The Five Act Sales Play for Renewals and Expansion

Perhaps the biggest change in moving from the license to the XaaS business model is the shift to a land-and-expand sales model that puts increasing emphasis on renewals, upselling, and cross-selling. When product was king, these were all bundled together in a major contract with massive capex and an ongoing maintenance commitment that was, more or less, a lock-in. Now that the customer is king, these have all become unbundled, and failure to execute on the retain and expand portion of the journey can drive the LTV (lifetime value) of a customer from positive to negative. That is what led to the rise of the Customer Success organization. Unfortunately, in many an enterprise, that message did not get routed to Sales—hence this series of blogs.

Specifically, the end-to-end go-to-market motion needs to be reorganized to put the right kinds of talent and processes in place across the entire customer life cycle. This post looks at how one would organize renewals and expansion. That varies depending on what type of account is being renewed. One of my more astute readers (shout out to Sergio) suggested that renewals were really an “Act 6” for each of the various plays. While my intellect could grant the point, my PhD in English Literature refused to, so please bear with me as we work through the various scenarios to follow.

Act 1: Assessing the Current State of the Customer

In the XaaS business model, sales is a relationship, not an event. In relationships, you need to continually reconnect, and that is the job of the Customer Success organization. In Act 1, it takes the lead, working in conjunction with the relevant sales team. Specifically, it leverages its tools and contacts to take the temperature of the customer’s engagement with the product line, creating a health score or profile to inform the dialog in Act 2.

In strategic global accounts, this can be quite complex indeed, as it involves checking in not only with the IT side of the house, to assess progress in integration and adoption, but also with the business side, to assess progress toward business value realization. This will likely require leveraging the relationships of the Business Value Realization team as well as the Customer Success Team. Perhaps the single most important person here is whoever is serving as the executive sponsor for the account. That person needs to connect with their opposite number to have a conversation about business value realization in the context of the customer’s ever-changing issues and needs. Such conversations can not only identify retention risk, they often can surface major upsell opportunities as well. 

In an enterprise vertical account, it is the same process, but it is somewhat easier to execute in that it can focus on the specific use case or cases that drove the original purchase. Here it is not the executive sponsor who is key, but rather the use-case sponsor. They have a vested interest not only in the success of this one account but in honing the power of their use-case solution for all accounts in their target vertical.

In a commercial horizontal account, where the focus is on productivity improvement within a target organization, it is even more straightforward, as adoption can often be a proxy for business value realization, so Customer Success can run the entire process.

As rust is to ironwork, as age is to athletic skills, as cholesterol is to arterial throughput, so churn is to annual recurring revenue (ARR). It is the quiet destroyer of your hard-earned gains. It is critical, therefore, that account teams accurately assess retention risks before they engage the customer in any renewal or upsell efforts. Timing here is important. If you wait until the last minute, the sincerity of your concern is, shall we say, subject to doubt. Thus, when retention risks are present, best practice is to surface and address them well in advance of the time to renew. That, in turn, requires installing a system that automatically calendars these efforts at predetermined times and holds account teams accountable to a specific set of deliverables. Without such a system, you are exposing the enterprise to unacceptable risk.

One final point. Act 1 is an intelligence gathering exercise, not a time to make sales pitches. At this point you want to learn the good, the bad, and the ugly. The job is to listen empathetically, ask probing questions to get to the specifics, and take great notes. The final deliverable is an account status memo to help tee up Act 2.

Act 2: Addressing Retention Risks and Upsell Opportunities

Retention risks must normally be addressed via a professional services engagement. This means, in the XaaS business model, vendors must create an internal professional services capability. And to make that organization affordable, it must do billable work to offset any services provided at no charge in order to retain a churning customer. And that, in turn, creates conflict with service providing partners who don’t want to see vendor “partners” competing with them for their business. (Nobody said this was going to be easy.) One way to soften the blow, both for customers and partners, is to fund the effort by substituting service fees for product fees. This puts a divot in your cash flow, but it keeps your revenue line intact, which is key both to your long-term health and your investors’ support. 

The complexity and extent of the services required should deescalate from strategic global, to enterprise vertical, to commercial horizontal accounts. Indeed, the more horizontal you go, the more likely the intervention can be templatized, then optimized, and eventually outsourced to channel partner. Designing labor out the mix is critical because the XaaS model cannot support repeated use of professional services for no charge, even when the size of the account is exceptional. And when you nonetheless must step up regardless, then you are better off discounting product than services, as that aligns the customer’s interests with your own, to bring the project to a close as quickly as possible.

So much for the downside. Ironically, sometimes what starts out as a downside challenge—say, a customer complaint—can end up as an upside bonanza. If you genuinely engage with the customer to address their user adoption and value realization objectives, they are more likely to treat you as a trusted advisor and to seek out additional ways to leverage the relationship. The key here is not to flog whatever product your company is anxious to sell, but rather to work backward from the customer’s use cases to find the best product/market fit for this account at this time. 

To help structure such conversations, vendors should bring a “stairway to heaven” model to the table. This is, in effect, a maturity model that aligns increasing consumption of the vendor’s product line with an increasingly valuable set of customer outcomes. By nature, the model is generic, so it is intended simply as a conversation starter. Customers value such models because they bring order to what can seem from their side as a chaotic jumble of products and promises. That, in turn, sets up the kind of conversations where customers and vendors can align around addressing problems worth solving.

Act 2 conversations are led by the sales team, accompanied by customer success and business value realization representatives engaged in the account. The former are getting up to speed for their role in Act 3. The latter are there to ensure a constructive continuity between the prior and future XaaS agreements. 

Act 3: Closing the Sale

Act 3 definitely involves a transition of responsibility to the sales team, but it is a mistake to call this a handoff as everyone needs to remain present at some level throughout each of the five acts. That said, closing the sale is what sales teams do for a living. (There is a model for delegating renewals to the Customer Success organization for small to medium business accounts that would otherwise get sporadic attention from a sales team focused on bigger prizes, but that we will address as part of a subsequent post.)

For more complex opportunities, particularly strategic global accounts, the renewal period is an occasion not only to solidify and upgrade the product deployment but also to revisit its governance as well. Program offices put in place at the beginning of projects tend to be decommissioned once the first set of objectives have been realized. In a strategic account, however, ongoing governance is key because the next generation of objectives can be as ambitious as the first, potentially even more so. This needs to be baked into the new agreement. Not doing so creates an open loop that can all too easily lead to a red account.

Act 4: Enabling Cross-Functional Processes

The simplest Expand sale is simply to add more users to the current deployment. This is the sort of thing that can be delegated to a Customer Success group, and ideally, automated such that system administrators at customer sites could do it by themselves. But when expansion involves new applications, and especially when those new applications need to integrate with the first wave’s deployment, then a dedicated program office needs to be put in place. 

Human beings do not like change. Installing a new system does not cause them to change. It causes them to resist. And in the absence of a countervailing force, that resistance leads to inadequate adoption, loss of momentum, and a retrenchment around the old ways. These are the forces that underlie churn and undermine returns with the XaaS model. 

Again, in strategic accounts, there is typically enough executive visibility and fungible talent to put the right governance in place, provided the vendor identifies this a best practice. In enterprise vertical accounts, it can be more challenging, as the owners of the new set of use cases may well be in a sibling organization that does not easily share power with your first cohort. In horizontal accounts, it can be even more challenging, as now you are trying to reengineer relationships across functions that have long-standing protocols. People in these organization do not take kindly to outside meddling, and that is precisely what you are proposing to do. 

For such goals to be realized, it is critical that the line-of-business sponsors of the next wave of change assign trusted lieutenants to the program office to monitor adoption by the end users and hold people accountable to making the change. The internal team deploying the system cannot do this themselves. It is not their prerogative to hold end users accountable. Only their management team can do so. Many a technology-enabled project has floundered on just these shoals, so it is critical for vendors to pilot their customers to a safe harbor.

Act 5: Realizing the Value

The longer you are in a relationship, the easier it is for both sides to take it for granted. This bodes as ill for customer relationships as it does for spousal ones. The XaaS business model is built upon continuous innovation driven by consistent attention to an ever-changing set of circumstances. The old “fire and forget” model of the product-as-king era has been supplanted by the customer-as-king era’s “must-be-present-to-win” model. There are fewer heroics but a lot more attention to detail.

This implies increasing investment in the Customer Success and the Business Value Realization organizations, not just with staffing to be vigilant but with systems to keep abreast of how each relationship stands at any given point in time. In one sense, realizing value isn’t all that hard. Both customers and vendors clearly want it to happen. But it is complicated, as any number of things can get in the way. 

Consistent monitoring is the first line of defense against these challenges. The Customer Health Score is a good proxy for this. Like Net Promoter Score, it is an imperfect metric, but it will detect issues that deserve immediate attention. Those issues reflect what venture investors call “trapped value.” If your company can release that trapped value, it can participate in the economic returns. To do so, of course, requires innovation, whether it be in enhancing the current product line or investing in a new one. Either way, by staying close to the customer during Act 5, one can better direct the next play.

Summing Up

The XaaS business model is putting us all on notice. We have always optimized our go-to-market efforts around Land—that’s what led to the three-act play. Now we must revisit our priorities to support a Land-and-Expand-and-Extend motion, one that not only retains and expands the current footprint but develops new ones as well. How we will organize, recruit, and compensate teams in this new context is a work in progress, but there is no going back. The economics of the model revolve around acquiring and maintaining customer relationships. Churn exposes inauthentic behavior; recurring revenue rewards true customer service. Making sure we align ourselves to the new dynamics is the current priority.

That’s what I think. What do you think?

Follow Geoff on LinkedIn | Geoffrey Moore Mailing List

_________________________________________________________________________

Geoffrey Moore | Zone to Win | Geoffrey Moore Twitter | Geoffrey Moore YouTube