The Ins and Outs of Customer Success w/ Lincoln Murphy [Episode 454]

Lincoln Murphy, Customer Success Architect and Mentor at Storm Ventures, and co-author of Customer Success: How Innovative Companies Can Reduce Churn and Grow Recurring Revenue. In this podcast, we decipher the mysteries of customer success, and cover how that role should play out in the overall revenue scope.

Key Takeaways

  • Lincoln saw there was no book that fully covered Customer Success, so he wrote one. You can’t lose customers and expect to grow in any meaningful way.
  • Lincoln explores how we got to the point where customer success is a new operating philosophy, not just for SaaS, but for all businesses. Salesforce was the main influence. He also compares reducing churn with real revenue growth.
  • Salesforce was facing an existential threat with 8% churn every month, before focusing on customer success. Lincoln gives his definition of customer success, and explains the causes of churn.
  • Churn also includes revenue churn, based on discounts offered for renewal. Lincoln discusses net revenue retention, how to determine it, and how it relates to overall growth.
  • Lincoln suggests segmenting customers, not based on their payment level, but on the experiences you need to give them to ensure their success. Losing a customer in a bad experience also costs you anyone they influence.
  • A customer who receives no value is not a good reference. Shoot for 100% referenceable customers. Know the traits of a bad-fit customer. Don’t set your customers, or your company, up for failure. Don’t sign bad-fit customers.
  • Customer success needs to be aligned with sales and marketing. Customer success can educate marketing and sales how the customer is using the product, and what language appeals to the customer.
  • A customer signing a one-year contract, and staying for five years, contributes five times the revenue of the original contract. Customer success is responsible for 80% of the lifetime revenue of that customer; sales is responsible for 20%.
  • Lincoln addresses time-to-value. If immediate value is expected, and that expectation is not met, that is a problem. Teach the client what to expect at 30, 60, and 90 days, so expectations are met. Help clients see long-term value, ASAP.
  • Lincoln talks about personal relationships and loyalty. Humanity is the table stakes, but the sale is about the value to the customer, and their success, not their loyalty to you as their sales representative.
  • Deals are no longer closed on the ability to charm. Value has to be delivered consistently from the vendor to the customer.

Episode Transcript

Andy Paul  0:00  

Hi, this is Andy welcome to Episode 454 of the Sales Enablement Podcast where I hold in depth conversations with today’s leading experts in sales. So Lincoln Murphy, welcome.

 

Lincoln Murphy  3:30  

Hey, thanks for having me.

 

Andy Paul  3:31  

So what was the impetus to write the book?

 

Lincoln Murphy  3:35  

There wasn’t one and and this is something that we need to know more companies need to understand that that you can’t continue to grow at all costs, you know, doing whatever you can to acquire whatever types of companies or customers that you can and churn and burn through through through those customers and expect to come out the other end successful I mean, it’s, it’s The timing was just right. AndI think it was a topic that needed to be covered. And really cool that we get to say that we wrote the book on customer success.

 

Andy Paul  4:13  

Grab the name price. 

 

Lincoln Murphy  4:14  

It’s not like this was the first book on the topic. It was just the first one that had that title. But, you know, the bottom line is a lot of companies, a lot of executives have ever realized and certainly investors have realized that, you can’t continue like you said in the introduction, you can’t continue to lose customers and expect to grow in any meaningful way. And honestly, I think we have to be realistic about this or expect to be in business for the long term. If you continue to turn for customers. Yeah, sort of shifted right and and you can’t just we can’t just say, Well, okay, we got that customer, we’re good to go. I mean, now we need to really focus on making sure that they’re getting real value from their relationship. With us, and that’s what the book was about. And that’s what I spend all of my waking hours doing is trying to get people to realize that this is incredibly important, and we’ll talk about that. 

 

Andy Paul  10:26  

Yeah, so I do want just not only do you know that the basic story of the Salesforce was that, you know, that a senior executive says, look, we’re returning 8% per month, which is virtually 100% turnover per year. And, we can’t pour enough new business into the top of the funnel to sustain real growth at that rate, right. So we’ve got a problem so I’m here as an existential threat like that to this company that  we all know and and like and look up to it’s like, really wasn’t that long ago, but they really had to come to face with come to grips with the fact that they were still HBO back in the 80s and 90s, that would have had similar churn rates on their pay subscription services. And we’re also faced a real existential threat and we face 100% turnover in customers every year.

 

Lincoln Murphy  11:11  

Well, and that’s the I sorry, I meant to go back and sort of close that loop. I appreciate that. But like you said, I mean, it may not seem like a very big churn rate, but the reality is, it adds up. 

 

Andy Paul  11:30  

Yeah, 8 x 12 is 96.

 

Lincoln Murphy  11:33  

But you know, what I always like to remind people is  here’s the thing about churn. Customers churn for one of two reasons. And these are the only reasons one, something happens to them, they go away, they go out of business. Maybe they get acquired, though, I say if they get acquired that maybe should be an opportunity, but we’ll go ahead and figure that in here. So they either go away, you know, they got a bit or they get acquired. The other reason they don’t stay with us. The reason that they churn is because they didn’t achieve their desired outcome through their interactions with us. And my definition of customer success is when your customers achieve their desired outcome through their interactions with your company. One could be that you acquired a customer that never had success potential in the first place. So this is growing at all costs, will sign any customer that will sign, will do you know, we’ll do whatever we can to acquire as many customers as possible, even if they don’t have success potential, and that’s a problem. The other reason is we acquire customers with success potential, but we don’t do the things necessary to make them successful. And, so when you have a high churn rate, it’s not necessarily because they’re all bad fit customers, it could very well be that you are just simply not doing the things through all of your interactions with them, to ensure that they achieve that desired outcome. So I think that’s what is really important to keep in mind. And once we start to understand that churn really is just a symptom of an underlying disease, it’s not a disease itself it then that’s the underlying disease when your customers don’t achieve their desired outcomes, if we can solve that underlying disease, churn goes away. If we just focus on churn though this is the interesting part, if all we do is focus on churn reduction through discounts in and making it difficult to cancel and, and not starting discussion around renewal until it’s too late for the customer. We have our contracts up exactly. If we do all those gimmicks and tricks. Ultimately, we’re not solving the real issue, we’re just sort of taking care of the symptom. And it’s gonna, it’s still going to be there and it’s going to cause us problems long term. So that’s when I talk about customer success driven growth, it’s all about ensuring that our customers are achieving that desired outcome. We’re operationalizing around that and we’re we’re doing giving them opportunities to grow their their relationship with us based not on our internal need to hit some quota, or make our internal number, but rather to ensure that they are simply achieving their desired outcome and that we’re putting the right offer in front of them at the right time.

 

Andy Paul  14:16  

You see that all the time with people renewing, giving discounts to people to renew, and you know, here you are with your renewal business that’s supposed to be with the existing customers supposed to be at lower cost of acquisition for dollar revenue. And yet they end up going back basically looking at a new acquisition cost.

 

Lincoln Murphy  14:31  

Well, and this is why you need to be really careful when you say, what’s your churn rate? Well, I could tell you have a 100% comfortable range, right? But what if, I could add a 50% revenue churn because I offered everybody a 50% discount to stay. So you have to look at both, right. And that’s why that is one of the metrics that we look at in customer success, and really, this is not just a customer success metric, but something that everybody should be looking at if they have a recurring revenue business, for sure. And that is net revenue retention. That’s a complicated metric to get access to, but at the core, or it’s pretty simple just as we start this month with this much revenue from our existing customers. And at the end of that month, we end up with this much revenue net of any revenue churn, and also including any upsells, or cross sells that came only from that existing customer base, not taking into consideration any new customers that are required in that month. And if we have greater than 100%, it means even if we lost some revenue through churn, we’re making up for that with upsells and cross sells. And if we’re greater than 100%, if we’re spending if we’re really good, we’re in the hundred and 20 130% range. That means we could actually turn off new customer acquisition and not just continue to exist as a company, but grow for at least some period of time. 

 

Andy Paul  16:01  

All right well what I want to do is sort of run through you guys have been the books or 10 laws of customer success reserve we sort of touched on one of them already which was selling to the right customer. And yeah, certainly for the reasons you talked about why you why some of the right customers why some of the wrong customers, and I think one things that you didn’t touch on but i think is important to get into is you delve into the book in terms of product market fit is that you can have a customer has a huge revenue potential, and it can be the wrong customer.

 

Lincoln Murphy  16:33  

And what I like to remind people of is if you see this with the way that we segment customers, it’s all based on what they pay us but the reality is, that’s not really what we should be basing this stuff on. It should be based on the way we segment should be based on our appropriate experience for the customer. Because we that’s that’s going to tell us what we need to give that customer in order for them to be successful. What I say is, look, if you can’t give the customer the appropriate experience based on what they need, you could reduce what you give them. But that would be an inappropriate experience, what you should really do is say right now, they’re not a good fit for us. And I would rather pass on a customer today and come back to them in a few months when they are a good fit, then churn and burn them and ultimately reduce my overall total addressable market. Because when a customer leaves, this is really, really critical to understand. When a customer churns out, they don’t just take with them the revenue that they’re giving us, and whatever it costs us to acquire them and serve them in the interim. There’s probably some unquantifiable either amount of revenue or number of customers out there that they also take with them through any negative sentiment that was generated by us not uh, not really living up to our agreement to give them the value that we said we would want to sell them. So when you’re churning and burning your customers, you’re actively reducing your total addressable market. How much revenue did we learn? How much valuation from you know, at the company level Did we lose because we signed customers that we shouldn’t have?

 

Andy Paul  19:25  

Right? And then the motivation you see oftentimes, especially in SAAS companies. 

 

Lincoln Murphy  19:39  

Yeah. So I mean, right there. And that’s something that’s interesting from a sales perspective. When I do a lot of sales training as well, customer success driven sales. You know, if you’re acquiring customers that don’t have success potential, you are violating one of the key rules from my perspective, which is should I shoot for 100% referenceable customer base, I don’t want to acquire a customer that is never going to be referenceable. And from a sales perspective, if you are a professional salesperson, if you care about your career if you care about your customers, but certainly if you care about your career, you will look at your customers as that from that perspective, I want them to be 100% referenceable, so that when I move on to the next job, or if I’m trying to get another job, I could actually get them to talk to my customers, not just the last company I worked for, but literally hey, go talk to these customers, and have them be referenced for free. That’s how really, really great salespeople think. And, you know, if you’re going into a situation where you were, you’re not 100% sure that there’ll be success or on the flip side, for sure they won’t be successful and you’re closing that customer, you are actively setting them up for failure. And ultimately, you’re going to set the cup, the couple of the folders up for failure. And I’ll tell you this as a salesperson if I’m working for a company that allows bad fit customers to be signed, I’m going to go work somewhere else, because that is eventually going to catch up to me, as a salesperson, I’m going to have to overcome these objections in the marketplace caused by that negative sentiment of churn. I just don’t want that. I don’t want to have to deal with that. So I’m going to go find another place to work where they get this. And I’ll say one more thing about this, that I sometimes raise this to just be provocative when I’m talking to, you know, maybe a group of CEOs, or maybe just one CEO to try to get their attention. You know, if you are knowingly allowing bad fit customers to be signed, yet you are investing in customer success management in anything else to do with customer success, after the sale, then you’re a bad CEO, or you are investing in something that you absolutely know is not going to work. So one of the things I tell people, this is an actionable thing that your audience you guys are listening to, you could do this right now. I suggest it is to sit down and figure out what the characteristics of a bad fit customer look like. So that you can then go to your salespeople and say don’t sign customers that have these characteristics. You can go to your marketing folks and say, let’s make sure that we’re not somehow attracting customers that have these characteristics. These are the characteristics of the battery customer. don’t assign them.

 

Andy Paul  22:40  

Well, what you’re talking about, though, is really interesting. As you know, we’ve had a number of guests on the show. We talked about the same age-old problem of sales, marketing alignment, but really what we’re saying is that you can throw Customer Success into that equation as well. It’s not just about sales marketing. It is about customer success, really helping to find your third last customer successes. 

 

Lincoln Murphy  23:13  

Oh, I mean it’s gonna hurt everything and you’re right this alignment needs to be there. But I want to be really clear I mean, if you’re a customer success person listening to this, I would maybe not lead with the bad fit customer thing if hopefully leadership will take the initiative and do that. Start by feeding back to sales and marketing, the things that good fit customers are experiencing. The use cases that are successful the things they say the words they use, the way they talk about not only our product, but what they do with our products so that you can tell sales and marketing to use this language that we have so much information on our customers mostly kept in the customer success management area, that if we can feed that back to sales and marketing, we could make sure that we are really interesting that conversation already taking place in the customers mind, which is their desired outcome, it’s what they need to achieve and how they need to achieve it, then if we can use the language that our customers use, and talk about the use cases that are that are successful, that’s fantastic. So if you can, as a customer success, person, or organization helps sales, close more deals and help marketing, you know, get more mq ELLs and SQL, increase the pipeline, then you can go back and say, by the way, these are the these are the things that aren’t working so well. So don’t close those rights, lead with the positive thing, help them do better, do more of their core, help them achieve their core goals, and then come back and say, by the way, don’t close these customers. But management leadership in the organization should start by defining what your bad customers are. And that’s what I do with any company I work with; the first thing we do is lay that out, because that’s going to change. You know, a lot of things if we can eliminate those bad customers right out of the gate. We don’t even sign them. That’s going to have a positive impact on everything going forward.

 

Andy Paul  24:59  

Well, so Interesting, you know, thought perspective as you say, Okay, we’ve got sort of defined, especially in the SAAS business, we’ve defined the sort of hierarchy or we’ve got sales development reps feeding leads to account execs. And there’s this perception that they can’t exist somehow or the alpha dogs at the top of this pyramid and customer success is down the pyramid somewhere maybe above SDRs. But, you really look at it as, when you look at how the company grows, it’s really that the sales is just a really a feeder to customer success. Is it really time to serve? Or are you seeing people even worse, or rethinking sort of this whole, you know, heroes notion of no account acquisition and saying, well, it’s very important, but I mean, the real top dogs are the customer success people. 

 

Lincoln Murphy  25:46  

There’s a lot of pushback from sales on that. I’m sure I tried to talk about the fact that look, you know, if we signed a customer on a one year contract, And we keep that customer for five years, then that initial sale of that first year contract is only 20% of the overall customer lifetime value. Most of the time sales driven companies and certainly the sales organization that doesn’t have any of their compensation or metrics tied to retention, they look at that initial sale as 100% of the lifetime value of the customer. That’s all they really care about. But as a company, we have to look at it and say, you know, what, if we just get them to renew at the same level, over that five year period, then that initial sale is really only worth 20% of the overall lifetime value? Yes, it is incredibly important, we have to have that initial sale. But if we do things right, and we actually grow the customer over those five years, and maybe even get them to stay an extra year, we might get to a point where that first year, that first year contract is worth 2% of the overall lifetime value of the customer. Again, still absolutely critical that we sign the customer. But what if we don’t do right, and we miss out on all of that stuff that takes place after that. So you know, to your point, I like to look at it not as the customer success organization is the hero, I like to look at it as we are a company all moving in the same direction, and that we’re not separate parts of this. We’re all moving together. And I think if we can look at it that way, and sales is not this thing that sits out there on its own does whatever it wants, but rather, we’re all in this together. I think that’s what needs to change.

 

Andy Paul  27:28  

Yeah, no, I agree. I think that’s a great, great vision to have. So another one thing that would start tightening over just starting talking about is a key role is obsessively assessed obsessively. I can talk today, obsessively improving time to value. Yeah, and that’s such a critical thing. I think that the subscription business, whether it’s SAAS or not, this is one of the key things because if people aren’t getting the expectations, look, we’re going to start getting value almost immediately.

 

Lincoln Murphy  27:56  

Right? Well, you just said a key word and that’s expectations. And I say, if all we did with, honestly, if all we did in our lives, probably with our families and everything, if all we did was better manage expectations with people, things would be so much better off. But you know, we’re gonna have to go through this process of integration and implementation in whatever and that’s going to take x number of weeks. I’m just laying that out and being honest about it, I think things would be a lot better. But to your point, we also need to reevaluate what value means to our customers. And so one of the ways I look at at first value, whatever that is, it’s either the point where your customer has for the first time achieved real value, so they’ve gotten value out of the out of their relationship with you or for the first time outside of sales and marketing, they see the true value potential in their relationship with you. Because again, in an enterprise setting, we are realistic that a customer may not get value in the first 30 days experience is what economists call experienced value. Right? Exactly. So we need to just set them up, let them know what’s going to happen at some point, when we’ve gone through some configuration, and maybe they start to see something, something happens where they go, Ah, okay, cool. So if you’re talking about an aha moment, that’s what the aha moment should be. So often people talk about an aha moment. And they’re kind of looking at it wrong there. It’s like, when they first figure out what the product can actually do. It’s like, I think that’s the wrong way to look at it. That means what you’re basically saying is the customer goes in, pokes around and then goes, oh, I get it. That’s not the experience we want our customers to have. We want them to get to a point where, you know, we’ve facilitated this whole thing within the context of what the appropriate experiences for the customer and they see for the first time You know, maybe they haven’t gotten value yet, but they see, okay, I can see the long term here, I know that this is gonna work for us feeling good about this, I invested money in this transaction, of course, and you know, to get this started, but I’ve invested my time and energy, but I’ve also invested my political and social capital within the company. And I need to get to a point where I can at least say, I did, I made the right decision, right? If we can get our customer to that point as quickly as possible. That’s what we need to shoot for.

 

Andy Paul  30:27  

It’s critical time difference value is super important. So build off that so the last point we have time to talk about today which I thought was really interesting is Customer Success rule number five, which is saying you can no longer build loyalty through personal relationships. So tell us tell us what you meant by that. Because that I think is probably scary to some people, because a lot of people go through a career in sales thinking yeah, you know, I can bring these customers with me or you know, it’s all about money. relationship with the customer, which I don’t think has ever really been the case as much as salespeople like to think it is, but less right.

 

Lincoln Murphy  31:09  

Yeah, I mean, look, it’s interesting. We have to understand that no matter how big our company is, no matter how big the company of our customers, we’re still selling to humans. And so there is a relationship aspect to that there isn’t, you know, we have to be, we have to have empathy and all of that stuff that’s just sort of table stakes. That’s a given. What I think what we’re trying to say here with that law is this, you and I can have a great relationship. But if I do not ensure that you are successful with our product, so you’ve not achieved your desired outcome, the business outcome through the appropriate experience with our product or through our interactions with our company, to the consumption of my service, whatever that is. We have a great relationship and what ‘s going to be the only thing that that great relationship is going to ensure is that It’s awkward when you tell me that you’re canceling and moving on to a different company. Because we have so we have to ensure success. It no longer locks you into a five year contract. And you know over a couple of steak dinners and call it a day, that might be still how you sell, we may still have a five year contract that this doesn’t no longer term contracts are not still out there. But the point is, even on a three year contract, I’ve seen it where companies turn out they don’t renew and they cite things that happened in the very early stages of the relationship. Sometimes they even cite things that happened during the sales cycle, sure planning their escape, you know, while they were getting started. But the bottom line is we can’t rely on just that relationship to keep the customer. You have to make sure that the customer is achieving their desired outcome through the interactions. By the way, part of that appropriate experience may be a more tightly coupled relationship. Okay, so that’s what’s going to ensure that you’re giving them the appropriate experience. But I’ll tell you what if you can’t help them achieve that business outcome they’re looking for, like, that’s it, no matter how great that relationship is, you’re done.

 

Andy Paul  34:10  

Well, the relationships even on the sales side, on the pre sale side, it’s, you know, people want to still, just to your point about, clinging on to the notion that you play around a golf stake, take them out to lunch, whatever. And then, you know, obviously less so perhaps with the SAAS business budget in sales, but it’s really more and more and almost exclusively, it’s about what you can do for the customer. Even on the pre sale side, right? I mean, they have a job to take care of and they’ve got to make a decision about, you know, achieving a solution of value for their company. If they don’t think you can produce that for them, no matter how much they like you. You’re not going forward with you.

 

Lincoln Murphy  34:44  

Yeah, I don’t. I don’t think we’re seeing. I haven’t seen too many situations lately, where people are close, really great salespeople are even less. productive salespeople are closing deals, based simply on their ability. to charm someone that I don’t I don’t think we’re there anymore. But it’s certainly keeping you know, even if we were able to start a relationship like that. I don’t think it’s one that would last if the value wasn’t consistently delivered to the vendor to the customer. 

 

Andy Paul  35:15  

All right. Well, Lincoln, it’s been great talking to you. 

 

Lincoln Murphy  35:20  

My pleasure.

 

Andy Paul  35:43  

Thank you for spending the time with us today as well. Make sure you join us again tomorrow. But until then, I really appreciate it if you go to iTunes, subscribe, leave a review. We want to hear what you have to say, good or bad and if you take a screenshot of your review and email it to me. Until next time, this is Andy Paul. Good selling everyone.