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If you're north of $5M ARR, 40% of new revenue should come from existing customers. Are you seeing enough revenue from expansion?
Even if you're getting expansion, maybe you can get more - we talk about a few ways to achieve it.
Mentions & Sources
Openview SaaS benchmarks
Elena Verna
***
Even if you're getting expansion, maybe you can get more - we talk about a few ways to achieve it.
- (00:00) - Introduction
- (02:34) - Why does expansion matter?
- (05:45) - Challenges with Expansion
- (08:19) - Strategies for Effective Expansion
- (10:28) - Do you get the right customers and do they want more?
- (19:14) - Add-Ons and Multi-Product Strategies
- (26:45) - Customer Success and Resource Allocation
- (28:34) - How many CSMs do you really need?
Mentions & Sources
Openview SaaS benchmarks
Elena Verna
***
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This episode is brought to you by Growblocks. Finding and fixing problems in your GTM shouldn't take weeks. It should happen instantly.
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Creators & Guests
What is The Revenue Formula?
This podcast is about scaling tech startups.
Hosted by Toni Hohlbein & Mikkel Plaehn, together they look at the full funnel.
With a combined 20 years of experience in B2B SaaS and 3 exits, they discuss growing pains, challenges and opportunities they’ve faced. Whether you're working in RevOps, sales, operations, finance or marketing - if you care about revenue, you'll care about this podcast.
If there’s one thing they hate, it’s talk. We know, it’s a bit of an oxymoron. But execution and focus is the key - that’s why each episode is designed to give 1-2 very concrete takeaways.
[00:00:00] Mikkel: Hey everyone, this is Mikkel Plaehn. You are listening to The Revenue Formula. In today's episode, we discuss four simple reasons you're not getting any expansion and, of course, what you can do about it. Enjoy.
[00:00:13] So, how does it feel, like, to have a weak co founder and CEO
[00:00:22] Ola: it feels great.
[00:00:27] Mikkel: So, Toni is out, sick, with the man flu. Definitely something been going around. And I was like, well, you know what, this is my shot. To get someone way smarter, way funnier. And also, quite frankly, someone who has way more hair on this show.
[00:00:44] Ola: Happy to step in.
[00:00:45] So we have Olafur with us. You're a co founder also of Growblocks. And you're our COO. Taking care of all our operations, whatever that means. Making sure everything runs.
[00:00:56] Ola: And more importantly, I take care of our customer base.
[00:00:58] Mikkel: Yeah. And you're the one I go to when there's no more candy bars or whatever. And then there's a big sigh. And it's just like, well, you have a credit card.
[00:01:07] Go down and get some. Go down and get some. Solve the problems
[00:01:10] yourself.
[00:01:11] So the actually, also another funny thing, by the way yesterday was my son's first day of school, first day of school. And today I then dropped him off at school and he's just like, so ready. He's like strutting down the hall.
[00:01:27] You know, like how some people do like the gun with the hands and do a wing. It was like that vibe. And one of the other kids one of his friends spots him and he just walks over and this kid, by the way, he has a bandana on just to set the stage. And my son goes. Hey August, bro, and then they just hug, and I was just like, oh no, this is like
[00:01:49] Ola: They're not tatered yet. They don't know
[00:01:51] Mikkel: it is,
[00:01:52] No, that's
[00:01:52] that's true, but also just all the lingo and terms they pick up is just, oh, you can just feel there's some things as a parent where you're like, You know what? I'd really like to be able to open up my laptop, delete that word from your vocabulary.
[00:02:06] That would, that
[00:02:06] Ola: want bro culture at six years old, right? No, no,
[00:02:09] Mikkel: And he's also like, let's go!
[00:02:10] And I'm like, have you been watching Corporate Bro or what's
[00:02:13] going
[00:02:13] Ola: No, he's been listening to your podcast.
[00:02:16] Mikkel: Well, he is occasionally saying, like, subscribe. So that's kind of hilarious. So I don't know, by the way, how we're going to segue from that into the subject though. That's going to be a bit tricky. It usually befalls on me. It's a heavy burden, you know, so I don't know.
[00:02:30] I mean, he's growing a lot. He's expanding his his friend circle, his knowledge.
[00:02:34] And today we're going to talk a bit about expansion.
[00:02:37] Ola: Yeah
[00:02:37] expansion.
[00:02:38] Mikkel: And I guess it's, it's pretty key because. we kind of talked about it before hitting record. You said, Hey, what is, everyone is struggling. And I was like, well, you know, it's the wind rates are down.
[00:02:47] ACVs are down, sales cycles are longer. And you're like, oh yeah, like new business, shit. Yeah, exactly. But that's not what we're going to talk about.
[00:02:55] Ola: going to
[00:02:57] Mikkel: So we were going to talk a bit about expansion and I found a couple of. Benchmarks as well, just to kind of let's, you know, kick us in the right direction here.
[00:03:05] So according to OpenView, if you're 5 million AR or north of that, at least 40 percent of your new AR that you take home should come from existing customers. So if you have a challenge in hitting your target, especially now, if you know, planning season and everything, there's a, you know, another side to look at of the business, which is your, which is your, your customers.
[00:03:28] And I think winning by design, I saw they had this saying that actually the majority of your revenue will come after the initial sale. So I just wanted to hear maybe from you also, you you've operated as COO at, A couple of other companies as well. You've probably had, you know, your fair share of challenges strategic items on expansion.
[00:03:50] Why is it so important?
[00:03:53] Ola: Why is expansion important? Well, at the end of the day, the reason why you're focusing on expansion as a business is because number one, it signals that your product is good and it's working and people want to buy more of it.
[00:04:04] So it's a good signal to your investors and to your company that you're actually building the right thing. But at the end of the day, the reason for it is actually that if you just look at CAC Payback as a function of your company and where can you be investing dollars, typically you will be doing 12 to 18 month CAC Payback on newbiz.
[00:04:23] That's typically sort of the numbers that we're seeing. The average now, I think it's around 16 to 18 or so. And, but within that, there is sort of a math equation that also happened, which is that you also have a CAC Payback on your upsell dollars. And typically your CAC or customer acquisition cost or dollar acquisition cost, if you will, is actually a fourth
[00:04:44] Mikkel: Of newbiz. Wow.
[00:04:47] Ola: And why is that? Well, it's still an AM selling it and all of that jazz, but it's actually the reason for that is that Well, number one, you don't have the marketing cost, you don't have the SDR cost, you don't have a ton of the stuff that you otherwise need, so the sourcing cost can be completely removed.
[00:05:03] And the sourcing cost in sort of good companies is typically half of your CAC Payback. So if you can take out that out of the equation, you end up with a much more efficient dollar acquisition cost than you do on new business. So, If you can do proportionally more dollars on existing business than you otherwise will on new business, that just means that your average dollar acquisition cost is actually going to be lowered composition wise.
[00:05:28] And that's actually why you want to do it.
[00:05:30] Mikkel: actually I think that's super interesting because right now, I'll bet you, and maybe you can provide some color to that, but a lot of folks, they're looking into a new year, which is inherently gonna be difficult to plan because everything is just shifting constantly.
[00:05:45] And efficiency is still going to be a priority, but if you can lower your, you know, new dollar acquisition by actually bringing in more expansion, you're going to be way more efficient, which I think is actually a little, I think inherently people know and understand that, yeah, you know, it's easier to sell more to an existing customer, but then I also have a hunch that few then actually proceed to then prioritize it.
[00:06:07] Ola: Yeah, that's, that's absolutely true. There are sort of two main issues that I've seen on the acquisition of existing base dollars, if you will, which is that either A, you're not investing enough in it.
[00:06:18] So basically you might have a CS team and you ask them to upsell and kind of do that alongside their normal job. And you don't have a dedicated function. You might then allow your AEs to jump in, you know, haphazardly whenever they get the signal from the, from the SDR to then, you know, close the deal.
[00:06:32] close business on the existing customer base. But typically people will have one focus or the other. It's going to be an AE working on new business deals, or there will be, you know, an AM working on, you know, bring in upsell dollars. And then on the other hand, what I also see is that a lot of companies, they actually look at the acquisition of an AM as a function of revenue from the existing
[00:06:52] base.
[00:06:53] So they say, well, if I bring in three account managers and I give them a million an ARR target each, I should be expecting that they will roughly do 90 percent of that. And then we'll bring in, you know, two and a half million in upsell dollars next year. But actually their ability to. hit their numbers is actually not a function of how many account managers you have.
[00:07:13] It doesn't scale with the amount of account managers you have. You actually need to right size your account management team to the expected dollars you can extract from the base that you have. And it's a very simple exercise. You should basically go back 12 months, see how many upsell dollars did you have against the base 12 months ago.
[00:07:30] Today, you're going to have a new base and therefore a base that, you know, you can now calculate what should you be expecting over the next 12 months to be extracting from that. And if that number is you know, 10% on a 10 million AR base, then you can hire one account manager and give him a million in target.
[00:07:44] And then that's gonna be that, that, that's gonna be the structure. Right.
[00:07:48] Mikkel: I also think if you have this scenario where you think it's just like with account executives, more AEs equals more revenue, it's just wrong.
[00:07:54] The math doesn't support it. If you have that same approach with the AM, you're probably going to exhibit some of the behavior I've experienced on the receiving end as a customer that all of a sudden you get an email from someone you've never heard of before wanting to talk about how they can help you maximize the utility of the platform or discuss your contract.
[00:08:14] And you're like, wow. I'm using it. It's fine. I don't need to use it more. Thank you very much.
[00:08:19] It's kind of hilarious So I think and I think maybe that's a good segue because we also want to get a bit practical with How do you then think about expansion and set it up?
[00:08:30] Ola: No, I mean, I like to work from the top down.
[00:08:32] So really, if you want to, so the current, you know, net retention rate benchmarks that you want to be gunning for at the very least is to have 105 NRR
[00:08:43] But then the upsell target is also kind of a function of your churn rate. So if you're working in an enterprise company and you have a 7 percent churn, And you want to end up with a 105.
[00:08:54] That means you need to upsell at least 12 percent on the base. Then you want to figure out, well, okay, if that's the target, then that gives us basically 12 percent of the 10 million we have. That means we need to upsell next year 1. 2 million. Let's just say that's our goal as a business. Then you want to figure out, is that a viable target?
[00:09:10] How much have we been selling on base? So the customer base going back to a month, is there a misalignment between what we need for the NRR to be what we need it to be, because churn is really hard to change, upsell is not as hard to change. But it still requires some effort. So I would actually work my way backwards saying, well, for me to hit my NRR number, what would my upsell rate need to be on the current base that I have?
[00:09:32] And does my historical performance indicate that I can actually do that with the current customer base that I have and, or have acquired over the last 12
[00:09:39] months?
[00:09:40] Mikkel: last
[00:09:41] Ola: And with that, then you can at least form an idea of saying, Hey, you know, do I now just need to staff against that? And if the number isn't true.
[00:09:47] And you are not getting to the, let's just say 12 percent upsell rate. You only have a 6%, only half of that. Then it's a pricing and packaging exercise. It could be a ICP analysis. Do we, you know, which customers are we actually upselling to? Should we be acquiring more of those customers? And then there's a ton of other things that you need to figure out to see, well, how could I bring my upsell rate to the desired goal so that I can end up with the NR number that I'm supposed to be delivering
[00:10:13] Mikkel: delivering to So you also kind of promised that what we're going to go through for simple reasons, expansion isn't happening. And I think we're kind of getting close to that now. So what, what are some of the reasons it's you've seen that, that it just ain't happening?
[00:10:28] Ola: Yeah, so there's I think on the on the fundamental level it is number one Do you have the right customer set that are using your product and when they use it successfully do they happily want to buy more?
[00:10:39] So are you selling to the right customer types to the right buyer persona to the right ICP? So I would Figure out if the right ingredients are there. Do I see discrepancies between different regions? Do I see discrepancies between the different verticals that we're servicing and upselling to? So trying to understand if there's a composition problem, just even in our customer base, or are we even having the right ingredients to create that, you know, outcome that we actually want.
[00:11:02] And then at the end of the day, it's also to figure out, well, if we do have the right customer base to sell to, do we have the right things to sell to them? And that means that you inherently need to also look at, well, are there paths that are easily understandable from where people can go from a base value to an additional value that makes sense and can be monetized.
[00:11:21] And that then takes you all the way back to pricing and packaging on the newbiz side, which is where people have obviously come up with this, you know, land and expand concept and everybody says they do that. Well, fundamentally, they might not want to do some of the things that that require, which means that you might have to design a pricing and packaging strategy that on the newbiz side.
[00:11:39] Actually brings in a lower ACV on the land side. So you're leaving yourself room to actually fill up into the, you know, ACV that you can get them to at the end of the day. But knowing that you will be actually then closing a higher conversion because you don't have to sell the full value. So you ideally then on the newbiz side would have a higher conversion rate.
[00:11:58] You potentially would have a shorter sales cycle because you don't need to sell that full value that might also require you to have multiple stakeholders. But that comes then with a shorter sales cycle with lower ACVs, but that is the land and expand, and therefore That leaves money on the table that can be then extracted.
[00:12:13] And again, at a quarter or a third of the cost on the post sale side.
[00:12:17] Mikkel: yeah
[00:12:18] Ola: So that's kind of, I think the two main things that I'll be looking at is the composition of the base that you're selling to, and do you have the right offering and the right product path? Basically, how can you move them from one value prop to another or increase in value through using the same value, but having more people enjoy that value.
[00:12:35] And that's kind of the. Those are the two major kind of things that I'll be looking at. There's a ton of processes and how do you upsell and who do you upsell to? Are you doing that only at the renewal? Is it intro contract, you know, upsells? There's a ton of practical stuff we could talk about
[00:12:51] Mikkel: think let's keep think at the top level, also because it's going to be a case by case, most likely in many cases. But, then let's hop back into these two points you're kind of hammering on. Because you and I spoke funnily enough the other day or about, back when we worked together, at this social media management company that Toni and I also worked together in.
[00:13:09] And you and Toni also worked together in. So we're like one big family with the same history, I guess. There were a subset of customers, agencies, and they were just fundamentally different from the rest,
[00:13:22] right? They would turn, I think you said their retention was what, what, 60 percent or something crazy low?
[00:13:28] Ola: Yeah, it was, I think they had a turn rate of maybe 30 percent or something like that. And it was a quite sizable part of our base as well. So what the agencies were essentially doing is that they would have clients that needed the agency to manage the social media.
[00:13:38] And then the agency would buy a platform to manage, you know, that. But then you would also basically working within the life cycle of when they lost a client, they would sometimes let go of the tool. So we were kind of operating in a different way with where normal customers, they would be. teams internal to companies who wanted to optimize social media strategy, and they would buy a tool to do that.
[00:13:58] And they would have that problem today, tomorrow, and a year after that. So they would have a completely different churn pattern. So when we looked at our churn rate, which was high at the time, we actually then looked at the segment level below. So basically, do we have the right ingredients? And there we found just that one customer segment, aka agencies, and there was a couple of other segments, they just churned way higher, and they basically drove the average down.
[00:14:19] And then At that point, you really need to make a decision to say, well, we then see, we actually have a good retention rate on what you might say is our core ICP, which might not be agencies, but then you can also assess, well, what's our customer acquisition cost of agencies? And are they actually so easy and willing to buy that we're actually happy to have a higher convert, sort of higher churn rate, because on the balance, they come in cheap, we lose them a lot,
[00:14:45] that's still the math works out, right?
[00:14:47] Mikkel: But I think the interesting piece I also reflected over was like
[00:14:50] okay.
[00:14:51] What is the recurring impact? It's like, well, we just need the tool until the customer, you know, churns and there's no way we're going to help them actually keep the customer that's on them ultimately, right? So there's like, you can't really do much in, in that realm. So giving them a path to expand, really difficult actually to do because they're going to say like, well, on average, our customers stick around for, you know, 12 months and we have like three months left.
[00:15:15] So I get you want to sell this thing to me, but no thank you. And I think that maybe goes into the, the second part you mentioned, which is the, you know, path to almost more usage. So it's funny, the software we use to produce this episode originally it was just, hey, you can upload the audio, it transcribes it, and you can edit the episode and done audio only. Then they added video. That was a clear path to expand usage for us. Then they added okay, if you're recording with guests remotely, we have a studio and you could kind of keep going with more and more. Do you want to do live? Do you want to do whatever, right?
[00:15:53] So they have clearly thought about this kind of, hey, there is maybe a starting point and then as you go you can expand and get more sophisticated, right? Have you seen anything or worked with anything like this strategically? Because some of it is also very closely tied, quite frankly, to the product roadmap.
[00:16:11] Ola: what you're speaking actually about is unlocking functionality.
[00:16:13] So it's not a usage. Yes, you might use the product more, as I said, like that, but you're actually unlocking functionality.
[00:16:21] In this case, this product and this company has done is to basically create an a la carte model. So basically saying, what do you need to get started? What is it that's going to solve your base needs here?
[00:16:29] And it's for you, it's recording podcasts and maybe publishing them. And then you want to, you know, once this series is a little bit more successful, maybe you want to now add videos. So your need for that additional functionality comes later in the lifetime of you as a customer. And therefore them sitting there and pitching that to you on the first day of your contract is actually not helpful.
[00:16:46] It will drag out the sales cycle. You might see your wait time value, but you might not be ready. There's a bigger sell involved. It just doesn't make sense to maybe sell that to you. So in this case, this is actually a functionality increase. So basically now you're having a product that has functionality that can be sold in bytes and chunks.
[00:17:02] And you try to land on the base value, and then all these additional values can then extract it sort of down the line. Versus user space. That's actually where the value is not in additional functionalities. It's just in you using the product more and or more people on your team also using the product, but for the same functionality.
[00:17:21] And those are two different things because that's basically where the, the increase in the value that you're getting from it is for you using it more. That's the main driver of the value of that. So if you have a single. you know, functionality product, then user space might be the right thing for you because the value comes from you using it more.
[00:17:38] And therefore, as you use it more, that's how pricing should actually increase.
[00:17:41] Mikkel: increase. But,
[00:17:41] you know, I think that's also, it's, it can get kind of muddy because the fact that you then have This product that now lets you also do video might lead to me still doing, you know, using the product more, not just related to video, right?
[00:17:55] Sometimes they will, they will depend together. When do you think it, it transitions into being almost multi product? Because in my head, just as a customer, for me, that's not multi product. It's the same. It's, it's just extending on my use case almost. How do you, how do you see that? Because that's, that's probably one of the other options you also have to expand more.
[00:18:16] Ola: No, I mean, this is very clearly a multiproduct. You just don't see it like that, but that's how they're selling it to you. It's a functionality you want to have that you cannot get with the core product you bought already. So you are buying another product line or an add on, if you will. The fact that you use it more doesn't bring them more money.
[00:18:31] If they're not monetizing on the amount of podcasts that you publish, for example, then it's not a usage based pricing model. So the way that they extract money is that you publish and you do a lot of publishing, I hope, and then you want to possibly buy more functionality, which is the video and all the other things you said.
[00:18:47] the, you using the product more is actually more a term
[00:18:51] Mikkel: than it tool.
[00:18:53] Or it would be a, hey, let's start another show, so we need another seed, and therefore it's more usage, right?
[00:18:59] Ola: Yeah, usage here being basically seed based,
[00:19:01] which also can be the thing, but that, that both of those can work hand in hand, but typically the scale comes with functionality or it comes with seeds and usage.
[00:19:11] Those are the two main models that you're going to be working
[00:19:14] Mikkel: Yeah, so you mentioned another interesting one as well which I think we should talk a little bit about, which is add ons. How do you think about and go about add ons to kind of help, you know, drive expansion? Because it's very clear if you don't have any add ons, you're not getting any expansion revenue from add ons, right?
[00:19:31] So how would you go about that?
[00:19:34] Ola: Yeah, but I think that's also where people, I think, sometimes get these things confused, that add ons or
[00:19:39] different features. What is it, what's actually the difference, right?
[00:19:42] And the difference between add on versus a new functionality or a feature, if you will, is that You need to think about it. Can I sell three different features to a customer who has three different use cases? And can he buy that feature alone, and it does the job that it needs to do with that one feature?
[00:20:00] Now you can go out to You know, three or four different buyer personas who have four different problems, and you can sell them a product line, if you will, that are of the four core products that can operate independently, or they can operate together to give a more holistic use case. An add on is only a thing that increases the use case for one product line, but does not operate without you having bought the core product feature.
[00:20:26] And that's why you need to build out if you're going to go for the not uses and the seed based approach, then you need to build a two strategy, which is number one, ideally having a multi feature set strategy where you can have four different use cases service that can be sold independently, because now you can upsell.
[00:20:44] basically now to expand the breadth of the, of the functionality that you want. And you can also take users down further down the journey. Let's just say that this is an add on. You can't buy the video without having the core publishing. That's an add on strategy to say, how can I drive this person further down the one use case that they have and actually enrich that experience?
[00:21:02] And that's more of the add on structure. So it's kind of building a breadth and then depth. Add on is depth and breadth is basically new products
[00:21:10] Mikkel: is
[00:21:10] Ola: features that can be sold independently.
[00:21:13] Mikkel: So the breadth basically means you have multiple tiers?.
[00:21:17] Ola: It could be tiers, but tiers is usually also unlocking additional functionality within the same usecase, so it's a little bit different how you slice and dice it you know, typically it's an ala carte model where either you do a package and you say, here's the middle package and you get a little bit of this, a little bit of that, and these three features.
[00:21:34] And then you get a little bit more, you know, and there might be integrations and stuff like that's usually how you package stuff, but if you can sell something independently, that's actually where you end up with the a la carte model, where you say, we have these three different products, they serve three different functions, and there might even be for three different types of people inside of a, or three different types of companies for that
[00:21:52] matter. And that just opens you up to be a multi product company. Then you can actually then build on add ons for each one of those. And you can actually build a much better sort of post sale environment because if you package stuff together, you're typically then selling them a package that fits their needs and they basically buy it.
[00:22:08] And then you have a harder time actually upselling because now you need to convince them that they actually do need APIs or they do need more users or they do need something, but that's a little bit harder to do, to
[00:22:16] Mikkel: Yeah, I saw one, one common example, at least from, for the marketing teams out there is going to be you, whatever you're going to do a webinar, you need a tool, right? And they have three different tiers.
[00:22:27] Maybe there's some usage based depending on how many attendees you can have. But then one add on which is super common is custom branding or removing the software's branding, right? And they, so if the software is, let's just say, I don't know, 50 bucks a month, then it's like 10 bucks for that.
[00:22:43] They're like, yep, I'll definitely take that. That's such an easy kind of win to take. There's value for both. But I think what's really important is what you choose to price out on an add on level. And I think this was maybe Elena Verna she's over at Dropbox, I believe who said, well, a good indicator for whether it can be an add on is if less than 40 percent of users are or customers are using it.
[00:23:09] Because if you take something that's like, say, 95%,
[00:23:12] Ola: going
[00:23:12] Mikkel: going to be really tough.
[00:23:14] Ola: Yeah. and I think that's absolutely right. But I think you need to figure out what is the What is the use case for 80 to 90 percent of users? That's the core packages. An add on is basically, to your point, the lesser use feature because you want the people who value it to pay for it.
[00:23:30] And you don't want to bake it into a price point for a core base package for people who don't actually want it because now you've artificially given them a higher price point for something that they don't value. And therefore it's better sold as an add on. And on the other side, when you have tiers or packages, what you're essentially trying to do is you're trying to take elements that are essentially add ons, let's just take the white labelling, so you want to have your logo or it could be APIs or it could be a stronger governance of the platform and who can do what, what you're actually doing is you're self differentiating companies into SMB mid market and enterprise.
[00:24:02] Who cares about governance inside of a platform? Who cares about, hey, we can't have the, the. The, the Røde logo on, on our podcast, it needs to be our, our logo. That's an enterprise. So basically that's a low value kind of thing. It's an easy thing to add, but it is so important to them that they would pay four or five X for that because actually they are not price sensitive to that extent, right? That customer who is like, that's a nice to have. I, I might find it cool to have my logo. They're not gonna pay three times as much
[00:24:31] and that's okay
[00:24:32] Mikkel: as much. It's the, I'll definitely use it
[00:24:34] Ola: Yeah. And then it's maybe better as an add-on for the middle packages. Yeah. But it is include, and that's kind of where you need to also be careful with what add-ons you, you know,
[00:24:42] Mikkel: you know, add
[00:24:43] Ola: packages.
[00:24:44] So
[00:24:45] Mikkel: But you know what I also like about it is the fact that let's say only 20 percent of users or customers use that feature. You might go and say, well, should we even prioritize it? But if those 20 percent are paying for it. On top. Very different conversation all of a sudden. I think that's a very interesting kind of shift that can happen also in the go to market and even the leadership team to say, well, actually it does matter.
[00:25:09] And we might want to prioritize even building it out because there's revenue tied to it directly. Right?
[00:25:15] Ola: that's also the question of like, when do you also kill features? Like
[00:25:18] if 10 15 percent of people are using it, is it actually worth doing? And is it worth supporting?
[00:25:22] Do we want to build it
[00:25:23] Mikkel: see a conversation that goes like, Hey, we have this, feature blank and only 15 percent are using it, can we charge money for it?
[00:25:32] Would that work out? And then if it's a resounding no, I was like, well, maybe we need to rip it out.
[00:25:38] Ola: Yeah, because at the end of the day, this will make your comp, your product more complex to use.
[00:25:43] Every add on, every additional capability is just another thing for a user to learn. And if they see the button there, they will click on it. If they don't know how to do it, then that's going to be just the worst user experience. So you typically want to strip away everything that either can't be sold, isn't useful to a large part of the base that has bought into that package.
[00:26:00] And that's kind of the balance between it being an add on versus should we also just cut it out of the tool.
[00:26:06] Not everything somebody use is worth developing and continues to develop.
[00:26:09] Mikkel: Yeah, I think another interesting thing we’ve shared in previous episodes also is. What we're saying here is you have potentially existing features you can price out.
[00:26:20] It means you don't have to build new stuff, right? You don't have to build new stuff. A very classic thing you can also do is look at your services and support. Particularly, can you give someone, you know, fast track or whatever on support at a on top price for expansion, right? So there there's a couple of things you definitely can do.
[00:26:43] Ola: And I think that's also an interesting angle, actually, that I see a lot.
[00:26:45] It's that companies might, in some cases, actually say that we only put CSM or supports on an ARR per customer above 6k or something like that.
[00:26:56] They did, they'll just put an artificial line in the sand and say, Our gross margin doesn't support us giving those services to customers below that.
[00:27:05] And I think that fundamentally speaks into a wrong mindset about it, which is services that you're providing, that can increase usage, can increase understanding of the product and can help expand, should be applied on what is the potential of that customer and the revenue that they're bringing, not what are they paying me today.
[00:27:21] So, You need to make sure that you're also balancing the resources that you're allocating not to what customers are paying you, but what is the potential of them being able to pay you. So in many cases you're under servicing companies that are in your portfolio who are bang on ICP fit. They just started out with a very low base use case.
[00:27:42] But if you can work with them and make them successful with that base use case, it's a fairly easy upsell because they're like bang on your ICP. And therefore you're basically leaving money on the table because now you're giving them under service. They are not seeing the full benefits of the platform and they're not being serviced in a way that would hopefully increase the likelihood of you upselling to
[00:28:00] them.
[00:28:01] Mikkel: tomorrow.
[00:28:01] Yeah, is this the equivalent of almost accidentally stumbling on a land and expand
[00:28:05] motion?
[00:28:06] Ola: a hundred percent.
[00:28:07] Mikkel: So how would you tackle that if, if someone, if someone's listening now and they go like, hey, actually, that's true. We have all these accounts. They don't get assigned a CSM, but they are a fit. They do have the size and the right person and they're using it.
[00:28:21] How do you have that conversation internally? Because I think there's this, what is the rule? Is it a million managed per CSM? And then there's a point when it's, you know, sustainable to have someone and have finance in there going like, you want to do what?
[00:28:34] Ola: Yeah. No, I think people also get the service costs kind of wrong. They say every CSM is a million or two million or half a million or whatever it is.
[00:28:42] It's actually a function of your gross margin. If you want to have 80 percent gross margin, and let's just say your server cost and some of the other overhead per customer is 10%,
[00:28:52] and you, you know, want to then allocate another 10 percent to your CS and your let's just say your CS function, just to keep it simple.
[00:29:00] Well, if they're managing a million, you can in theory offer to pay them 100, 000 a year. Are you doing that? Probably not. So if you're paying your CSM 50, 000 a year, then in theory, you could be profitable or have the gross margin you want by each CSM carrying 500, 000. So it's actually just a function of your gross margin of how much you want to service on those accounts.
[00:29:19] But I was more speaking into the fact that a CSM will often help and breed the ground for something that can be upsold later. And when you're looking at that, you should actually be looking at how are the different segments in my customer portfolio performing. How are my different industries? How are my different company sizes?
[00:29:36] How are my different regional customers actually expanding and contracting? And then you want to find the cohorts of customers that have the highest upsell rate on base. And then irregardless of their ACV, you want to potentially think about applying a CSM and an AM on all the customers that fall within those segments that have the highest upsell rate.
[00:29:56] So basically they are the ones that have self. They have basically told you this product resonates a lot with me and I like to buy a lot more of it once I find and unlock that use case. So that's basically how you want to attack the composition of the base and then your cost of service is something completely different where you're just saying well what's the minimal thing I can throw at this to make this account happy and not churn out and that might be a CSM and that's a function of your gross margin
[00:30:21] Mikkel: And you know what? I think this is also gonna help if you're, whether you're actually in a competitive scenario or not on the newbiz side, being able to say, Hey, usually people won't give you a CSM when you're only paying this. We actually will because we see Your your type of business they're going to expand with us over time because we can deliver on the impact you need So we're more than happy to give you that, additional
[00:30:45] Ola: Yeah, and the value perception will be so much higher. Even though the ticket size doesn't warrant it, they will feel over supported because they're like, Oh, I'm only paying 6k a year, but I'm getting a full blown CSM helping me out every single week and every month.
[00:30:57] Yeah. So that also leads to a better relationship, but then can be upsold later. So that's how I think about it. It's the composition of the base. Where am I finding the biggest pockets of opportunity? Am I then getting at the end of the day to the 12, 15, whatever upsell rate? So I hit the NRR number. Am I deploying the right resources, the account managers and the CS, where I'm optimizing for which accounts are being upsold?
[00:31:18] That's the whole playbook. I mean, Because at the end of the day, then I split the whole customer base that they're managing down into kind of three different layers or tiers, if you will. I say, there's a set of red customers, they're unhappy, they're not an ICP. So there's a sentiment, there's usage, there's an ICP fit, and those are in the red zone.
[00:31:34] And that's where I want the CSM to focus their attention. They need to take care and make those happy and potentially re implement, find another stakeholder, work through that account set. You have the yellow customers that are potentially on one side or the other, not in the right fit, but using it a lot.
[00:31:49] potentially happy, so the sentiment is good. I want the CSM to try to bring those into green. And then I want the account manager to work the green accounts. He shouldn't be working the entire book. He should be working the green accounts, because you can only upsell to people who are happy using the base product.
[00:32:03] There's no point in account manager reaching out to people who are in the red, either on the sentiment side, on the usage side, or in the ICP fit side.
[00:32:11] So that's actually how you want to then distribute the, you know, plan of attack is to say CSM, you're obviously going to talk to our Greek customers, but I want you to focus on the yellow and the red.
[00:32:19] Account manager, I want you to absolutely focus on the green, potentially look at some of the yellow. And that's kind of how you
[00:32:26] Mikkel: that's
[00:32:27] Ola: the workload and kind of figure out where you're, where you're applying a resource in the optimal way.
[00:32:32] Mikkel: So, i mean it’s funny we ended up talking about this, because you’re also doing expansion here at our company. So did you get any kind of new ideas that you gonna, I was gonna say take home, but i mean you’re not going home now. I hope you at least also got some ideas from this.
[00:32:51] Ola: Yeah
[00:32:51] Yeah
[00:32:52] Mikkel: mean, it was your knowledge, so probably
[00:32:53] not.
[00:32:54] Ola: while. And for us, it's it's functionality, opening up new functionalities to our customers.
[00:32:58] That's going to be our best path to, to deliver more value and then ultimately get more, more ourselves.
[00:33:04] Mikkel: And if you're interested in what kind of value we deliver, go check us out at growblocks. com. And Ola, thanks so much for subbing in for our lazy, sick CEO.
[00:33:14] Ola: Thanks for having me.
[00:33:15] Bye.