Hot Takes: Customer Success as COGS or Operating Expenses?

By December 19, 2019Blog, From the Experts

As customer success has evolved from a novelty concept to a widely-employed discipline, new questions have arisen about how to shape the department. Different opinions on compensation models, organizational structure, and more are discussed within the CS community and on our webinars. 

Another evolving question is how customer success is allocated within a company’s finances. To explore this topic, we spoke with three customer success leaders. Oliver Bell, Megan Bowen, and Kellie Snyder all shared their experiences on the following question:

Are customer success managers accounted for as Cost of Goods Sold or as Operating Expenses?

First, let’s level-set and quickly define these two terms:

Cost of Goods Sold:

Cost of Goods Sold, or COGS, are the costs incurred in creating the product, in the software world COGS include expenses directly attributed to the delivery of the product. Examples include Hosting Costs (think AWS) and Customer Support.

Operating Expense:

A simple definition of Operating Costs, or OpEx, is the ongoing costs to run a business. A simple example is Accounting and Finance, or Sales and Marketing are considered Operating Costs. 

This may not sound that exciting, but this is an important topic because the reality is that CS has grown in popularity and importance because it is mission-critical to the overall health and wellness of any business, in particular, the software market. The challenge is that many in senior leadership still misunderstand Customer Success’s core mission. As an example, many executives and board members still confuse customer success with customer support or even customer service or account management. In this simple example, the implications to the business can be significant which we can see in important valuation metrics like CAC, LTV, and GM can be impacted depending upon the allocation of the expense.

Alright, if you’re still with us, here’s what we uncovered. 

In the past, customer success usually lived under Sales

Before talking about where customer success lives on financial sheets, the experts shared the ways they’ve seen companies organized. Understanding how customer success teams are structured within the business and their roles and responsibilities is a direct correlation to how they are funded and accounted for financially. Like many elements of customer success, the people that customer success managers report to have evolved. 

Kellie Snyder, former Chief Customer Officer at Deputy, shared that “it’s been interesting to watch it because it’s changed over time.”

“The further back you go, you would find [customer success] in the sales or revenue organization, whatever that was referred to. And it was your more traditional account manager that had an expansion number on their head. It was a lot less about retention.”

Kellie has noticed a change in customer success understanding and positioning, though. “I think the shift has really been around not just expanding [accounts], which you still want your success managers to be responsible for, but also understanding the customer base and being proactive about their needs and challenges. Then creating value through that engagement that just creates a much more connected experience. And that makes things like renewals and other expansion opportunities a lot easier to do.“

Oliver Bell, Chief Financial Officer at Springbot, has seen similar changes. “Typically, I’ve seen [customer success] live in the revenue organization and have a VP of customer success, and that person would report into a CRO or potentially COO. I will say it’s become a little bit sexier to have that role either report directly to the CEO or chief customer officer, in the same way that the HR function would have a chief people officer that would report to the CEO.

Now, the allocation of CS on the financial sheet varies by company size

If the role of customer success is changing positions within a company’s structure and culture, what effect does that have on financial reporting? The panelists agreed that there’s no one right answer, but methods tend to vary between earlier and later-stage companies. 

Startups may count customer success as a COGS

Kellie shared that she’s “seen all the post-sales functions divided all different ways in the financials over time. And it’s always been, I think, the smaller the organization, the bigger a debate point it is.”

There are a few reasons why this debate may pop up more in smaller companies. “One, it is a big cost, but two, it’s just very hard to separate the lines in the right places. I think a lot of times, you need to get more granular, but it’s always been a big challenge in small organizations to get to that point so that you actually can start managing, optimizing, and aligning those pieces as they grow. Kellie added that in small companies, customer success is normally seen as either a COGS or operating expense, with no partial divisions.  

Megan Bowen, VP of Customer Success at Platterz, has also seen customer success reported as a cost of goods sold. “I often have seen customer success on the COGS side, and that could be for a number of reasons. For example, sometimes people don’t have a full understanding, and they associate that team with more of a support function. And so I do think it comes back to the leadership of the organization and having a customer-centric mindset.”

In addition, smaller companies and startups may have fewer resources for customer support and have their success teams taking a more active role in that function than in renewals and expansions. This would mean CS fit more squarely into COGS. 

While larger companies see CS as an operating expense

As companies grow and can look at customer success allocation more granularly, you may start to see customer success being allocated as an operating expense. Oliver shared that “traditionally what I’ve seen is customer support live in COGS. Typically, depending on the complexity, customer support is the front line to ensure that any and all functions of your product will deploy properly. And therefore, it’s typically considered in the COGS. And most all else in the customer success organization, the ones I’ve seen, would live below the line in the OPEX world. What I’ve also seen is as companies grow and CS grows with it, and the product evolves, and the business evolves, there’s typically more of a standard of an allocation.”

The allocation that Oliver mentions is dividing customer support between COGS and operating expenses. “Sometimes, it is hard to distinguish which is a critical or consultative function, and where does it stop and where does it end? And it’s a lot easier obviously from a financial standpoint, to allocate a certain percentage, be it 25%, 50% of the cost of the entire organization into COGS and then the rest into OPEX. But that number can move over time, certainly as you mature.” 

Companies may also change which metrics they focus on and value most as they grow and evolve. Kellie shared that “certainly as organizations continue on their journey, you often get to a point where that crazy growth isn’t quite as crazy as it might have been. And then the board starts to ask a little bit more question, as far as where are you focusing and how we’re going to continue to drive the business? And I think what I’ve seen is just a lack of not looking into what’s going on with your renewal base.” 

Customer success can drive sustainable revenue

In addition to discussing how customer success expenses are allocated, the panel talked about the impact of customer success on business growth. Megan started by sharing the scope of roles and responsibilities she’s witnessed. 

“I’ve been in companies where the CSM actually owned both the retention activities and identifying upsell, expansion or cross-sell opportunities and actually executing against them. So I’ve seen [different] models work. I don’t think there’s a one size fits all answer, but there is a lot of power if the CSM can own that experience end to end because they can often be positioned as a trusted advisor to the customer.”

Megan also added that “the post-sale team carries the bulk of the revenue for the company with the current customer base. And you could argue that you’ll see more growth in a year from retention and expansion of the current customer base, versus new customer acquisition. And that you really need to be making the appropriate investments to set that team up for success.” 

How customer success is positioned within your company also affects how investors view the organization. 

“I will say though, new investors [are looking through an] efficiency-driven growth lens. And by that I mean, the first thing they’ll ask is about renewal rates, the next thing they’ll ask is about your CAC to LTV, more even than your sort of new AR growth,” Oliver said. 

Metrics such as CAC to LTV, NPS, and recurring revenue are also of interest to board members. How should customer success leaders be approaching the conversation of organization and financial allocation?

Megan thinks that “ in order to really have a credible conversation with the board, the CEO needs to be fully aligned with the customer success leader, that it is a priority. And I think that is key for any of these types of conversations to really be initiated and be had in a meaningful way. So it’s really about creating a customer-centric organization from the top down, and making sure the CEO and the other executive leaders are aligned with those values of whoever is running that function.”

At the end of the day, the question of whether customer success is reported as a cost of goods sold or an operating expense comes down to company culture and priorities. Smaller companies or startups focused on acquisition may lump customer success as a COGS for easy reporting. On the other end of the spectrum, larger companies or organizations focused on sustainable growth are more likely to see CSMs as consultants that are an operating expense. 

Having company-wide alignment on the importance of customer success gives the function the tools and voice to proactively retain and grow existing customers. 

If you want to hear more about how Oliver, Megan, and Kellie organize customer success, access Hot Takes in Customer Success: COGS or Operating Expense? here.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.