1: Gainsight, founded in 2009, provides software that helps businesses increase sales by maintaining and enhancing customer relationships. Gainsight entered the Software as a Service (SaaS) market to help firms retain customers.
SaaS is a software distribution model in which a thirdparty, such as Gainsight, hosts applications and provides services directly to a firm’s customers. Gainsight has developed a SaaS business model to provide a platform and infrastructure for firms to use in customer management.
The firm has more than 600 employees and has been ranked as one of the fastest-growing firms in the United States.
Gainsight was founded to develop creative solutions to assist firms in retaining customers and growing their customer bases. The need for strategies to increase customer retention and reduce customer churn or loss was seen as a business opportunity in an emerging market. Churn rate is the rate at which customers fail to renew subscription to a service and, if not managed well, this is a problem for SaaS companies. For example, churn rate varies by industry, but a 5–7 percent churn rate is typically considered acceptable.
However, according to a recent study SaaS companies—
with firms such as Dell, Oracle, GE, Hitachi, Microsoft, and others—have churn rates as high as 30 percent. Thus, the concept of customer success was first developed to address the “churn problem” through selling firm investment in customers to help develop success with products and recurring value.
To accomplish this task, the role of customer success manager (CSM) was created and Gainsight developed software to help those in this new job. The role of a CSM is to proactively engage customers, handle customer issues, and resolve problems to promote the “health” of each customer.
Customer health is a metric driven by data, which Gainsight neatly compiles, that indicates a customer’s potential for churn. CSMs essentially spend their days looking for ways to improve each customer’s health score to ensure downstream renewal of product subscriptions. The upside benefit is that healthy customers not only renew, they expand and buy more. Gainsight went to market with a product to serve the needs of a job that barely existed at the time. Much like consumer disruptors, like Uber and Airbnb, Gainsight had to communicate its solution to an existing, yet unaware, market.
The Need for Market Disruption Gainsight didn’t just invent a market, rather, one emerged because the way in which companies retain customers is fundamentally changing. The advent of cloud-based SaaS products has transformed the assignment of upfront risk from the buyer to the seller. In the past, most sales resulted in the transfer of a product or service to a buying firm with a large upfront “buy-in” (e.g., product or software purchase, infrastructure build out, and/or increased staffing) and longterm licensing agreements. In these situations, customers were “stuck” because of high switching costs and longterm structural commitments to purchased products. The days of customers being “stuck,” essentially guaranteeing long-term commitment, are quickly disappearing. Today, customers have increasing power because they assume less risk—thus, a market existed for Gainsight’s products.
The onus of risk has moved to the selling firm from the buying firm—empowering buyers with more flexible options. This change has caused major problems for companies. For instance, Salesforce.com realized that its cloud-based CRM system was easy to sell, but that retaining customers was very difficult for a variety of reasons (e.g., complexity of the product, and low switching costs).
Salesforce.com was gaining many new client subscriptions but most of them were not renewed. Most SaaS firms are faced with a crisis: they can find new clients, but there is no guarantee that those clients will see value and keep renewing their subscriptions.

Questions for Discussion

1. Describe how Gainsight’s strong customer success management results in reduced churn.
2. Why do you think CSM roles are growing so rapidly?
3. Explain the pros and cons of a “freemium” service model.