Nick Mehta: [0:06] Companies, as they move to subscription-based business models, they now have this massive new thing they've got to figure out.

[0:12] How do I make sure my customers have been onboarded properly? That they're adopting the products and services. They're getting value. They're going to stay with me. They're going to grow and spend more money over time.

[0:22] We thought that would create a whole new industry and it turns out it has. It's created a new job, customer success manager, which according to LinkedIn now is the sixth most promising job in the world. It's created a whole new strategy for companies which is not about sales and marketing but making sure your customers are successful.

Dan Saks: [0:39] That's Nick Mehta, CEO of Gainsight, a pioneer in the emerging customer success sector. Nick is a tech industry veteran and a respected leader. He's been named a top SaaS CEO three years in a row by "The Software Report." He's been a finalist for Ernst & Young's Prestigious Entrepreneur of the Year Award.

[1:03] In December of 2020, he led Gainsight through a private company acquisition by Vista Equity Partners, a deal that put the company firmly in unicorn territory with a valuation of $1.1 billion. Nick is also hugely passionate about company culture. While at Gainsight he's helped to build an award-winning culture that is frequently recognized in numerous lists as a great place to work.

[1:32] In this episode, Nick talks about the skyrocketing growth of customer success as a category, the practical aspects of how to turn customers into advocates, and why having a human first mindset at work is important for customers and employees alike.

[1:51] This is Daniel Saks, co CEO of AppDirect, and it's time to decode customer success. Welcome to "Decoding Digital," a podcast for innovators looking to thrive in the digital economy. I'm your host, Daniel Saks, and I'll sit down with other founders, CEOs, and changemakers to decode the trends that are transforming the way we work. Let's decode.

[2:23] Nick, thanks for joining me today on Decoding Digital.

Nick: [2:26] I'm so excited to be here. Thanks for having me.

Dan: [2:28] Not only have you created an incredible tool to really transform and help customer success executives thrive, you've also been part of a movement, which is really the subscription economy and the customer success movement to really help optimize customer experience, customer lifetime value, and ultimately delight end customers with a better digital experience.

[2:50] Let's take that back to the beginning. Tell us about your first experiences with subscription services and how customer success emerged.

Nick: [2:58] Yeah, absolutely. My experience probably, everyone has their first time that you understand that this is going to be different for me, I'd worked at Symantec and in some of their software that they would sell, that was sold to the enterprise on-premise. Meaning, the customer pay all their money upfront.

[3:13] They would be basically stuck with the software, whether they're using it or not they paid for it, and that was great. That model worked great. Obviously, a lot of businesses did very well.

[3:23] I went to run my first business that it was a subscription business. It was company called LiveOffice. I ran it and then eventually sold the company.

[3:31] In running that company, I came in with the whole mindset and some of you might have gone through this transition yourselves where you went this old mindset, where you build a product and you sell it. Then, you move on to the next customer, you sell then. You move on to next customer, more transactional type model.

[3:45] To this model, where I realized, "Oh, my gosh. Our customers are with us." Every month, we have to return their business and they can either stay with us or they can go, whether we're delivering value, whether they're happy, whether they're getting the outcomes they're looking for. That's what customer success is all about.

[3:58] I learned this on the job in my last company, and I saw how it changes a business because you still have to build great products and you still have to market and sell them. That's still very hard, but you've got this whole third thing you got to do and make your customers successful. We thought this creates a whole new opportunity, that's why we launched Gainsight in 2013, seven and half years ago.

[4:17] The idea was basically we thought that companies, as they move to subscription-based business models, they now have this massive new thing they've got to figure out, how do I make sure my customers have been onboarding properly, that they're adopting the products and services, they're getting value they're going to stay with me, they're going to grow and spend more money over time.

[4:34] We thought that would create a whole new industry and it turns out it has. It's created a new job, customer success manager, which according to LinkedIn now is the sixth most promising job in the world, and it's creating a whole new strategy for companies which is not just about sales and marketing but making sure your customer's successful.

Dan: [4:52] Obviously, subscription business models have really transformed the way businesses adopt services, and I go back to the founding of AppDirect. For example, my great grandparents had a furniture store in Niagara Falls, Canada. We just shut it down, and we really attributed that to the lack of access to technology.

[5:07] Back in the day I remember, maybe when I was 10 years old or 13 years old or something, we adopted a service called profit systems. It was that on-premise service that you talked about, but we had to mortgage the store. It cost hundreds of thousand dollars to buy the software, and there was no idea of customer success.

[5:23] It worked well for a couple years but then the software became obsolete, and that whole CAPEX investment went to nothing, and it hurt us.

[5:31] Tell me, what do you measure from the onset when it comes to customer success and subscription business models, and how important is it to delight the customer from the beginning?

Nick: [5:42] Absolutely. What happens is many of you might be in the process of either moving to a subscription business model or launching a subscription business or maybe you acquired a subscription business.

[5:51] Usually what happens is you have this new thing and you keep running it the way you've always run your businesses. You've got your sales and your marketing, and you build your products. You have bookings, and profit, and so on.

[6:04] Those things don't go away, but there's this kind of tsunami that happens in every business where all of a sudden you've got all these customers that now are either renewing or not.

[6:13] Some businesses you start and you have longer-term contracts, so it's almost like you push that problem out and all of a sudden it hits you where, two or three years in, you've got all of these customers that are renewing and that are thinking about whether they're getting value or not.

[6:26] For a lot of companies, they don't truly become a subscription business in terms of the operating model till they get those first waves of renewals where they've got to think about things differently. What they end up doing is they say there's these six key performance indicators that matter in thinking about customer success and this new subscription business model.

[6:48] There's three that are what we call the lagging indicators that are the end goals, and then three leading indicators. These are on every management dashboard of any subscription business that's strong.

[6:58] The first one is what people call gross retention rate, which is saying, "I've got $1,000 worth of spend across all my customers per year." Let's say it's 10 customers spending $100 a year.

[7:09] OK, great. Out of those same 10 customers a year later, without adding on any new services, so just the stuff they've been spending on, are they spending $1,000 still? Are they spending $900? Are they spending $1,100? Have they contracted or grown out of that existing spend? That's called gross retention rate. That's the number one.

[7:27] Number two is what people call net retention rate, which is saying, "We should count the things that they're expanding as well because they might have bought new services. They may have added new users, and that can be therefore more than 100 percent."

[7:37] The third one is, "I don't want to just keep my customers and grow them. I want them to be great advocates so other people will want to buy my services and buy my subscriptions." That's something most people would be familiar with something called net promoter score.

[7:49] Those are the three end goals most people optimize for, and then there's three leading indicators that you can think of as, "How do I get there?" The first one is a measure of the adoption of my service. Are people using it? Are they using the features and functions? Are they using the advanced capabilities?

[8:05] The second one is, "What's the health of that customer overall?" A lot of people look at a lot of different signals like the adoption, the satisfaction, their onboarding experience, their technical support experience, their billing. Add all that together and that almost a predictor of their likelihood to churn or to stay or to grow.

[8:25] Then finally, "What's my efficiency in serving these customers?" Because what you're ending up doing in customer success is you're hiring people, and you don't want to just throw people at the problem. You want to automate. "How much do I have to spend to retain a dollar of revenue?" Just like you might look at the cost to acquire a customer, what's the cost to retain a customer?

[8:43] You've got these three lagging indicators, gross retention rate, net retention rate, net promoter score, and then three leading indicators, adoption, health score, and then by cost of retention.

Dan: [8:55] How do you help the customer get on board, and then how do you help them get more value over time? That shift requires a different org shift in the way that you think about structure incentives for your team.

[9:05] Is it the same sales rep that goes on it? How do you talk about that evolution when a company first has, primarily, a sales force focusing on bringing in new clients, but then making that shift to an ongoing relationship?

Nick: [9:16] Totally, yeah. You're right. It does shift, and that's one basic concept I'd give you, and I'll click in your specific question, is that in the future, your product, whatever you make in your organization, your subscription product is the combination of whatever the physical, or software, or technology, or information product is, and the customer experience together.

[9:36] Your product is that, all together. Your product, I'm sure, is evolving every year. You're adding new features, you're evolving it, you're moving into the cloud. Therefore, your customer success and customer experience should evolve with you.

[9:48] It's changing. It's a feature, not a bug. It should keep evolving. One year, you might be focused on getting customers to deploy. The next year, get them to engage, and so on. That means the organizational model will evolve too. To your point, one of the things that evolves a lot is, "Who owns what?"

[10:05] In a free customer success model, you often have a salesperson or a channel partner who owns the relationship and everything. That's the one person.

[10:14] Typically, the downside is they often were very focused on the transaction. Beyond that, the customer didn't always get the attention they wanted, and there might have been a reactive support organization that would respond to issues, and that was it. It was really up to the customer to get value.

[10:27] What people typically have done is they've said, "OK, starting out, I'm going to create this Customer Success team enroll, and their basic job is, make sure the customer is getting value, make sure they're adopting, make sure they're staying with me." There is a few different models.

[10:42] One is the salesperson owns all the commercial relationships, and the CS person is driving the adoption and value. That's one type of model. A different model is the salesperson who closes the deal, hands off to the CSM who handles everything after the sale. That's a second type of model, and that works particularly well in SMB, transactional type businesses.

[11:03] A third type of model is the salesperson who closes the deal, hands off to a different salesperson who manages that commercial relationship going forward. Some people call them the account manager or they use the analogy of a farming rep, and then they work with a CSM going forward.

[11:17] You do have these different models where you, depending on the situation, if you tend to sell an enterprise big-ticket type product with a lot of upselling going forward, often that same sales rep who's selling is the same one managing going forward, and the CSM is focused on adoption and value.

[11:32] If you have a product, that's a little bit more transactional and you want the rep going off to the next new customer, then sometimes you'll have a sales rep close the deal and then hand it off to a CSM to manage going forward.

Dan: [11:43] You mentioned briefly that the traditional transactional model would be, you'd have a sales rep, or you'd have someone in the channel that'd be selling and they'd be responsible all in. Obviously, channel sales are super important today more than ever, but how does customer success get enabled to the channel?

Nick: [11:58] That's a great question, and it's probably one of the hottest topics right now in the customer success industry. Initially, a lot of the early customer success programs were focused on direct business.

[12:10] Obviously, companies like Salesforce, the majority of their revenue is direct. One of the born in the cloud companies are newer to the channel and your company's helping them get there, but the early days of customer success were very much direct. Now you have companies like Cisco, and VMware, and other big companies that are very channel oriented, adopting customer success.

[12:30] They all started with their direct customers, but as you know very well, 90 percent of a lot of these big companies, business goes through the channel, at least on a volume, in number's basis. What's happening is these big companies are saying, "We need our channel partners. They become extensions of our customer's success."

[12:47] There is two different things that these companies are doing. One is, they're enabling their channel to actually deliver customer success to the customer. Cisco is a good example.

[12:57] They created an advanced certification that if you want to get those advanced rebates and things like that, you basically, as a channel partner of Cisco, have to actually create a CSM program, a customer success manager program. Train people on it, designate on it, and actually one of the tiers of the program, you even have to buy software like Gainsight to manage that customer success programs.

[13:17] We now have a number of Cisco resellers that actually use Gainsight as well. That's one model is, you're enabling your channel to actually deliver customer success, like sharing those best practices, technology, content, and almost monitoring them, making sure they're doing it and doing it in partnership.

[13:33] The second thing that we've seen people do is they're applying this customer success concept to the way they manage the channel.

[13:39] In other words, I'm Cisco. My partners are my customers as well. They're doing things, like we talked about of, what's with the health score of my partner, and what is the risk in my partnering, and what's the retention of my partner, etc. Those are the two things we're seeing.

Dan: [13:53] Got it. It seems at Gainsight, the technology obviously would be relevant in both cases. Is there a difference, though? Do you have a partner health score versus a customer health score, or can you apply it in a similar way?

Nick: [14:05] Yeah, you definitely do. One of our other customers that I mentioned is VMware and they have a division called Cloud Health Technologies, which helps companies measure cloud consumption, and it's sold through a lot of cloud oriented MSPs.

[14:18] They are basically using Gainsight to manage the health of those partners, and so there's a partner health score. Then they have the customer health score for the partner's customers. It's a little confusing. You got two different tiers here.

[14:31] What they do is the partner managers at this division of VMware use Gainsight to manage the partner health. Is this partner trained and enabled? Are their customers successful? Are they using the products, etc? Then they expose the health scores for all the partner's customers to their partner through Gainsight.

[14:46] Then that partner now logs in and says, "OK, these customers are healthy. These are the ones at risk. We need to go run some programs together." So yeah, it's very much two layers to customer success with partners.

Dan: [14:56] Got it. You spoke about the subscription model and how that applies to technology companies, but what we're seeing is that more and more industries are building subscription business models, whether it's telecoms who have adopted digital services recurring, or whether it's traditional manufacturing companies, I think everything could be delivered as a subscription in the future.

[15:15] Tell us about those nontech companies that are trying to go through this transformation and institute customer success.

Nick: [15:22] Absolutely. I'll share a couple of stories with you. We just closed a very large telecommunications company, a B2B, Telco, that basically sells to lots of small businesses and enterprises. Telco services Internet connectivity and things like that.

[15:35] They basically have this huge multi-thousand person account management team, and sales team, that were run in that traditional model. You sell to a customer, you sell them more stuff, and by the way, great people and everything else. What was happening is their services were becoming more digital. They were reselling cloud services.

[15:52] Their customers were thinking of them more as a software company. They wanted to think of themselves as a software company. One of the things that software companies are doing, they hired McKinsey. They looked at what does it look like to become more of a digital business.

[16:04] One of the workstreams that came out was turning this giant sales and account management team, breaking it up. You've gotten now a customer success team. They rebadged thousands of people as now CSMs and launched this thing, then worked with Gainsight on that technology to operationalize it. That's an example on Telco.

[16:21] Another example in business services, ADP, big payroll's company which, as most people know, payroll's becoming more digital. There's more HR technology. ADP has a lot of great HR technology.

[16:31] They wanted to convert that account management and client services team into more proactive customer success team because they wanted the customers to be using some of those digital products and services that they had been innovating in. They started working with Gainsight on that.

[16:44] A third example, Rockwell Automation is a manufacturing company in Wisconsin, and they build factory floor equipment. Traditional model will sell the equipment, and they'll sell maintenance contract with that equipment, and that maintenance contract is recurring by nature. You didn't think of it as a subscription. You just thought of it as a warranty.

[17:02] As the equipment started getting fitted with more sensors and IoT, Internet of Things technology, that allowed Rockwell to see what customers were doing and provided more proactive services that looked more like subscriptions. They converted their service/sales team that would basically sell your warranty services into a customer success team to make sure customers were getting value.

[17:24] Then the final example I'll share is in the world of medical device world. There's a company called ResMed, and they make residential in home medical equipment. It's a big company. They basically make things like what's called a CPAP device, which is if you have sleep apnea and you're sleeping, you're having a hard time, it helps you breathe through the night. It's a very important stuff.

[17:42] In fact, they actually use their energy and time to help make ventilators for the pandemic, so very much in the heart of keeping us all healthy. In this business, they sell this equipment through a channel. This channel is called home medical equipment. The people that will come to your home and set up that CPAP device.

[17:57] You go to the doctor, the doctor says you have sleep apnea. They recommend you to a home medical equipment company. They come to deliver it to your house. They build the insurance company. Very complicated.

[18:05] That business, they started retrofitting with cloud services. They have a service now that a patient can have that lets them track their sleep. You can imagine you have this device in your house and I want to make sure I'm sleeping well.

[18:18] Now, they want to make sure that patient is using the service well. They want to make sure the partner is getting the patient the service that they need and setting it up well. It's all a subscription, so they need to make sure that that's all delivered and getting value and going to stay with you, and they use Gainsight for that.

[18:33] Whether it's medical equipment, whether it's business services, whether it's telecommunication, manufacturing, as I'm free to require everyone's moving subscription, as you do a great job of enabling. As they do that, they can't afford to just sell to the customer and leave. They've got to make sure they're going to be successful.

Dan: [18:49] How is the industry do we breed more customer success managers? If you're an executive that's looking to hire these people, where do you find them?

Nick: [18:56] Within customer success, there's different flavors and you probably have seen this in your own business system. There's different types of CSM, and I, in my own head, have this sort of model where I say, "OK."

[19:06] Some CSMs are the domain experts. They work in the shoes of that customer domain. For example, Workday, the HR software company, some of their CSMs came out of HR. They worked in HR, so they can go talk to the customer and commiserate with them.

[19:21] Some CSMs are technical experts. They really know the product inside and out. For example, a lot of security companies, they want the CSMs to know the security domain really well.

[19:29] Some CSMs are process and consulting experts. They know how to drive change in a company, particularly if you have big customers, you got to get them to change. Some CSMs are all about organization and execution, attention to detail because [inaudible] have a lot of customers.

[19:43] What that means is we, our CSMs, come from might be different. In the first example domain experts, they might come from your customers. We bring them in and actually then training them on your business, but they know the domain.

[19:55] In that second example, where it's technical, they might come from your technical support team, or they might come from your sales engineering team or your engineering team. That third example where they're really consultative. Some of the higher end CSMs might come from McKinsey, or Bain, or BCG, or Accenture, or Deloitte, or PwC, some of these big consulting firms.

[20:15] Then, finally in that fourth example of the hyper organized process execution person, they might be people that have grown up from jobs like inside sales or other areas, and they're just really good at executing.

[20:25] What we believe needs to happen to enable this is for all of us to be pretty open minded, to create more feeder jobs that feel into this, and then really focus on enablement, just like in sales. Sales people don't just magically appear. They start as maybe sales development reps or business development reps, and they grow in the inside sales and then field sales. They need to be this career path thing.

[20:46] Just as one small plug, we created this program because we feel like in technology, in particular, technology hasn't been great at creating diversity and letting lots of people in. Unfortunately, it's been very, very limited even though technology creates so much wealth. It's wealth accruing to a very small percentage of the population.

[21:03] We created a program to bring underrepresented minorities into customer success, which is a big challenge in the US. It's not enough underrepresented minorities in tech, where we bring them from other walks of life. We train them on this field. Then, we bring them into early jobs inside companies and so we actually have that program, it's called CSYou, C S Y O U.

[21:20] Go to our website. You can see, we have dozens and dozens of companies participate. We've raised millions of dollars now for this program, but that's just an example of how we can expand the funnel and basically bring more people into these amazing jobs and help our businesses at the same time.

Dan: [21:38] It's truly incredible. Call out for everyone to go to the website. We'll put it in the show notes, but really amazing. I want to take a second to switch gears because in hindsight you've created an incredible culture and you're known for that culture, and that's helped drive what you do.

[21:51] It's not only about your own team, but clearly, you've impacted your customers and their organizations, and it really helped to create this customer success movement. What advice would you give to people and organizations on culture and how to really thrive?

Nick: [22:06] I think everyone's culture got to be authentic to yourself. It's hard to give any generic advice because I think the most important thing is don't create a culture that somebody else has gone through that just sounds good, or you read a blog post or you write a book, and those things sounded good. That's the worst kind of culture is the one that was just copied and not truly you.

[22:21] I can say that for us, what motivates us and I think it's rubbed off on some others is this idea that there's this mental model, many people have in business, which is it's all about business that's separate from us as human beings.

[22:35] Business is about being business like. It's not about being personal and it's not about your feelings. It's about being ruthless, and closing the deal and transactions, and all that. There's a lot of movies and books that have reinforced that notion. We think that we got a little lost at least from our vantage point, where business is created for human beings, it doesn't exist for its own sake.

[22:55] Businesses exists to serve humans. You can't forget the human and business. We talked with this idea of human first business, which is thinking about all of your stakeholders whether it's your employees, whether it's employees families, whether it's the customers, the community around you and even your investors, all as human beings first and putting that mindset.

[23:16] As some examples, it shows up in these tougher situations. When the employee tells you they're leaving, is your first reaction that they're betraying you and that they're dead to you, or is your first reaction, "Congratulations, that's awesome," then, "I'm so excited for your new job," and, "Thank you for all you've done for us."

[23:32] What's your first reaction there? By the way, I haven't always had the perfect first reaction, but I've learned to try to do the latter.

[23:37] Another example would be you have a competitor, and you're talking about them internally. Are you talking about them as they're evil and they're bad, or just human beings trying to do the same thing you are?

[23:46] You have a customer who is demanding in a call. Are you talking about how that customer is so bad and so mean, or are you saying, "Gosh, they must be having a tough time right now. I wonder if something's going on in their personal life. How can we be more empathetic to them?"

[24:00] It's about how you react to the stakeholders around you. Are you humanizing them or are you dehumanizing them? For us, that's been powerful, and then the second thing we've learned is that we are very open about this culture, this human first mindset, with our customers, with our community. We talk about it all the time.

[24:17] I think that one thing that's powerful is when your culture isn't just your own culture. It's the culture you bring to your customers, and it's all one big thing, those walls between what the company is, who the customers are, what the community is, all are coming down in most businesses.

[24:32] You can see this in our consumer lives. Nowadays, when we buy from a brand, we're affiliating with the culture of that brand. Nike has a specific brand, and there's things that they value.

[24:43] Some people like it, some people don't, and the people that buy from them probably tend to affiliate with that brand. Any kind of brand that you work with, you end up adopting a bit of their values and culture. That's true even if you're selling to other businesses.

Dan: [24:59] Amazing, and then to conclude, I read that you started an e commerce company out of your dorm room selling golf clubs. Did you always want to be an entrepreneur? How did that come up?

Nick: [25:09] My quick story is super privileged. My dad was in tech and he was in some big companies in the '70s, Digital Equipment. If folks knew, that was a big old company and then he was a VP there. He went to be CEOs of some small companies.

[25:22] Nothing ever became huge, but it provided us a real nice middle class lifestyle and also gave me the chance to grow up around technology and computers, and a chance to do your own thing.

[25:32] In college, what happened was I was probably going to go do the "normal" post college work for somewhere. I was going to go work in investment banking, but I met a classmate in a computer science class.

[25:43] He was a golfer and he had this idea, this is the mid '90s, "Hey, there's this new Internet thing. Let's see if we can sell golf clubs over the Web." He started it and then brought me on as his co founder.

[25:51] It was a crazy, crazy thing where we then graduated, and then we raised venture capital and the company took off. We almost went public but we missed the IPO window. The stock market crashed. We eventually sold it. Didn't make any money but had some great memories.

[26:05] That was my first experience which ruined me for life because I was...The first experience not working for anyone else is working for myself and therefore I was probably unmanageable going forward.

[26:16] I did work for about five years at a big company at Symantec like I alluded to and I had a great time there, but I, at some point, figured out I was running a big team and I was like, "I want to run my own thing." Even though I love the company and all that, but I want to run my own thing. That's been in my mind the entire time, it's just enjoying leading a team.

Dan: [26:35] That's amazing. Nick, thank you so much for joining us. We covered a lot of ground and this was amazing.

Nick: [26:41] This is great. You asked some great questions. Thanks to all of you for listening as well.

[26:44] [music]

Nick: [26:47] On the next episode of decoding digital.

Ross Mason: [26:50] Data is better than fuel. Fuel just makes something go faster. Data creates this new asset class of things that you can go and create brand new things that are even bigger than the thing where the data came from in the first place.

Dan: [27:06] Founder of MuleSoft, an expert in APIs and entrepreneurship, Ross Mason.

[27:12] [music]

Dan: [27:16] Thanks for listening to Decoding Digital. Make sure you never miss an episode by subscribing to the show on your favorite podcast player. To learn more, visit decodingdigital.com. Until next time.