Welcome to “10 Ways to Win in Climate Software,” an Energize series defining the playbook for sustainability SaaS entrepreneurs. In case you missed it, catch up on the series opener and the first three Ways to Win in our countdown:
In traditional enterprise software, a common debate lies in finding the right balance of operational investment in product R&D versus sales and marketing. Yet in climate software, Energize has repeatedly found that a different – and often underappreciated – operational function serves as the dynamo of enduring growth: customer success. In fact, we believe climate software companies should invest in customer success early and often, even more so than their traditional software counterparts. Why?
Climate software markets are frequently logo constrained, meaning that attracting and retaining the most valuable customers is more important for climate SaaS companies than for traditional IT counterparts. While climate software companies may lack the rocket ship ARR (annual recurring revenue) growth rates of general SaaS, their customers tend to be very sticky and to expand naturally. We’ve found that climate software customers can generate net dollar retention rates (NDR) of more than 130 percent, compared to the NDR range of 110 to 130 percent typical for enterprise software. This software "stickiness" results in lower growth rate decays, more durable ARR growth and top quartile cash efficiency. By working with customers to ensure successful software implementation, optimize product usage, and own the renewal and upsell processes, customer success teams can help climate SaaS companies lean into their stickiness potential. And when customer success teams are well-resourced and high-performing, they can dramatically increase customer satisfaction and upsell while reducing churn rates – ultimately securing more efficient growth. After all, increasing customer retention rates by five percent can increase profits by 25 to 95 percent.
Energize’s portfolio company Sitetracker, a distributed asset deployment software platform, has significantly grown – and retained – their customer base by prioritizing customer success from day one. Originally focused on traditional critical infrastructure industries like telecom, Sitetracker began broadening the application of their platform to serve climate industries like EV charging, solar and microgrids. Doing so required adapting their software to unique field workflows, industry nomenclature, data elements and legacy system integrations. Sitetracker ensured successful software implementation in each of these industries by investing early in a dedicated customer success team – and has garnered ultra-sticky customers and top quartile net dollar retention as a result.
“Sitetracker’s software is the digital deployment backbone for fast-growing climate technologies. We grow as our climate tech customers grow – and a robust customer success function helps our customers adopt and implement Sitetracker more effectively,” said Sitetracker’s CEO Giuseppe Incitti. “On average, our energy and climate customers double their ARR by month 18.”
The Energize team has distilled our recommendations for climate SaaS entrepreneurs developing their customer success strategies and budgets into four tenets, or “Golden Rules”:
1. Invest in customer success early.
Many customers are adopting climate software solutions for the first time, making customer education paramount in emergent climate categories. Buyers expect high-touch customer service and will need help with implementation, integration with other IT and data systems, and even internal change management, training and communication. For example, in emerging fields like carbon accounting software, expert customer success managers are needed to guide customers through decarbonization concepts and accounting principles that are likely new terrain – like Scope 1, 2 and 3 emissions tracking and marginal abatement cost curves – as well as to provide operational software integration support and sustainability advising for understanding emissions baselines and near-term decarbonization pathways.
We frequently see climate software companies with inadequate customer success investment or engagement face higher rates of customer churn. As enterprise SaaS leader HubSpot rightly identifies, the best software companies make “a true investment in customer success” where services are oriented around the customer rather than the software company’s own convenience. Listen to your customers and don’t avoid customer success in pursuit of perfect SaaS metrics and margins!
2. Launch an internal value consulting group.
Securing a spot in customers’ operational budgets often requires defining a rigorous, quantitative business case. Finding data to quantify the value delivered by emerging categories like climate software can be difficult for customers, but your company likely has access to it – and with just a little bit of investment, you can help client champions justify their spend on you.
Our portfolio company Aurora Solar, for example, formed an internal value consulting group to help their solar installer customers understand the ROI of their spend with Aurora. By spotlighting the increased conversion rates and reduced customer acquisition costs that their software enables, Aurora drove home the value of their solar sales and design automation software.
3. Monetize customer success as professional services.
Implementation and professional services are often viewed as undesirable in traditional SaaS. But in climate software, we see these services as enablers of customer stickiness and account expansion. Professional services can also serve as a mechanism to have customers pay for the development of new product features that become scalable software over time.
We encourage our sustainability SaaS leaders to generate revenue from implementation and recurring support services, which oftentimes can be housed within the customer success organization (and leverages the same talent). Energize portfolio companies Sitetracker and Urbint both effectively employ professional services to monetize premium levels of customer engagement in the energy industry, an industry still early in its adoption of cloud software.
Generally, we prefer to see professional services revenue not exceed 20 percent of overall revenue and to target average gross margins of 30 to 50 percent. Climate SaaS companies should make sure there is a glidepath to at or above 70 percent gross margins over time by balancing professional services revenue profitability and professional services revenue as a percentage of overall revenue.
4. Trade gross margin for customer lifetime value.
Achieving customer traction may necessitate lower near-term gross margins that fall short of the 80 percent target sought after by traditional software companies. The reasons are two-fold: firstly, generally accepted accounting principles (GAAP) require a portion of customer success cost to be included within cost of goods sold (COGS); additionally, climate software companies that are effectively monetizing implementation and professional services will often price that revenue at a gross margin range of zero to 50 percent, consistent with how most consulting firms price their professional services.
At Energize, we believe customer success investment can be well worth the gross margin tradeoff given the stickiness, account expansion and high customer lifetime value (CLTV) it yields – provided the margin reduction doesn’t result in a CLTV that is lower than the cost to acquire and serve a customer. Our most sophisticated climate software companies track the account-level CLTV and compare it to the cost to acquire, implement and serve specific customers. Time and time again, we see great climate software businesses with gross margins of 40 to 60 percent, but with a long-term pathway to more than 70 percent.
In short, the Energize team believes investing in customer success can unlock significant ARR growth, customer expansion and enterprise value. Establishing effective customer success services also helps companies build a community around their theme, further accelerating brand awareness and creating a platform for product-led growth driven by customer demand. Though often overlooked or under-valued, we’re unabashed in our support of best-in-class customer success…which leads us to our final and most comprehensive golden rule for climate entrepreneurs: don’t skimp on customer success!
Next up? Ways to Win in Climate Software #6: "Own the Problem"
This article represents the views of the author and is provided for informational purposes only. It is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Readers should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Information is subject to change based on market or other conditions.