November 25, 2014
Thanksgiving Podcast Download: Michael Dearing on Pricing
Heavybit releases an audio-version of one of the most popular talks in the Heavybit Library -- Harrison Metal's Michael Dearing on Pricing.
Morgan Mackles: I'm really excited about this subject and about having Lincoln here. Lincoln is a former executive at Gainsight, which is company that a lot of us in the room are familiar with. He moved on to become a highly successful consultant and speaker, and most recently he co-wrote this book on customer success with Nick Mehta, who is CEO of Gainsight.
Pretty serious stuff here, Lincoln. I'm very impressed. I love the book. I'll let you talk a little bit about what you're up to, and then we can dive in to some of the concepts from your book.
Lincoln Murphy: Thanks for having me here. Thanks for coming out, guys. What I do all day long, all the time, and what I love, is helping companies grow by focusing on customer success. That's what we're going to talk about, is customer-success-driven growth.
What I'd like to do is just throw out there my definition of customer success. It's part of my introduction of me. Now you don't have to agree with me, but at least you'll know where I come from when I talk about customer success.
My definition is really simple. Customer success is when your customers achieve their desired outcome through their interactions with your company. There are a couple things in there that you might wonder what those mean. Desired outcome is something I think we'll talk about in a little bit, so we'll certainly unpack that for you.
The other thing is through the interactions with your company. I deliberately don't say, "They achieve their desired outcomes through the use of your product."
The use of your product is just one set of interactions with your company. There are lots of other things that go on. If you think about interactions with your company, that actually goes back to the first time they interact with your marketing content, the first time a BDA or an SDR from your company reaches out to them.
Customer success is a life cycle thing. It's not just a department. It's not customer success management software. It's really an operating philosophy.
The best companies out there have customer success as their operating philosophy. The best of the best have it as their operating model, and we'll talk about that, too. Just want to throw that out there so you understand where I'm coming from. It's really something that your company needs to have at it's core, I believe.
MM: One of the things that really resonated to me, from the book, is when you're speaking about the operating philosophy. One of the things I really like is you have a two-prong or two-tier sort of definition of what that means.
LM: Desired outcome is made up of two pieces. One is the required outcome, it's the thing that your customers need to achieve. It's not, and let me be really clear, it's not the use of your product. We have to get out of our own way because we've built a product and we want people to use it.
That's great, but they're not signing up for your service in order to simply use your product. They're trying to get something out of it, right? So that's the required outcome, and as long as we keep that in mind, we're going to be much better off than thinking that using your product is the only thing that matters.
The other piece is appropriate experience. This is the game-changer piece of it, because if you don't think about this, you'll focus only on that required outcome. I could help you achieve your required outcome, but if you don't achieve it in the way that is appropriate for you, you might not feel like you were successful. And I said feel, but literally there would be boxes that you didn't check when saying, "Was this successful?"
The example I always like to give is commercial airline travel. I live in Dallas, TX, and I fly out here a lot. That's a three-and-a-half, four hour flight. That can't be downtime for me. Actually, it's one of my most productive times of the day, when I'm flying. But because of that, my appropriate experience is going to be different than the appropriate experience of somebody who's going on vacation and just needs to get from point A to point B.
In a commercial airline analogy, the required outcome is get me from point A to point B safely. And when I fly, let's say, Southwest Airlines, I know that they helped me achieve that required outcome, got me from point A to point B safely. Because when I get off the plane, I'm swearing and complaining about the experience because it was completely inappropriate.
There was no assigned seating. There was no room to work. The plane didn't even have Wi-Fi, right? So it was a completely inappropriate experience, but that's okay. I'm not Southwest's ideal customer. I fit in better with Virgin America or something like that. So we can take that same thinking to software, to what we do.
Let's assume you have something like email marketing, just a very simple thing that we can all wrap our brains around, even if we don't do that. Let's say that I needed to get more people to this event. I could actually achieve that required outcome in lots of different ways.
I could print out flyers and go hand them out outside, and I might get some people here. It might not be the right people, but hey, it turns out I have an email list, right? So I'm going to maybe go to an email marketing solution. Right there, my required outcome, I've chosen a method to achieve that.
Now let's say I'm an early-stage, technology startup. Maybe I want to integrate that into my product, so I really just need an API, some lightweight docs, that tell me how to do it, and maybe a Slack channel for support. That's it. I don't want to talk to anybody. I want it to be completely self-service.
On the flip side, let's say I'm in a department in a Fortune 500 company. I have an event; I need to get people to the event. I have an email list, so required outcome method, but my appropriate experience is going to be very different. I probably need a full-blown graphical UI. I need support, real 24/7 support. I maybe even need to be able to buy it on a three year contract.
If you don't take into consideration those two things, required outcome and appropriate experience, you're going to be in trouble. Unfortunately, the companies that are not really thriving, they tend to create an appropriate experience maybe for their early adopters or their favorite customer segment, and then they try to sell it to everybody else. What happens is they alienate all of the other customer segments.
I see this a lot with, we'll say, technology startups that don't really want to talk to the customer. They'll try to create a normalized experience they think is going to work for everybody, and it ends up really working for nobody.
It doesn't resonate with anybody, and so they might be helping the customers achieve their required outcome, but a lot of those customers are just hanging out until they can find another solution that meets their appropriate experience.
Long story short, desired outcome is one of these really simple concepts that is absolutely transformative once you really understand it.
MM: That's incredibly pertinent here at a developer-services based program. Very cool. Definitely something we can ask about in Q&A, because I think that that's really a topic we could talk about forever.
Another aspect of the book that really jumped out at me, that I liked a lot, is your philosophy about customer success as a revenue lever. Tell us a little bit about that.
LM: I just think we have to get away from thinking of customer success as simply a way to mitigate churn. There are lots of ways that you can come to customer success, that you can realize that you need it.
For some companies, it's going to be because they have a churn problem, right? The thing is with churn, and I want you guys to really think about this and just really, really understand this: Churn is a symptom of a bigger disease, an underlying disease. You can treat the symptom.
Try to figure out a way to reduce that churn, but as long as you focus only on that symptom, you're always going to have churn to deal with. Because you're not actually taking care of the underlying disease.
The underlying disease is that we're not helping our customers achieve their desired outcome. That's generally it. Unless your customer goes out of business or they're acquired, the only other reason they churn out is generally because they didn't achieve their desired outcome.
We have to get away from thinking of customer success as simply churn mitigation. Let's start looking at it as a positive. What if I come in, treat that underlying disease? The symptoms of churn go away. Are we done? No, not at all. In fact, as the economy and markets tighten up, and money doesn't flow from investors as much, they're looking for more efficient growth.
The real key to success, or the way that they would measure success now, is not having low churn. Investors don't want your customer base to just be stagnant. Even if they're staying, even if they're not churning out, we don't want just a bunch of customers that are renewing at the same level every year. We want those customers to be growing, to be on what I call an ascension path.
I want customer success to be that revenue lever, that understanding that when a customer comes in, we know where this customer should go, if we do everything right, and we can grow right there with them. It's not forcing things on them at the wrong time. It's understanding that when they reach this, there's going to be different success milestones.
When they reach a certain success milestone, that might have a logical upsell with it, and we can operationalize around that. It's a really awesome way to be able to actually look at your customer base and say, "Here's the revenue we can get from this, from our existing customers." Talk about predictable revenue, that's fantastic.
That's not something we can generally do, because most of the time, we're just guessing. We're hoping. But if we can actually build a logical model around that, then we have a true predictable revenue model within our existing customer base.
And that's all powered by customer success. Your customers that are not successful are not going to take an upsell offer, at least not willingly.
MM: Now, in one of the aspects of our lives, as startups here in the SaaS world, that you mentioned was churn, right? One of the things that is well known about you is you have kind of a provocative point of view about the concept of churn and what an expectation level for churn should/could be.
LM: I get a lot of people who push back and say, when I say you should have 5-7% customer churn annually, and people are having 5-7% monthly, they push back and say, "That's too low, Lincoln. We can't do that."
Look, here's the thing, and I see this a lot, and this is actually really disturbing. Instead of saying, "Let's figure out why 45% of our customers turn over every year, or whatever, we just say, "Well, that's how it is. That's how it is in our market. Customers churn."
In the B2C world, you're going to have sort of transient customers. Some of those customers will leave, and some of them will come back. So you might have higher churn. But in the B2B world, especially infrastructure, especially anything that really touches multiple parts of an organization, you really shouldn't have that much churn. What I want you to do is to say, "Is the churn that we have avoidable or unavoidable?"
The level of truly unavoidable churn that you have is much lower than you think.
Unavoidable churn is, again, when your customer goes out of business, or whatever. You go back and you look at your churn, and you say, "How much of it is truly unavoidable?" That's going to be lower. That means we have only a few of our customers that were truly unavoidable churn. That means the rest of it was avoidable.
What does avoidable mean? It means that we messed up. Something we did or didn't do kept our customer from achieving their desired outcome. If we focus only on acquiring customers that have success potential, that we know are going to be able to get value out of our product, if we're deliberate about who we go after and acquire, then two things should happen.
One, avoidable churn should go down because we're acquiring good-fit customers, and then we're going to work to make them successful. Unavoidable churn should go down because we're only acquiring good-fit customers, right? Churn should be much lower than it is in almost every case, and I believe you can get, from a customer churn standpoint, you can get to near zero.
The best companies on a revenue churn, from a revenue churn standpoint, are what we call net revenue retention. They're actually in the 130%, 150% net revenue retention, which means they're ending the quarter, ending the year, with more revenue from their existing customer base than they started. That's where you want to be.
Some people call that negative churn, or something like that, and I think that that term needs to die. I hate it because that's what we're measuring success on, right? But churn is, in itself, a negative term. So I want to get that out of here.
Net revenue retention is a much better term, and I think it's also just more accurate in what we're doing. I think negative churn is something we've got to get rid of.
MM: That's a perfect segue for some of your growth terminology and metrics. You mentioned NRR, net retention revenue. Give us some of your philosophy on land and expand.
LM: Land and expand is, I guess, the model du jour. It's certainly on everybody's mind, and that's because, again, if I can acquire a customer and then grow within that customer account, that's ideal. Not just because it's cheaper, which is what you hear a lot of, right? It's easier to retain a customer than acquire a new one.
It's actually better if we can expand our footprint. I like to say if we can get the customer to invite us in to other parts of their company, that's fantastic, and we can operationalize around that.
As the customers achieve certain success milestones, that's the time, after they've done something where we know they're both successful and probably emotionally happy, we can reach out and say, "Hey, could you advocate for us internally, get us into other parts of your company?"
That's just a great way to grow, and that's what investors are looking for right now. They want that land-and-expand potential, and so success potential is one thing you really have to look at. That's not going to happen if you acquire customers that aren't successful.
They're not going to say, "Yeah, it was so great that you sold to us, and we didn't really get any value. Let me go introduce you to the accounting department or whatever." That's just not going to happen. Maybe they were introducing you to the accounting department for them to tell you they're not going to pay their bill, but certainly not for them to use your product.
Land and expand is one of these really key concepts I think that everybody's focused on right now, especially investors, and it is 100% powered by customer success. You see companies out there that have a sort of self-service, land-and-expand model. Something like Slack would be a good example. But if you listen to the way that they build their product and really their philosophy, it's all about customer success.
It's just built into the product: Their experience, their customers, their users are very much within the product. But enterprise customers, vertical-specific customers, may not be all self contained nicely in the product. It doesn't mean the rules don't still apply. Land and expand is huge, but 100% powered by customer success, though.
MM: One of the terms that I've heard you use is "deliberate installed base expansion."
LM: I use "deliberate" a lot, because very often we have a customer base that we just got. Certainly in the early days, we'll say, "You know, we have all these customers that just came to us. We had a lot of traffic." And then we say, "Well, let's go back and look at those customers and figure out who is the best customer. And that'll be our ideal customer. We'll really go to market with that."
But the thing is they were just random people that found you, and they may not be the best customers that you really want to go after. I think this is true, certainly in my experience, that this is the number one reason companies fail to get the traction that they really should get, whatever that means, generally it's going to be some sort of growth, is not being deliberate. Not being deliberate in who you go after. Not being deliberate in the way that you operationalize everything. Just hoping things happen.
I'll tell you this, and I think you guys from the infrastructure-and-developer-centric model here, I'll push back on CEOs in that space a lot on this, you're so process-driven, but when it comes to the success of your customer, you're just based on hope and faith. That doesn't make any sense, right?
So apply the same logic, the same process-driven mentality, to ensuring your customers achieve what they need to achieve from your product. It's a pretty simple process to apply. You just have to do it. You have to think about it that way.
MM: I wanted to ask you a question that I heard you answer very articulately this morning. A situation that I think is very realistic here at Heavybit, for a lot of the member companies is, "Hey, things are going well. I'm Series Seed moving towards A, and Lincoln, I think this customer success thing, it's really for me. So at what revenue point should I be actually caring about customer success and thinking about hiring people? When should I care about them?"
LM: You either want to start thinking about customer success, at least, as your operating philosophy, either right when you start your company, or now. Whichever is sooner.
I mean, that doesn't mean you go out and hire CSMs or even build a customer success organization from day one. That may not be what's needed. But absolutely going into this with that as your operating philosophy and eventually moving that into your operating model, I think is the key to success, certainly going forward.
MM: That answer really struck me, and it was interesting to see how many sophisticated startups really didn't get that message, I think, right away. But what about this: Is there a difference between intending to take care of your customers, and loving your customers?
To me, it feels like that's not really enough, right? You speak a lot about, as you said, "deliberate, organized, systemized, memorialized." What's the difference? Everybody here, everybody in this building, wants their customers. But what's the difference?
LM: First and foremost, you can say you're customer centric, and you can say that you love your customers. But what are you actually doing to ensure that they're going to be successful? A lot of times it's, "Well, we built the product. We built this great product. Why isn't that enough?"
Well, it might be enough in the early days with early adopters that are going to figure out how to be successful with your product, in spite of what you do. But at some point, we want to move away from that. We want to start doing things because of what we do. Things happen because of our efforts, and not just in spite of them.
The main thing is really understanding that our customers are the entire reason we exist, you know? This is why we're here. This is why I think we have to talk about this stuff. It's not just product centric, right? It's not just the product.
We have to think about everything that's going on in their world. Everything that they have to do outside of our product. Everything they have to do to get to the point where buying our product makes sense. Think about that whole experience. That's customer success.
A lot of people aren't there. They're not thinking about that, but hopefully we'll get them there.
MM: You're very familiar, obviously, with our developer services space, but what advice would you give these guys as they are moving from Series Seed into the Series-A and Series-B worlds?
You might be thinking, especially as you start taking on more funding and you start having to focus on delivering something to your investors, a return at some point, you might fall into the trap of thinking that's why you exist. That's why your investors put money into your company. That's not actually why you exist in the market, right?
Your customers, they don't care about that. You exist because they believe that you will help them achieve their desired outcome, that you will give them the result they want or need in the way that they want or need it.
As soon as you take your eye off that ball, you're going to be in trouble. So there are lots of reasons going on behind the scenes that you exist, but it's all about the customer.
MM: That's great. Thank you so much, Lincoln. Really appreciate it.
LM: Absolutely. Thank you, guys.