PowerPoint Presentation

Tomasz TunguzPartner, Redpoint Ventures I write about SaaS startups at tomtunguz.com Redpoint works with many as-a-Service companies including Stripe, Twilio, Zuora, Zendesk, Looker, Infer, Tidemark, and Expensify Former PM at Google; statistics nut

Clearing: Thank you. Its a privilege to be here. I want to thank Nick Mehta and the Gainsight team for inviting me to speak to you all.

Content:My name is Tomasz Tunguz. Im a partner at Redpoint where we work with many as a Service Startups including Stripe and Twilo, Zendesk and Looker, among others. I focus on early stage SaaS companies and I write daily about SaaS trends daily on my blog at tomtunguz.com

Transition: Recently, Ive become a student of customer success after Ive seen the impact it customer success can have on the growth rates of startups. Because I love numbers, Ive used data to explore the impact customer success can have on a business. Im going to walk through precisely why customer success can have a disproportionate success on a SaaS companys trajectory.1Why CS Is CriticalHappy customers, better productGrow fasterDecrease capital needsClearing: At the highest level, customer success is critical to a healthy SaaS startup for three reasons

Content:Startups with strong customer success effortsdevelop better products that keep customers happierthis enables the business to grow faster by mitigating churn and by encouraging account growthwhich dramatically decreases the capital needs of the business to reach the same milestonesIn short, customer success makes companies more efficient because keeping an existing customer happy is far less expensive than finding a new customer.

Transition: Lets make all this more concrete. Ive founded a hypothetical SaaS company and it looks like this.

2Hypothetical SaaS Company$50k in MRR50 customers at $1k ARR each$1250 in CAC, Sales Efficiency of 0.8Growing 15% m/mClearing: My hypothetical SaaS company is just about to raise a Series A. Here are the key metrics on the business

Content:$50k in monthly recurring revenue50 customers who pay each $1k per yearThe business pays $1250 in customer acquisition cost and our magic number or sales efficiency, which is the ratio of s&m investment to revenue, is 0.8, so we break-even on a customer 15 months after they start payingAnd our revenue is growing 15% month over month with startling predictability

Transition:The biggest impediment to my SaaS startup is churn. Right now, the company is losing 4% of its customers each month. So the key question is how important is that churn and how much should I be willing to spend to mitigate churn?3

Clearing: Ive modeled the revenue growth of my business over the next 24 months.

Content:In the y-axis, Ive charted monthly recurring revenue. In the x-axis, Ive plotted time in months.Each line represents the future trajectory of the business at different churn rates.The line at the bottom, the blue line, extrapolates the business at todays churn rate of 4% monthly.The yellow line, in the middle, shows the business at zero percent churn.The top line, red line, is the growth curve of the business with -4% churn. In other words, the business isnt losing accounts. Instead, accounts are growing in value over time, at the rate of 4% each month.Because growth is compounded, the impact of churn is enormous even after only 24 months. At current course and speed, the business will generate $550k in MRR 2 years from now. At zero percent churn, the MRR is 1.2M, 125% more. At at -4% churn, the business is 4x larger at $2.7M in MRR.

Transition:Managing churn dramatically alters the trajectory of this startup. In addition to the powerful impact on revenue growth.4

Clearing: managing churn has a tremendous impact on the cash needed to grow the business.

Content:This is a chart showing the cash needs of our hypothetical startup required to double annual revenue as a function of churn. Im only considering the sales and marketing costs to acquire a customer in this chart.On the left hand side, we can see that at a 4% annual churn number, I would need to invest $8.5M to double the revenue of the businessAt zero churn, I need only 3.8M, 55% less. At negative 4%, I need only one tenth the capital.

The major difference between these scenarios is the number of new companies the business needs to acquire. In the worst case scenario, the business needs to replace a few hundred churned customers each year just to keep the revenue for the business flat. High churn rate businesses are leaky buckets.

Transition:The benefits of using customer success initiatives are clear at the highest levels of the business. If a CS team is managing churn effectively, the business will grow faster and consume far less capital. The next key question is how much should my business be willing to invest in customer success? Lets take a look at the data. 5

Clearing:This chart shows the financial characteristics of a 2 year customer that churns.

Content:On the x-axis is time, on the y-axis is money. The monthly recurring revenue the customer pays is flat at $1k.The business takes first fifteen months of the companys subscription dollars and uses them to pay off the customer acquisition investment.The remaining nine months are contribution, aka profit.

Transition:How do these financials change with a customer success investment?6

Clearing: Heres the same chart for a renewed customer.

Content:The first 15 months nullify the cost of customer acquisition. And then in months 15 to 21, the business collects profit. But in months 21 to 24, immediately before the customer renews, the business invests revenue dollars into customer success, which incites the potential customer to renew for another 12 months.For an additional investment of 3 months revenue, the company doubles the contribution from a renewing customer, from 9 months of contribution to 18 months. Again, retaining an existing customer is much more profitable than finding a new one.

Transition: More often than not, however, customer success teams may not be able to retain a customer, despite their best efforts. 7

Clearing: That investment doesnt come for free. Heres a chart for a churned customer with a customer success investment.

Content:The company has traded 9 months of contribution for 6 months of contribution, reducing profitability by half. With a customer success team, sometimes the company doubles its profits and sometimes, it halves its profits.Now that we have a sense for how customer success teams impact individual customers, lets bring it back up to the strategic level and go back to the question.Transition: How much should my hypothetical SaaS company invest in customer acquisition?8How Much to Spend on CS?Expected Value = Save Rate x Value of Extension =30% x 12 months x $83/month = $298 or about 30% of ACVClearing: Heres the math. Keep in mind this is a rule of thumb, an estimate.

Content: This an expected value calculation that boils down to:- how often the customer success team can save a churning customer- how much the customer is worth in the upside caseFor this business, Im assuming 30% of at risk customers can be saved and renewed for another year. Which implies I can afford to spend about 30% of a customers annual spend with the company on customer success investments. Thats no small fraction of the total revenue. But its worth it because that $300 is still 25% of the cost of acquiring a new customer.

Transition:

9Return on Investment?2 pp decrease in churnIncreases revenue by 50%Decreases S&M spend by 30%

Clearing:In summary, if I invest $300 per at risk customer, and the customer success team is able to reduce churn by 2 percentage points from 4% to 2% per month

Content:- the company will increase its revenue by 50% and decrease its capital needs, its sales and marketing spend by 30%.

Conclusion:- thats the power of customer success. - Its a new discipline, one that the community is crafting best practices as we speak. - And the effort is well worth it. - Well executed customer success teams have the power to transform businesses and radically improve their growth. - and if were CEO of this SaaS company, thats precisely the investment I would make into customer success- thank you very much for having me.10