The Perils of Allowing Customer Success Managers to Manage Renewals: Why Sales Should Take the Lead

Introduction

In today’s climate customer retention has become a mission-critical aspect of running a successful business. As companies strive to maintain their competitive edge, the management of renewals takes centre stage. However, the practice of entrusting Customer Success Managers (CSMs) with the responsibility of managing renewals has grown in popularity. In this comprehensive exploration of the topic, we share our experience and observations into the vital importance of renewals in managing churn, discuss why companies often choose to assign CSMs to renewals, and dissect the true motivations behind this choice. Furthermore, we will investigate the risks and challenges associated with CSM-led renewals, emphasizing why sales teams should be at the forefront of all commercial interactions.

I. The Crucial Role of Renewals in Churn Management

To underscore the significance of renewals, let’s consider a hypothetical scenario. Imagine a company with an Annual Recurring Revenue (ARR) of $5 million, facing a customer churn rate of 2% per month. In this scenario, the business would need to acquire approximately 133 new deals each month from new customers, assuming an Average Monthly Recurring Revenue Rate (MRR) of $750 per deal, just to compensate for the lost revenue due to churn. This illustration vividly demonstrates the pivotal role that renewals play in ensuring the financial health of a cloud/tech business. Customer retention is not just essential; it’s a strategic imperative.

II. Why Companies Push CSMs to Manage Renewals

1. 1. The Myth of Customer-Centric Relationships

One prevailing belief is that CSMs are best suited for renewal management because they purportedly possess a deep and unique relationship with the customers. However, in practice, this assumption often proves to be far from reality. More often than not, it is the sales team that successfully closes and wins renewal business. Why? Because renewals are generally easier to secure than acquiring entirely new logos. (The hard work has already been done in terms of sourcing the business, initial engagements, discovery sessions, contracts etc.)

2. 2. The Easier Path to Renewal

Companies tend to favour CSM-led renewals because they believe that involving CSMs increases the likelihood of customer renewal. In reality, this often stems from the perception that it’s easier for a salesperson to win a renewal compared to acquiring new business. The challenges associated with netting new logos include facing frequent rejections, enduring prolonged sales cycles, and dealing with skepticism, especially if the company lacks the well-established trust and reputation of industry giants like Microsoft, Salesforce, Oracle, SAP, or IBM. Many organizations have been burned in the past, leading them to adopt a “land and expand” approach instead of a “big bang” deployment strategy across all business units and potential users.

3. 3. The Hidden Motive: Lowering Customer Acquisition Cost (CAC)

The core, albeit often unspoken, reason behind pushing CSMs to manage renewals is the desire to lower Customer Acquisition Cost (CAC). CAC calculates the cost of acquiring a new customer, providing insights into the efficiency of sales and marketing efforts. Companies perceive it as more “cost-effective” to compensate CSMs without commission, or with a significantly lower commission rate, than to pay full sales commissions. However, this approach often leads to a host of issues and overlooks the critical role that sales plays in the renewal process.

III. The Challenges with CSM-Led Renewals

1. 1. Lack of Commercial Acumen

One of the fundamental challenges associated with CSM-led renewals is the lack of commercial acumen. CSMs are typically more inclined to prioritize customer satisfaction over revenue generation. Their approach tends to be more “happy to please the customer” rather than strategically optimizing the renewal for the company’s benefit.

2. 2. Single-Threaded Engagement

CSMs will typically fall into the trap of becoming “single-threaded,” engaging with a single stakeholder within the customer’s organization. This narrow focus can be detrimental, as it fails to tap into the potential of cross-functional collaboration across multiple teams.

3. 3. Insufficient Transformational Impact

CSMs are rarely positioned to drive transformative change within organizations. Consequently, they may find themselves relegated to lower rungs on the corporate ladder, forced to engage quarterly with “admins” who lack meaningful business insights and are often the last to hear about significant business changes.

4. 4. The “Happy Ear Syndrome”

Another common issue with CSM-led renewals is what we term “happy ear syndrome.” CSMs may often provide overly optimistic assessments of customer satisfaction and loyalty, only for the shocking reality of churn or license contraction to hit unexpectedly.

IV. The Flaws in Incentivizing Sales Teams for Expansion

“But we incentivize our sales team on expansion” is a mantra heard in many organizations. However, this approach is fundamentally flawed for several reasons. For instance, if a salesperson is assigned a portfolio of “install-based” accounts, and these accounts either churn or experience reduced usage, there may be zero opportunities for expansion. In such cases, the salesperson could potentially earn no commission, leading to frustration or even their departure. Replacing a departing sales rep involves significant costs, not to mention the time required for the new hire to become fully productive.

V. The Perils of Overemphasizing Net New Logos

On the flip side, placing too much emphasis on incentivizing sales teams to acquire net new logos can be equally problematic. This approach is often driven by an organization’s failure to effectively “TAM” (Fully understand the Total Addressable Market – the real opportunity in the White space accounts – We discuss the issues of “TAM” here, here and here) net new accounts, resulting in salespeople being forced to try and win business in accounts that are a poor fit for an organisation’s products or services, protracted sales cycles and challenges in securing new business. This can also be problematic especially in an economic climate that may be heading towards recession, obstructing salespeople from earning commissions can lead to unforeseen consequences.

VI. Why Sales Should Manage All Commercial Interactions

In a world where revenue is the lifeblood of any business, it is imperative to have seasoned professionals at the helm of commercial interactions. Sales teams possess a unique blend of skills, knowledge, and incentives that make them ideally suited for this role.

1. 1. Expertise in Negotiation

Sales professionals are experts in negotiation. They possess the skills, experience, and training necessary to navigate complex contractual terms and secure favorable renewal terms. Their focus on revenue generation ensures that every renewal negotiation is optimized for the company’s financial benefit.

2. 2. A Revenue-Centric Approach

Sales teams are inherently revenue-driven. Their primary objective is to generate revenue for the organization. With this laser-like focus on revenue, they are best positioned to maximize the financial outcomes of renewal negotiations.

3. 3. Consistency in Customer Interactions

Consistency is key in building trust and maintaining strong customer relationships. Sales teams can establish standardized processes and negotiation approaches, ensuring that customers receive a predictable and dependable experience during each renewal.

 

4. 4. Expertise in Cross-Selling and Upselling

Sales professionals excel at identifying cross-selling and upselling opportunities. They leverage their in-depth knowledge of the company’s product or service portfolio to identify and capitalize on revenue-enhancing opportunities during renewal discussions.

Conclusion

When it comes to managing and winning renewals, one fact stands out clearly: sales should manage ALL renewal business. While the allure of entrusting CSMs with renewals may seem enticing, the associated risks and challenges far outweigh any perceived benefits. Sales teams are uniquely equipped to navigate the complexities of renewal negotiations, prioritize revenue generation, ensure consistency in customer interactions, and identify growth opportunities. In the relentless pursuit of business success, it is imperative to place sales professionals at the forefront of all commercial interactions, recognizing that their expertise is the linchpin to achieving optimal renewal outcomes and sustaining long-term growth.