Where should Customer Success sit on the P&L?
Should Customer Success go in COGS or Sales?
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A common question for Finance teams at companies with a Customer Success function: should you categorize Customer Success in Cost of Goods Sold (COGS) or within OPEX as a Sales and Marketing expense (S&M)?
There’s an age old tension for CFOs to shuffle the costs into Sales, keeping it out of COGS and protecting the company’s gross margin. A higher gross margin indicates scalability and leverage in your operating model. And a lower gross margin drags down your customer lifetime value calculation.
If we’re being honest, costs in Sales aren’t scrutinized to the same extent as they are in COGS.
However, Sales and Marketing is not always the most academically honest place to put the group. We can delineate based on activities and goals. But first, let’s define the difference between Success and Support.
Customer Success vs Customer Support
Customer Success and Support are often used synonymously, while their activities are very different.
Customer Success professionals are typically responsible for ensuring users get the full value out of the product so they retain as customers, and are well positioned for expansion and upsell opportunities. Who exactly performs these expansion and upsell opportunities we’ll get into momentarily.
Customer Support, on the other hand, is typically responsible for break / fix type requests. There are varying levels of Customer Support - Tier 1 being “I forgot my password,” and Tier 3 being “The recent update messed up my cloud configuration.”
Customer Support, unequivocally, belongs in COGS.
Customer Success, on the other hand, is more of a grey area.
Here are the criteria I use to assess where it should sit:
COGS or S&M?
Can a customer start using the product without your assistance?
If your product requires professional services to get up and running, whether or not the customer pays for it (cough, subsidizes the cost to break even), that’s COGS
Even if it’s a “lighter” touch than full blown PS, if your primary job is activation and onboarding, that is a COGS role
Do you provide training?
If your primary job is teaching the customer how to use the product, then you belong in COGS. This is an extension of onboarding
Do you fill a product gap?
At early stage companies it’s common to throw people at a problem and invent technical workarounds
This falls under the cost to serve your customer, and should go in COGS
Do you have a quota?
This is the million dollar question!
This can take the form of either expansion or renewal dollars
This doesn’t mean a retention goal (e.g., 90% of your book of business sticks around) - that’s different, and more a measure of if you succeeded in activating the customer and getting them to realize value
But if you carry a bag, this crosses the line into Account Management, where the goal is to expand wallet share by either selling more of the same product (more licenses, more usage), or sell additional products (upsell, cross sell).
In the perpetual license world, this is called the Renewals team, where maintenance contracts are sold after initial purchase, which is a sales function
There are no free lunches, and if you want to take pressure off your gross margin and put Customer Success into the more financially forgiving Sales bucket, then the resources have to do just that - sell.
Run the Numbers
I had the pleasure of interviewing Jessica Lanier, CFO of Restaurant 365. Not only was she a founder before becoming a CFO, which helps her better understand the CFO / CEO dynamic, every company she’s worked for has been acquired. What a hit rate!
We covered:
Getting acquired by Qualtrics, and their intensive hiring process
Why sometimes not making a decision is the right decision
Why employees should think about where they work like an investment decision
Quote I’ve Been Pondering
“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”
-Mark Twain
Good down to earth every day topic. Question and answer format was helpful.
You made the distinction that a renewal dollars target justifies a CSM being categorized as Sales. But if they’re given a retention rate target, they should be COGS. Aren’t those two sides of the same coin?
If I translate the retention rate into dollars retained, why does that automatically make them a Sales resource?
Would love some additional color here!