (like CS) is piloted on spreadsheets and Google Docs. The question is, can you scale faster at some point through systems?

While the classic benefits of systems are the same in any field (consistency, automation, tracking), one of the unique benefits of systems in CS is in enabling the experimentation that's needed in a relatively new field. Do you A/B test approaches to onboarding? Can you compare time to value for different products? Can you look back consistently at patterns in churn or growth? Figure 22.1 depicts the old adage.

Fail #13: Starting Budgeting Too Late

As we have seen, CS leaders are often brought into the process at the end, leaving them with the proverbial scraps at the dinner table. If your budget year starts on 1/1 or 2/1 and we are sitting here in August, you're on the verge of running out of time. Even if you're reading this in the thick of summer, the New Year is upon us. Get ready.

Schematic illustration of the old adage.

Figure 22.1

How to Spend Less Money

Let's say you do all the things above, and you're still left with less budget than you want—which is often the case. Phil Nanus from TSIA says that as a result, “One of the hottest topics and trends in Customer Success is scaling Customer Success.” You'll learn a lot more about our advice on scaling in Chapter 25.

How to Prepare for a Recession

Nanus from TSIA says,

If you haven't already accumulated metrics that prove the ROI of your team, now is a great time to do that.

Summary

In this chapter we discussed how much companies are spending on CS and how CSM teams can scale their impact with fewer people when they don't get the budget they wanted. We also discussed the importance of developing strong ROI models to defend CS budget in a potential future downturn. One of those ways to justify CSM spend is to charge clients for it as a service, which we'll discuss in the next chapter.