Manage the Consumption Gap to Drive Customer Growth

Manage the Consumption Gap to Drive Customer Growth

Since 2016 when Thomas Lah and J.B. Wood published Technology-as-a-Service Playbook, the technology sector has experienced a dramatic shift in how products are sold and how customers purchase products. There is no doubt that the as-a-service phenomenon has changed the business capabilities for tech companies dramatically.

Digital sales is growing, digitization of virtually every aspect of business is increasing, the deployment of customer success functions is on the rise, and the amount of business conducted on a recurring basis is increasing. This transformation has placed pressure on companies to manage their customers in a new way. No longer do we sell the “big deal” and then just renew the maintenance a year later. Now, we sell the initial subscription and nurture that customer over a long period of time to grow them to a large customer.

The journey of moving from a product-centric, capital sale of assets or licenses, to an XaaS business model is illustrated in TSIA’s “Swallowing the Fish” framework (figure 1) below. As revenue shifts to 100% recognized at the point of sale to a subscription schedule in which revenue is released over time, companies experience a dip in reported revenues. At the same time, new business capabilities are deployed to manage the recurring nature of revenue and to manage the customer relationship. The rise of customer success is largely attributed to the need to help customers adopt technology so that they maintain a relationship and drive the lifetime value of the customer.

TSIA's Fish Model Displayed Visually
Figure 1

In the pursuit of revenue and profits, risk has shifted from the customer to the supplier. No longer are technology companies realizing 100% revenue before value has been adopted, leaving the customer to drive value on their own time. Now, suppliers make a promise to deliver value over the term of the subscription and the risk falls back to the supplier to ensure the customer is using the technology, and getting the value they were promised. Revenue is at risk until recognized. The result: a potential consumption gap, OR a potential growth opportunity.

Manage the Consumption Gap - 2 Outcomes

Thousands of conversations with TSIA members indicate that the Fish is absolute. Virtually no one escapes the Fish during this journey. Yet, as we click down into the details of this journey we find several paths emerging. (figure 2)

RISK: Unused capacity / value / licenses / consumption potential amplifies the real and potential risk for revenue attainment, causing the revenue trend to dip further than planned. (Red gap below)

In some cases, we hear that Sales continues to behave in a traditional manner selling the largest deal possible, presumably to extract the highest bookings and commission possible, leaving the customer with a much larger subscription than they can reasonably consume. In other cases, we hear that Sales scoped the size of the deal properly, but lack of understanding for the customers capacity to consume leaves value unrealized.

Customer Success (CS) is the organization that leads the charge to overcome these risks, helping customers to adopt the solution, and therefore reducing the risk of the customer becoming dissatisfied, or wanting to reduce their subscription, or worst case cancelling after the first year.

visualdepiction of TSIA's Fish model and impact on revenue and cost

Growth: Value realized, expansion generated, and renewal executed successfully. Under this model, CS and renewal specialists play a critical role in revenue growth, reducing the revenue impact from status quo levels. By focusing on revenue in addition to adoption CS organizations are helping technology companies reduce the gap and accelerate the journey across the fish. (Blue field)

This dynamic is often overlooked and under appreciated by company leadership. CS plays a critical role to develop and grow the company's revenue results and is not simply a customer satisfaction capability.

Subscription Optimization: TSIA Recommendations

TSIA research indicates that by adopting a couple of key business practices, technology companies can make a significant impact on revenue growth.

  1. Track revenue through customer lifecycle. Companies that build the capability to track revenue across the Land, Adopt, Expand, and Renewal (LAER) journey show an 11% improvement in subscription growth rates. (source: TSIA 2021 H1 LAER Benchmark)
  2. Utilize Customer Success Managers (CSMs) as the primary point of initiation for subscription upsell. Companies that utilize the CSM role to generate upsells, ether from lead generation or actual selling, demonstrate a 10% improvement in subscription growth. (source: TSIA 2021 H1 LAER Benchmark)
  3. Compensate CSMs for expansions. Companies that compensate CSMs for expansions through targets, goals, MBOs, or quotas grow revenue by 14% above those that do not compensate for expansion.

Ready to learn how TSIA's Customer Growth and Renewal Research can help your company? Contact your Member Success Manager for assistance. Not a TSIA member yet? No problem! Contact us today to learn more.