In an increasingly cloud-based world, delivering a world-class customer experience is a whole new ball game for many technology companies. Given the recurring revenue-centric approach of most cloud offerings, software, hardware and infrastructure company executives are realizing that the post-sale operating model is critical for reaching profitability goals as their businesses scale.
Maintenance, Customer Support and Retention (MCR) functions need to move to the forefront and become the most essential areas to drive profitability within the subscription model. Understanding how best to operate, organize and enable these functions is critical for exceeding customer expectations, delivering business benefits and growing the downstream recurring-revenue base for each account.
Background and challenges
Given the maturity of the Software-as-a-Service market segment, software customer experience executives are on the front line in addressing the challenges of scaling subscription-based models. The traditional software economic model consisted of high up-front license pricing coupled with very attractive ongoing maintenance fees. The post-sale maintenance business often provided a majority of revenue and high margin (70+ percent of total margin). This resulted in less pressure to create efficient and effective MCR functions.
Adapted from TSIA, 2013.
In contrast, SaaS customer experience executives are forced to offset lower up-front initial license prices and lack of maintenance revenues with up-selling to premium tiers, cross-selling new apps, selling premium services and adding additional users (as illustrated above). This requires a new operating model and capabilities — one that requires solution selling, customer success management and lower-cost customer support among other capabilities. In addition, customer behaviors are changing and higher expectations exist on how they interact and get problems addressed in an on-demand world.
The table below highlights the major challenges around four key operating levers: cost structure, product adoption, consistency of experience and organizational capabilities. Legacy software companies making the transition to cloud have another layer of complexity around each of these levers as they must support hybrid models (on-premises and cloud) simultaneously.
Four key imperatives
In working with dozens of software and technology companies over the last several years, Waterstone Management Group has outlined four key imperatives for software customer experience executives to help develop and operate a new MCR model for the next stage of cloud services growth.
1. Monetize additional offerings
To address the loss of maintenance revenue and the lower up-front license costs, cloud software companies must monetize additional offerings — in essence redefining the offering portfolio to include anything that will drive increased revenue. Further complicating this is customers’ expectation that a SaaS offering doesn’t require upgrades and other requirements of traditional perpetual license models.
This means that while traditional customer support still needs to be offered, cloud providers need to take a step further to ensure additional revenue through perhaps offering premium support tiers, cross-selling third-party applications, proactively promoting downstream professional services and driving penetration of higher subscription tiers.
To determine what should be offered, companies must take a broad view of the offering portfolio and proactively manage new offering development and retirement. Questions that must be considered are what offerings are offered for free with the base subscription, how to price (flat fee, monthly subscription premium) and acceptable margins that offset customer acquisition cost and potential churn.
2. Embrace new delivery channels
The second key imperative is for companies to manage customer service delivery costs as their SaaS business scales. This often means augmenting traditional phone and email support with new support delivery channels including self-service portals, online communities and social media. While self-support is a low-cost support option, support sites and digital channels are modestly effective at best, according to TSIA benchmarking surveys.
Further, the overall trend is that effectiveness of these channels has actually been decreasing over the last decade. Social media has become an attractive support channel, given its low cost and broad reach. However, limited tracking of social media statistics currently constrain understanding of how effective social media actually is as a support channel.
Waterstone recommends that software companies embrace digital support channels but need to operate them fundamentally differently than in the past. First, these channels should no longer be managed by marketing, website or other stakeholder groups but need to be under the control of the customer experience lead.
Second, performance of these channels needs to be measured as they are in other channels. Measurements like customer resolution rate, time to resolution and customer satisfaction need to be used just as they are tracked in the contact center today.
Lastly, if an online community or forum is used, it needs to be monitored for potential customer support and product-related issues. A recent study by Edison Research showed that over 40 percent of customers that contact a company via social media expect a response within an hour and nearly 60 percent expect it within the business day.
3. Proactively manage customer success
Another key element of succeeding in delivering an outstanding customer experience for the cloud is proactively managing customer accounts and ensuring customer success. This is a new mindset versus waiting for the annual renewal to come due and reaching out to the customer 60 days before the renewal date. This often involves creating a new “customer success management” function in addition to account management and customer support — potentially adding additional fixed costs to the business.
SaaS companies can better manage these additional costs by a) proactively managing every customer touch point to ensure product usage/business success, b) identifying new customer needs and following up on new leads and c) enabling the customer success function with CRM and other technologies.
Companies should actively engage with customers and perform quarterly check-in calls on adoption or training needs, demonstrate new features and applications, offer best practices, recommend new features, etc. The idea is to better understand the relationship between the customer and the company’s offerings — instead of being focused on blindly getting a renewal. Traditional CRM technologies that integrate sales and support information are getting even more useful as customer profiles are augmented with product usage and community/social media information.
4. Rethink professional services
Lastly, professional services need to remain a significant and essential part of the business model. However, cloud companies need to rethink the traditional scope of professional services — beyond initial systems integration and end-user training — with an offering portfolio that can support a customer throughout the customer life cycle. This will require developing new offerings and retaining new skills sets.
New offerings for cloud include packaged offerings designed to speed deployments (e.g., data migration/import) and interactive/engaging training content to ensure product usage. Post-implementation and performance improvement services should be considered that help the customer maximize solution value/ROI and proactively support the on-boarding of new users and upgrading to premium tiers.
The ultimate goal is to ensure that the service portfolio helps the customer achieve business outcomes and that they are being used on an ongoing basis and not just at the point of initial sale. In the end, the company also needs to decide which of these should be delivered by in-house resources and where to leverage third parties.
Tying it back to cloud economics
Leading subscription players are tracking and targeting improvement around four key subscription metrics: Customer Acquisition Cost (CAC), Average Revenue Per User (ARPU), churn and CAC Payback Period. There is not one single formula across these key metrics that ensures profitability.
For instance, a company can be very aggressive in customer acquisition (Company F in the figure below, a leading SaaS marketing platform), but very low churn offsets acquisition cost and creates a positive Customer Lifetime Value. Another company, Company P below (a leading security SaaS provider for SMBs), offsets a higher churn rate with a lower cost acquisition payback model. Investments that are made in the MCR functions need to tie back to the economic model being targeted to build for the overall business.
Based on recent research conducted by Waterstone Management Group, companies are able to drive targeted improvement in Customer Lifetime Value by comparing themselves to relevant benchmarks across a number of dimensions (as illustrated below). These comparisons will guide decisions on new initiatives and investments within MCR functions.
Software and subscription businesses will get increasingly more sophisticated around how they manage and grow recurring revenue. As they do, MCR functions will be a key source of value and require greater levels of focus than they’ve received before.
Key questions customer experience executives need to ask themselves are outlined below, which will help identify opportunities for performance improvement.
Singu Srinivas, a partner at Waterstone Management Group, has nearly 20 years of experience working with Fortune 500 and smaller high-growth technology companies. His experience has centered on creating growth strategies, developing go-to-market capabilities, and enhancing the operational effectiveness of B2B and B2C technology companies, as well as the services arms of manufacturers, retailers and ISPs.
Neil Jain, a partner at Waterstone, has more than 15 years of experience formulating growth strategies and improving operations for companies in the software, hardware and telecom industries. Claire O’Neill, manager, and Dan Chen, analyst, also contributed to this article.