Companies that support open source software face stiff competition, with constant pressure on customer retention. As a result, Customer Success is a critical investment for open source players. In this post, I shed light on why Customer Success is important to open source companies and offer five key actions companies should take when putting this capability in place.
Open Source Companies Face Unique Challenges
While Customer Success is important for all software companies, there are unique circumstances that open source companies face that amplify the importance of Customer Success.
- Compete Simultaneously Against Both Free and Proprietary Offerings
Open source companies not only compete with the freely available software on which their products are built, but they also often compete with well capitalized companies that offer proprietary solutions in a similar space. In situations where customers are already considering the use of free open source software, open source companies must be able to convince customers that paid support / functionality is necessary and can offer a positive ROI.
When competing against proprietary software vendors, open source companies often don’t have the same budgetary resources available, particularly from a sales & marketing standpoint. Even if the product is functionally on par or better than a proprietary solution, open source companies need to make two ‘sells’:
- Convince customers that an open source solution is enterprise ready to meet their needs.
- Convince them that they should pay for the support and tools that the open source company offers on a recurring basis.
Managing this delicate balance of competing against free software and highly priced propriety solutions at the same time presents challenges on how pricing is set and, more importantly, how pricing is justified at each renewal.
- Operate a Business Model That Is Heavily Reliant on Subscription Health
While open source software itself is free, business models of companies that support open source software often involve charging annual subscriptions for maintenance, support, warranties, and proprietary extensions.
In a subscription economy, customers expect fast time to value for their investments and have the ability to revisit their decision at each renewal. To maintain high retention, open source companies must continue to engage and demonstrate value to their customers. This is different from the traditional software license sale. Open source companies need to think and act more like SaaS companies in the way they engage with customers and manage success.
- Manage a Disproportionately Long Tail
Users of open source tend to be either smaller companies or small divisions within larger companies. As a result, open source companies have significant dollars in the long tail that have to be actively managed. Often times, sales can’t actively sell to or engage / re-engage with these customers. This means that open source companies may be missing opportunities to capture the high potential value that these customers carry by driving adoption in other groups, business units, or divisions with the existing base.
Why the Customer Success Discipline Is Essential for Open Source Providers
Like most software companies, open source providers have established processes for pre-sales, sales, implementation services, training, and support. However, what tends to be missing across all of these roles and functions is the on-going focus on the customer—to ensure customers are using the product and are receiving value from their purchases. Having a focused Customer Success team can instill the discipline of on-going customer engagement to ensure that the value proposition is reinforced against free providers, freemium services, or other non-open source competitors.
A well-functioning Customer Success group should deliver three outcomes for an open source company:
- Increase customer AAR via increased adoption and use of the product and service across other divisions and business units, and higher penetration of new strategic products
- Migrate customers from basic to more premium subscription or service tiers
- Lower addressable churn
To put the impact of Customer Success in perspective, consider a company with $100M in annual recurring revenues. Every 1 percentage-point increase in net retention increase (either through ARR expansion or churn reduction) enhances market value by 2% over three years 1.
There are five critical actions that open source companies should take when establishing a Customer Success capability:
- Make Customer Success an Organizational Priority
- Charter a Customer Success Team Responsible for On-going Customer Engagement
- Don’t Look for a Customer Success Manager (CSM) ‘Unicorn’
- Gain a Deep Understanding of Your Customer (and User) Health
- Exploit the Long Tail
This starts from the CEO on down. Unless the executive team is aligned on the importance of the long-term health of the customer base, it is very easy to prioritize short-term revenue or cost priorities. Churn, net retention and customer health scores need to become part of the executive team vernacular.
While all functions like Sales, Services, and Support should feel accountable for delivering Customer Success, there is a need for an on-going engagement role with the customer. This team will be responsible for monitoring customer usage and health, and driving usage and adoption. Ultimately, this team should be accountable for the company’s net renewals rate.
Customers and users of open source software tend to be more technically sophisticated. They adopt new innovations, collaborate with like-minded and skilled practitioners in their community, and contribute to new developments. There is a tendency to look for CSMs that have the deep technical expertise to match their user base. That isn’t necessary. CSMs need to be just savvy enough to understand their users’ needs and connect them with the right expertise within the company. Most importantly, CSMs need to engage with users in targeted ways during key points in their lifecycle (e.g., during onboarding, at recurring quarterly reviews, during key innovation releases) to gauge usage, assess risk, and prompt adoption.
Unlike typical SaaS offerings, open source solutions are often delivered on premise. This creates additional complexity in gathering true product usage insight. The good news is that there are a number of other indicators that providers can leverage to get a 360 degree view of customer health. These include sales calls, support interactions, participation in training, webinars, community forums, NPS, social chatter, etc.
Given the importance of the long tail for open source companies, it is important to design the Customer Success model with automation and ‘digital touch’ in mind. The digital touch model functions similarly to a campaign management program and is focused on automated communication around on-boarding, customer health, upgrades, and renewals. By leveraging technology, CSMs can achieve success at scale. Capturing value in the long tail using automation positions the company well to upsell and accelerate adoption as those accounts grow.
Open source software companies that embrace and invest in Customer Success will be able to create the most value for their customers and their companies, positioning them well to win in this highly competitive market.
1 Assumes $100M ARR, new bookings growth of 10%, and Retention Rate baseline is 85% (increased incrementally by 1% for purposes of market value impact calculation)