This article was originally published in The Wall Street Journal.
Economic output declined sharply in the first half of 2022, and the U.S. seems to be in a period of stagflation, characterized by pressures both from inflation and a contraction of growth. This is especially evident in the Software-as-a-Service industry, where layoffs, hiring freezes and a slowdown in sales are creating never-before-seen headwinds. It’s forcing the sector to transform like never before. Times—and market conditions—have changed.
“The mindset in SaaS has shifted,” says Nick Mehta, Chief Executive Officer at Gainsight, a leading customer success and product experience platform. He’s also the co-author of two books: Customer Success and The Customer Success Economy. “A change in market multiples shows that the ‘efficient growth’ mindset has displaced the ‘growth at all costs’ mindset.”
Mehta blames the SaaS market collapse on the easy access to venture investment and cheap public capital. As companies focused on growth at any cost and raising even more funding, they veered away from the true North Stars of every business—customer outcomes and business efficiency. “What real value are you delivering for customers, and what potential value are you delivering for investors? Those aspects were totally overlooked over the last few years,” Mehta says.
As companies face the pressures of the current market—increasing challenges in closing new deals and existing customers rethinking renewals—it’s imperative that they determine how they’re going to grow over the long term—not just over the next quarter or financial year, but consistently and efficiently, year after year, regardless of the market. “Having witnessed so many downturns, one thing’s for sure: Companies built for durable growth will not only be resilient in the current market but also thrive in the long term,” Mehta says.
We recently sat down with Mehta to discuss how companies can create durable growth and set themselves up for that long-term success.
Q: In this period of economic turbulence, what models of growth do you think will emerge in SaaS?
Nick Mehta: Durable growth will come from three interrelated strategies—customer-, product- and community-led growth strategies. First, grow the business through existing customers via renewal and expansion. This is essentially customer success, and it can often be one of the easiest methods to grow since the cost of expanding a customer relationship is much cheaper than closing a new one.
Second, make your product the best sales engine possible. This is called product-led growth and it can be a highly efficient, repeatable method of growing business by offering a self-service free trial and driving adoption through customer use of the product.
Third, grow through community and customer advocacy—make sure your customers love and, in turn, evangelize your product. Customer, product and community—it’s a growth flywheel that builds on itself.
Q: What are best practices for employing those three strategies effectively?
Mehta: It may sound trite, but we see it all the time: Companies don’t put customer outcomes first. When someone buys a hammer, they don’t just want a hammer; they want to hang a picture. It’s a great analogy for business. When somebody buys from you, they’re looking to solve a problem.
The first focus should be on creating discipline around customer success to make sure customers are getting value. It’s about aligning everyone from product development to marketing to sales teams around the outcomes customers seek, not the technology or services you’re selling.
The product team, for example, needs data to understand how people are using the product, learn which features are driving the most value or causing friction, and use the insights to determine the product roadmap. When the product becomes sticky and a requirement for users, it can become a durable sales engine itself.
Lastly, word-of-mouth remains the most impactful marketing for any business. It’s imperative that companies build communities both in person and online where customers can evangelize the business outcomes they’re getting from your product. Your customers are often your best salespeople.
Q: How is customer success a critical component of durable growth?
Mehta: It’s always been important, but even more so today. The number one priority for any business right now is keeping customers. It’s a shift in mindset from closing as many new deals as possible to ensuring existing customers get value, grow and remain with the company over time.
Are your customers staying with you or leaving? Are they spending more money with you? Can you reduce churn and expand the customer base you have to grow over time? Understanding the patterns that cause customer stickiness is a huge factor for durable growth.
Because churn is a slippery slope, most investors now perform due diligence on customer retention as much as any other part of the business. Companies leaning into durable growth are more efficient and resilient, and thus more attractive to investors. These businesses are going to be able to raise capital because they can demonstrate real value through metrics like strong Net Revenue Retention.
Q: What is the role of data in supporting this new durable growth model?
Mehta: Operating without data when so much of it is available is irresponsible at this point. Are your customers happy? Are they spending more money with you? Can you reduce churn and expand your customer base quicker? Leveraging those customer behavior patterns is huge for durable growth.
Q: How is Gainsight helping users achieve durable growth?
Mehta: Working with more than 1,000 companies, including nearly 200 publicly traded ones, we’ve observed two core areas of opportunity. Number one is aligning different departments around a customer’s goals. Your teams aren’t talking to each other. Not because they don’t want to, but because there hasn’t been a great way to align them around efficient acquisition, adoption, retention and expansion. Our software consolidates all your product adoption and customer experience data and then personalizes it for sales, marketing, finance and customer success.
Second, we help companies scale around durable growth using automation and AI and support customers of all sizes using high- and low-touch strategies.
The most powerful aspect of durable growth is a deeper understanding of your customers. With Gainsight, you know what products you need to build because you understand and even anticipate customer needs better than your competitors. The most durable companies build the things customers are going to want in the future. That’s the long-term value proposition, because a deeper understanding of customers is fundamentally how companies innovate and win.
Q: What do you expect the next 12 to 24 months to look like in the world of SaaS?
Mehta: These sudden changes in valuations and market corrections are hard for people to process, but I think it’ll settle in the next two quarters. In some ways, all this change will create healthy businesses in the long term. Many of the companies we all admire today were forged during the downturns of the past. The companies that are going to dominate the next decade will be the ones that have efficient businesses today. They’ll have a durable growth engine with money to invest in their products and teams to innovate and consolidate market share. The winners will be resilient, react early, and benefit in the long term.