The $2 Million Dollar Man (/Woman): How to Think About Scaling Your Customer Success Team

In SaaS, there are a lot of great “rules” that do make sense overall but can be confusing or borderline misleading at times.  E.g., Sales +Marketing Expenses < First Year ACV = Success?  Great rule — at Scale.  But maybe not while you are scaling.  E.e.g., if Churn > 2% = Bad, Just Terrible.  Well — Maybe.  Especially if you have a slightly larger deal size.  But what really matters is that churn is going down, rather than the core absolute value, IMHO.

One you may not have heard but it’s a good one — is Hire One Customer Success Manager for every $2m in ARR.

If you haven’t hired a Customer (or Client – same thing ) Success Team before, it can be confusing to start.  It will feel like a cost center.  After all, I’m not really losing any of my Big Customers at the beginning — why spend $100k or so, all-in, to hire someone to proactively manage them and nothing else?  And can’t customer support just do some of this at least?

Let’s step back because the $2m Rule is a Good One it Turns Out.  Let’s look at the spectrum of deal sizes, and assuming $2m per Customer Success Manager, figure out what one can do at different deal sizes.  You’ll see once you divide the average deal size per customer by $2m, you get a quick sense of how proactive your Customer Success Managers can be, and where the likely dividing line between Customer Success and Support will be:

Screen Shot 2013-09-30 at 11.07.10 AM

What we can see from the above chart may be obvious if you’ve managed a true proactive Customer Success Team before — but it wasn’t initially obvious to me.

As the deal size goes up, the CSM can be more proactive.  And you’ll find it’s critical to segment the team based on deal sizes, so they can specialize in what they do:

  • For $100k+ deals, it’s so few customers per CSM, you need to get on a jet to visit those customers, at least twice a year.  Even if you closed them on the phone.  The CSM should know everything there it is possible to know about these customers.
  • For $20k+ deals, the dedicated CSM should know most of them reasonably well and their business processes cold.  Visit all of them if they are local, some if they are remote (if practical on roadtrips to).  Map out the org and who owns and is responsible for what at the end customer at a very granular level.
  • For $5k+ deals, you need to bond in the onboard process or first interaction, and then follow up in an automated but informed fashion.  You can’t know everything about 400 customers.  But you can try to learn the key facts, and at say 200 work days a year, you can afford to talk to all of them proactively, 3-5 per day.  You can.  Even this segment doesn’t need to be reactive.  There are enough hours in the day to talk to all of them, check in when them, and solve their problems and address their needs before they ever have to create a ticket.  Or get angry.  Or leave.
  • For $1k+ deals, you need strong systems and automation.  But you should still identify issues and proactively reach out when you see them.  Some will say you can’t be proactive here.  But much as we discussed that you can use salespeople at a $99 price point … if you can sell at $99 … you can manage that $99 customer to success, one way or another.
  • Below that, it’s going to probably have to be all reactive and ticket based.

OK with that, we get a sense of how many accounts Customer Success Managers can handle, and how to segment them in the early and middle days.

Beyond that, my learning and suggestion is as soon as you have just a large enough cohort in each segment — if you have the cash — hire a Customer Success Manager well ahead of $2m per segment.  Hire one for the large accounts (say $50-$100k+ ARR) as soon as you have Just Two Big Customers.  And hire one for the middle accounts as soon as that resource can just pay for itself (e.g., say $300-$500k in customer revenue per segment).

Why?  Well, as we’ve discussed before, Second Order Revenue — and Attitudinal (vs. mere Behavioral) Loyalty are the Real “Secret” Keys to SaaS Growth and Success.  The sales team only brings in a minority of the lifetime revenue per customer.  In fact, what the sales team really does in SaaS at a more existential level is not just get the contract EchoSigned, but really, introduce the customer to an entire program of lifetime success.   You’ll get as much as 6x the initial deal size out of many of your customers after the initial deal is closed.  (See our deep analysis of this math here).

So when you view Customer Success that way, you’ll want to be proactive, segment, and manage to success as early as possible.

However you do it, $2m ARR per Customer Success Manager — but hired in advance, not arrears — is a solid model to scale with.  In fact, if you can afford it, you may even want to take the hiring in arrears to the next level, and hire one CSM per $1m per ARR or so, if you are growing reasonably quickly.  Even at one per $1m ARR, it’s a great investment.  The best maybe you’ll ever make.

23 comments

  1. Jason – I very much like the ratio between revenue and number of customer success managers.

    However, customer success teams should still be proactive even at very large volume of customers. They will need the right technologies and tools that will let them know which customers needs attention and why, but at the same time the ratio that you’ve put in place should work; $2MM regardless of model per CSM.

    Guy Nirpaz,
    CEO & Co-Founder, Totango
    Provider of Customer Success Software

    • I agree you can be more proactive at the bottom and the key is tools. Will touch on this later. However, at a practical level, the lower the ACV, the higher the churn, and you have a multi-segment business, you may still end up semi-reactive at the bottom. But 100% agree the key is tools that help you at least identify issues at the bottom ;)

  2. Jason, Thank you for an excellent article!

    “If you haven’t hired a Customer (or Client – same thing ) Success Team before, it can be confusing to start. It will feel like a cost center.”

    You changed your mind about this later — what caused the shift? There are lots of CSMs out there still trapped in “firefighter” mode whose CEOs think of them as a necessary evil. How should they go about getting the attention of their CEOs to change that perception?

    Yours is the best breakdown of what should be expected of the CSMs at various deal levels I’ve yet seen, but the truth is that in most SaaS B2B vendors, the supporting technology that would enable the team to effectively carry the workflow isn’t there. Example: In order to identify issues and proactively reach out, you have to have the capability to monitor in real time what individual users are doing with the application’s feature set — and virtually no SaaS vendors have this capability designed into their apps. (You can buy it, of course, from vendors like Totango, Scout Analytics, Gainsight, and others, but the lack of the capability speaks volumes about how vendors perceive their products.)

    Beyond the monitoring, there are also the external factors that need to be a part of the CSM role. They need to keep up with business changes at their customers, especially the movement of key decision makers, influencers and power users. Here, too, the technologies that could make the process possible are largely missing. The result is that the team is overloaded and therefore their skills are being poorly utilized.

    Your article has been quoted and linked as a discussion in The Customer Success Management Forum on LinkedIn, and it will be interesting to see how the CSM community worldwide responds to it.

    Mikael Blaisdell
    The HotLine Magazine
    The Customer Success Association

    • Honestly, what caused the shift in the beginning was self-preservation. I was the “CSM” for our First 2 Big Customers and then xferred it to my first hand to handle. She did an amazing job but wasn’t a classically trained or focused CSM. Then, it became clear I had to approach it more structurally. I didn’t “get” the fact that Customer Success is a long term structured process at first.

      The real key if you want to help CEOs understand that Customer Success is ROI Highly Positive, not a cost center, is to help them understand Second Order Revenue. Show them the SaaStr post here, it should open some eyes ;)

  3. Jason, great post. I agree completely that Customer Success is a revenue generating function, particularly if there are organized processes to harvest the advocacy potential. In fact I am more aggressive than you and have 2 CSMs per $1M ARR in the beginning and adding 1-2 per $1M ARR, plus a leader, and support. If you can get 6x the value, then it’s a better investment than just about anything else you can make. Delighted customers that are mobilized to generate new deals are the most effective lead generation.

    My prediction is that the best B2B software companies will be investing a lot more into customer success than the companies in years past. The rewards are huge and the punishment for not getting it right can be total.

    What you may want to consider in a future post is the specialization of the CS function into onboarders/pilot converters, growth managers, anti-churn specialists, support and more; when and how to specialize, how to create a consistent customer experience across these specialized CS functions. Or if you want I can write a guest post on it.

    • I agree and maybe should update to make that distinction in the earlier days clearer.

      1 CSM for $1m once you are scaling, or if you are well funded (ahem ;) is probably the way to go.

      my comment of hiring in advance vs. arrears alluded to that but didn’t crisp-ify it. let’s update.

      feel free to write the guest post too!

  4. Hi Jason – great post. Curious about your perspective on role of ‘customer success’ vs. ‘Account Management’ (or who owns renewals, esp. for larger ACV). Hiring a CSM for every $2M ARR, does that assume 1 Account / Renewal Mgr for every x clients?

    • You know I wish I had the perfect answer there. What we did is turn basic renewals, as a billing function … over to finance. Then, we tried to split upsells into Small Upsells, and left them at Customer Success, and Big Upsells, and those were driven by sales with customer success together, for the most part.

      It’s a complex topic b/c The Old School Way to do it is to have a lot of Farmers disguised as Customer Success Reps that don’t care at all if there isn’t an upsell b/c they are just looking for the quota. I hate that and most of us do. But if you don’t find a semi-systematic way to maximize revenue per account, you are leaving money on the table.

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  6. The comments from Mark and Claus and your replies, Jason, highlight what I think is still a gap for the CSM function–the need for strategic thinking and management. This is not about maximizing call volume or closing tickets, it’s about strategically figuring out how to maximize revenue from the existing customer base at the lowest cost (i.e., profit!). In that sense, I disagree a little with your last sentence above about maximizing revenue per account. I’d argue for more of a portfolio mindset in which you strategically identify your opportunities and allocate resources accordingly. That could be on a customer-by-customer basis with application usage data as a foundation or it could be, picking up Mark’s train of thought, based on customer segments–identifying those segments that have the highest potential value and developing processes specifically to ensure their success.

    • I don’t disagree. We can dig more into that later. You’re right than in both customer success and sales, especially once you are post-Scale, what really matters is revenue per segment, not per individual customer or lead. E.g., that’s why there’s always Room at the Bottom in big, growing categories because the Big $100m+ ARR leaders ends up leaving room at the bottom because it’s not the best way to maximize overall revenues.

      But when you are still scaling (say up to $10m ARR), I think you can still focus on individual customers for a while too, not just the cohorts.

    • guynirpaz

      Anthony – I like very much the portfolio approach; You are absolutely right. Customer Success is not about account management, but constantly improving the value of your customer portfolio to maximize profitability

  7. I like the 2MM per CSM as a rule of thumb, but prefer sliding ratios between revenue and number of customer success managers as your business grows, as follows:

    You start at 2MM per CSM for your first 10MM, but as you cross the 20/50/100MM revenue marks, you will have 2.5/3/4MM assigned per CSM. The argument is that there’s got to be the economy of scale and as you invest in technology, tools, in-application support, customer community infrastructure, self-help, MVPs, online training, certification and so on. Your Customer Success also needs the CoE staffing for knowledge management and the best practices knowledge-base.

    I agree with hiring in advance, not arrears, philosophy since your new CSMs need 2-3 months of enablement with the tools, processes, app admin training, and on-the-job mentoring and certifications. SaaS customers expect support from Day One of signing the contract. You want your customers to experience your (proactive) customer on-boarding program, and not be exposed to triage!

    I agree with Guy that proactive guidance, and not just reactive support, ought to be in your support portfolio for customers at all levels, especially when customers are charged a premium for differentiated support.

    Customer segmentation by ACV (and that’s not the only) is a way to scale Customer Success. For a customer spending more than 2MM, you will have a dedicated CSM. Between 100k to 1MM, you will have 1:20 to 1:2 account ratios. For under $100k, you will use a resource pool and apply automation. Therefore, you scale by combining high touch (for the high end) and tech touch (for the masses).

    Lastly, in my opinion, it’s never too soon to create a P&L for Customer Success! You won’t be viewed as a cost center by your peers in sales and services. A P&L will do wonders to the CS employee morale, creativity and drive!

    • Yes I think it will be different for different folks especially post-Scale. But, I do think that if you make and see Customer Success as a profit (vs. cost) center, the $$/CSM will trend lower, not higher …

  8. D_C

    Thank you for the insights, Jason. I found your blog via Quora and your sharing of your experiences has me rethinking the way I have my sales organization structured. I have 25 years of culture to change which will be a challenge–but I’m also the type of person that will go nuts just HAVING to know how other people do it better than I do so that I can become better, too! So out with my comfortable ideas and in with those that produce better results!

    Here are some questions I posted on Quora but edited a bit in light of other posts of yours that I’ve since read

    My AE’s are used to being the only sales interface to the customer and earnung all associated commission but I can see how that won’t scale long term. I would like view on how to structure a Customer Success team when the culture and commission structure was never designed that way.

    When you create a sales versus customer success team, did you compensate the sales team for the add-on business that the customer success team closed? Did the salesperson retain some level of relationship with the customer or are they simply off to the next deal?

    Many times the smaller deals come first and the payoff is the larger deal that comes later after trust in the service, product, or company is established. Good salespeople will want to work into that large deal but we have seen that these same good salespeople have limited time to deal with smaller customer orders and renewals which are quite important to establish that trust. A customer success team seems be be half project management/half sales but is a cost to the company, too (which I see you addressed in your CLV post which I will need to justify this concept to the business owner), so I assume they work on some level of commission. How were they compensated and how much sales work did they do versus project management?

    Was there any customer attrition moving to the new model? Did customers who were used to a particular salesperson get upset because they were given to a “lower level” person that didn’t have the depth of relationship (or perhaps knowledge) that the original sales rep did?

    I can see a lot of upside to the split but also see where it can cause some very unhappy salespeople when you retrofit this into an existing sales organization. How did you mitigate all this?

    Thanks again for all I’ve learned so far!

    • I think it’s OK to compensate the sales team for revenue the customer success team later closes if it works for you. This especially makes sense in a land-and-expand model. The key I think is to make sure BOTH are compensated — sales and customer success in this case. So you need to build a model where you can pay both.

      We did this in many cases. One way to do it that works well is to draw a line at X% of the initial ACV and “only” pay sales if the upsell is great than that percent.

      I.e., if sales brings in a $20k ACV deal, and customer success then adds on $5k ACV … that’s no comp to sales. But if it hits say 100% of the ACV, either it gets pushed back out to sales (what we did — and usually right way to go — though still also comp client success) or sales and customer success can share it and still comp sales.

  9. I think how you define the CS role is important as well. $2M per CSM seems perfectly reasonable if that person is just doing ongoing management. If they are also responsible for other duties like onboarding/training customers, professional services, support, presales work, etc., then that number is going to have be be much lower.

    I think you really have to look at the marginal cost and the marginal benefit for adding another CSM. If you are a company with $100M valuation and your churn figures are close to your industry’s average, a 2% reduction in your overall churn numbers will add something like $20M to that valuation. If another CSM can reduce overall company churn even by 0.1%, that is a million dollars of valuation your are gaining. CSMs are more valuable and cost-effective than many people realize!

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  11. Hi Jason, this is a great article! I actually like the comments even more.
    In your experience, does it mean that you have to have both Account Managers (sales focused) and Customer Success Managers to work on the same accounts? Doesn’t it create confusion for the client on who is doing what? I would tend to promote a model with only one person responsible for the account. Isn’t it possible to have a Customer Success Manager handling all aspect of the account with the primary objective to maintain the ARR of his portfolio and retain 100% of his clients?
    We used to have two people working on the same account (one for renewal, one working on project and ongoing management) and clients were getting confused, plus it was difficult to have a fair comp plan without any conflict between the two reps. We now have only one AM responsible for the account and my idea is to change their role to make them CSM, focusing on improving the value of their portfolio.

    • I wished I had the perfect, any-size-fits all answer. I think though where most next-gen SaaS companies are coming out is having Customer Success manage; Customer Success close if the upgrade is small; and Sales close is upgrade is larger. And until you are Large, not really having Account Managers that just do upsells.

      That’s more customer focused. That’s what I did. But it may leave money on the table.

  12. To Cyrille’s last comment and Jason’s reply, I would suggest that in a mature SaaS company (500-600 customers or more), you should consider breaking out a separate team to do renewals and let the renewals team take down the small upsells and bring Sales in to close the big upsells. This frees the CSM from ever having to negotiate or close deals. It’s better for their “customer advocate” credibility if they never do this. They should be one of your best lead gen engines for existing customers, but keep them from having to close deals if possible.

  13. Courtney

    Jason – Can you speak more to the functions of a CSM and at what point in the sales cycle to they step in? I’m curious to know specifically if your model includes implementation and training as functions of a CSM.

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