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As more companies across multiple industries have embraced the subscription model, the sales focus has shifted. Now you need to know how to grow existing customers and how to get customers to renew their subscriptions. Customer growth and renewal are specific sales motions demanding skills that are different from the skills used to land an initial sale. The companies that are most successful in the XaaS/SaaS environment recognize these differences and structure their businesses accordingly.
In “LAER Explained: A New Customer Engagement Model For a New Business Era,” Thomas Lah explored the shift from a Product economic engine to a Service economic engine and the organizational capability shift required to be successful in an as-a-service world. Since that report was published, the percent of revenue derived from subscription has continued to grow year over year. We see no end to this trend for the near future.
The amount of revenue attended to in the post-sale period of the customer lifecycle dominates many companies’ business operations today and is putting pressure on many others. Suppliers’ ability to grow revenue from the existing customer base is a critical business capability. Let’s take a quick look at how companies are solving this business problem within the LAER model.
LAER (Land, Adopt, Expand, Renew) has become a default customer journey framework for thousands of companies to frame discussions for organizational design choices. The LAER framework is more than a series of tasks to complete. It includes all of the organizational capabilities that must be deployed to successfully achieve a specific outcome:
There is a wide understanding of the LAER model, and a general acceptance of the value this approach brings to performance, yet TSIA consistently sees members struggling to break away from a traditional model that looks more like “Land, Adopt, Land, Land” than LAER (Figure 2). The Sales executives with the LAND capabilities sell the initial deal and then re-engage the customer for Expand and Renew.
To successfully grow and renew revenue from the established customer base, TSIA recommends a segmented sales approach in which customer acquisition sales capabilities are differentiated from post-sales AER sales capabilities.
Companies must build selling and revenue management capabilities into Customer Success and Renewals organizations, and then link the two sales motions prescriptively to facilitate the movement of complex work when the sales play directs. Why?
Landing sales involves a rich set of sales capabilities aligned to a specific charter: grow top line revenue through the process of acquiring net new customers or selling net new products. KPIs include bookings, close rate, and in some cases, time-to-close. Key practices include opportunity management, forecasting, and pipeline management. Skills should be highly focused on the ability to influence a prospect to make the decision to change current state and adopt your solution for the future, negotiating terms for complex deals.
These sales representatives are typically paid at the top of the compensation scale for employees below the C-suite or VP level and are supported by significant marketing and lead generation capabilities. In short, this is a “hunting” role: highly variable and complex work that requires specifically refined skills.
Expand and Renewal phases of the lifecycle require unique sales capabilities from those needed in customer acquisition. They work toward a different charter: ensuring products are being adopted, the value of the promise is being realized, customers are satisfied, and customers are expanding their spend and renewing their subscriptions. Expand and Renewal sales positions can be thought of as “farming” roles.
The first step to building a great customer growth team is to be clear and aligned about the prime directive of the company and each function’s role in achieving this directive.
Imagine for a moment a basketball team. The prime directive is to win basketball games by scoring the most points. But what if the players were evaluated on their ability to pass the ball? The KPI would be the number of passes in the game, training would consist of passing techniques, and players would be organized so they could pass the ball effectively. This is obviously a terrible solution to achieving the prime goal of scoring points.
Yet daily, TSIA works with companies that place their business functions at odds with one another in achieving the prime directive. It’s common to see a company adopt market share growth as the prime directive for the company, then deploy the Sales executives into the Land motion of customer acquisition AND the Expand motion from existing customers AND the Renewal motion from existing customers.
TSIA benchmark data indicates that companies that give Sales organizations responsibility for Upsell and Renewals (including formal targets and quotas) in addition to net new sales experience reduced growth and profitability, with no impact on renewal rates.
There is less than a 1-point difference in dollar renewal rate when Sales executives are responsible for subscription renewals rather than Customer Success Managers or Renewal Specialists, yet ARR growth rates plummet more than 8 points and NOI is 9 points lower. Plus, customer retention costs rise dramatically.
Deploying the highly capable, high-cost Land sales executives and capabilities to resell low complexity renewals and to lead expansion efforts does not lead to effective revenue growth.
Building formal business capabilities to effectively promote adoption, then expansion, then renewal, and linking these capabilities together into a consolidated workflow has generated superior results for technology companies (see figure below).
Once the prime directive is defined and there is clear alignment between the functions, companies can do the work of building or refining the customer growth team. TSIA recommends that companies follow a prescriptive process to build the capabilities required for this organization:
1) Define KPIs and build the ability to capture and report on those KPIs
2) Define and publish key practices and policies to guide “how” the work is to be accomplished
3) Define roles and responsibilities to determine “who” will do what work and when
4) Establish the organizational structure of the organization
5) Determine the skills required and build the ability to train and educate this skill
6) Establish compensation for the organization
Approaching Customer Growth and Renewal via the LAER framework works, and the data proves it. LAER works best when the customer lifecycle is approached holistically. Cross-LAER goals and metrics need to be part of the organization’s thinking and plans, and
Customer Success is taking on increased commercial responsibilities. This shift has shown benefits in nearly every LAER metric.
These results are supported by several key principles and practices:
The art and the science of building a great customer growth team is to learn how to define the work and then to effectively map the right work to the right resource capability. Complex work should go to highly capable resources and low complexity work should go to lower capability resources. The work defines the organization. The organization does not seek out the work.
To learn more about how to grow customers and how to get customers to renew, explore TSIA’s Customer Growth and Renewal research practice.
April 22, 2021
Jack Johnson is the vice president of customer growth and renewal research for TSIA. In this role, he works closely with member companies to deliver research and advisory programs focused on helping them grow and renew services revenue effectively. Throughout his career, he has held Renewals, Customer Success, and Operations leadership positions at technology companies providing enterprise software or hardware, or in business services companies helping technology companies growing recurring revenue.
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The Technology & Services Industry Association (TSIA) is dedicated to helping technology and services organizations large and small grow and advance in the technology industry. Find out how you can achieve success, too. Call us at (858) 674-5491 or we can call you.