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In the latest episode of Founded & Funded, Madrona Managing Director Tim Porter hosts Pradeep Rathinam, a seasoned software executive with over three decades of leadership experience. Paddy was the Founder and CEO of Madrona portfolio company AnswerIQ, which Madrona invested in back in 2017. It was one of the early machine learning applied to SaaS companies that Madrona invested in. Paddy sold AnswerIQ in 2020 to Freshworks, where he started out as chief customer officer, helped take the company public, became chief revenue officer, and really drove a series of incredible accomplishments for Freshworks.
Today, Tim and Paddy dive into that world of SaaS go-to-market. Paddy shares his experiences on how to not just grow a company, as every company needs to do, but how to grow efficiently and how that includes reducing churn, expanding accounts, and landing new logos. This is something that all go-to-market leaders and startup founders have a lot of questions about how to unlock, so it is a must-listen for founders.
This transcript was automatically generated and edited for clarity.
Tim: So before we jump into the nitty gritty of efficient growth, tell us a little bit about the AnswerIQ story. You founded the company, built it up, and sold it in a relatively short period of time. Give our listeners some insights into what was AnswerIQ and why you decided to sell it.
Paddy: So perhaps the best thing I can do is start by introducing myself. So like you said, I’m old. I have three decades of experience.
Tim: I didn’t mean to highlight that. But I’m going on 30 years here as well. And it’s like, wow, there’s a lot of things that we’ve learned, isn’t there?
Paddy: The last decade is probably the most interesting for listeners here, I founded AnswerIQ, which was funded by Madrona. Thank you. It’s a classic B2B SaaS startup focused on using historical records to make predictions in customer service. We were using very early versions of GPT 2.5. And as I reached a pivotal point, which was — is this business going to grow to $100M or more? I reached the conclusion that being an AI layer sitting on top of customer service systems like Zendesk and Salesforce wasn’t necessarily going to get us to that $100M mark. So, in early 2020, prior to COVID, we sold our business to Freshworks.
Tim: Let me interject there quickly as we get into the Freshworks part of the story. I should mention that the AnswerIQ investment was led by my partner, Soma, and you had known Soma from Microsoft through the journey as well.
Paddy: That’s right.
Tim: In making that decision, was there strong alignment with the board? How did you work through that? Sometimes there can be a disagreement. Classically, the investor’s like, “We’re going to go for it,” or it could be the reverse. Was there a good alignment in that thought process that you alluded to?
Paddy: There was a very good alignment. Soma was an incredible board member and a dear friend. I think one of the things I learned in that experience was the simplicity of the questions that he asked, which was, “Hey, where do you see this business in five years? Do you see this business growing to a hundred million or a billion dollars? Do you see the path?” Once those became clear, it was alignment with the board to get everyone together to say, “Hey, let’s go out and find a transaction.” Freshworks was going for an IPO journey. I wanted to experience an IPO and I decided to jump on that bandwagon.
Tim: Freshworks, tell us that story.
Paddy: I joined Freshworks in 2020 as a chief customer officer. Those days, churn was the biggest challenge that the company was facing, and it was one of the key deterrents to its IPO and the net dollar retention. That was the first challenge I took on, built out the customer teams, and towards the end of three years, we reduced churn by over 40%. In post-IPO in 2022, our growth had slowed down significantly. We invested significantly in our field sales force, adding our investments by over 50%, and we saw a decline in new business in the field. I took on the challenge of the CRO to see how I could turn that tide. That was also an incredible year of sales transformation that we experienced.
In the end, it comes down to, like you said, why do founders stay or leave? For me, it was about what a mentor once told me — that being professionally rich its about the wealth of experiences you accumulate. It was about taking advantage of the opportunity to garner those experiences and learn from those.
Tim: When companies that I work with exit, I always encourage the founders stay on as long as you are learning a ton, and if you can have a big impact, this is a great opportunity. Yes, we’re in the startup business and it’s exciting like, let’s go do it again, let’s run it back. The notion of not just growing but growing efficiently has really been driven home. For those of us who’ve been working multiple decades, yes, businesses must be profitable and grow. Both are equally important.
There was a period leading up to really 2022 where it was sort of grow at all costs and you led through, it’s like, “No, we also need to be efficient.” When you’re a public company, and you’re reporting every quarter, it’s really glaring, and people are pushing on these things. But it’s incredibly important as a startup founder too. I mean the obvious, how long is my cash going to last? And so driving runway. I think efficiency through the full life cycle is critical in the market and everyone realizes that now, but it can be hard, especially as you’re also trying to significantly scale. Talk about your framework for thinking about efficient growth. What goes into that? What does it mean to you?
Paddy: Freshworks is a company that has over $600 million in revenue, creating SaaS products for IT service management, customer service, and CRM. With over 60,000 customers, we had three sales motions, which is PLG inbound, field outbound, and then partner-led. We had selling to three distinct buyers. We’re selling to a customer service leader, we’re selling to an IT leader as well as sales and marketing leaders. It’s a complex business in a lot of ways, right? When we started looking at this business, it’s not easy to break this down and say, “Hey, how do you really solve for growth?” Right after IPO, a year after that, like I said, we reached a crisis point where we created a 50% increase in our sales investment, and our new business declined in the field. All of these investments were essentially targeted.
Tim: That’s not efficient.
Paddy: Basically, all of them were targeted toward the field investments. We wanted to grow our ARR and ACV. I took on the challenge of the CRO, and one of the things I had to do was have a framework of how do you solve this problem. The first thing we did was look at deep analysis. I truly believe that growth for most companies lies within. If you’ve grown to a certain point that it’s 10, 50, or hundred million, there’s a reason why customers have bought you. There’s a reason that you need to go down and really analyze and be relentless in the analysis, whether it is by product, by geo, by SKU, by sales motion, really looking at both the economics, whether it’s CAC or LTV and those types of simple metrics or going into the mechanics of understanding and seeing what is going on with respect to win rates? What’s going on with respect to MQL-to-close and go-to-market efficiencies and engines?
Really looking holistically at the problem and saying, “How do we really break this problem down to see what’s going on in the business?” When growth stalls in a company, you typically will see the common view being the sales is broken. The go-to-market engine is not working or demand generation is not working. If you ask the sales folks, they’ll say, “Hey, the dog is not hunting.” The product isn’t really fit to what the market needs. It’s behind its competitive features when you compare AI with other competitors.
Tim: Wait, sales blaming product? Yes, that happens. Product blaming sales? Yes, to get in the blame game.
Paddy: It’s pretty common, but when growth stalls, it’s usually a structural problem that goes beyond go-to-market. Yes, there are go-to-market challenges but beyond that, when you look at product and mix what’s going on with product-market fit and pricing and packaging and competitive dynamics. It is a lot more complex than just looking at one dimension and saying, “Hey, we got to go do a go-to-market transformation and we’ll go find growth back again.”
Tim: You inherited a complex go-to-market, three different segments, three different buyers, and three different product lines; that’s a detailed matrix. What was kind of the range of deal sizes? If that’s something you can share, so the audience can orient because there’s sort of the big enterprise versus smaller deal size overlay on this too. Then, the first thing I’m taking away is to really know the data and follow the data. What did you do from there as you dug in?
Paddy: When we dug in, we realized two or three common patterns that were happening. The reason why our field new business had declined year-on-year was that the field was doing a lot of sub-$10K ACV deal. Imagine sitting here in the United States or in Europe or in Australia in some of these markets and building a sales force that is going out and selling sub-$10K deals. That was not cost-efficient and was primarily because of segmentation was broken. Our segmentation was such that more than 250 employees were belonged to what would be considered field. Looking at that data, one of the first things was to really break the mold and say, “Hey, we got to stop selling to a smaller segment of customers from the field,” number one. Number two, we got to sell a minimum ACV threshold, and we defined that as $30,000, and that became the core ICP.
More importantly, it was all products. Imagine a sales force running all products and selling them to three different buyers. It’s super complex. One of the things we did is simplify the motion saying, “Hey, we’re going to focus on one product that is going to be the winning cars.” We focused on IT. That was a product that was growing at 50% year-on-year. We made the sales force learn that one product and took all our other products and made them own to overlay and specialist sales force. What this is brought focus. Focus on IT, and on $30K plus ACV. We had competitors like ServiceNow, Ivanti, Cherwell, and we were winning in that marketplace. All we had to do was try and get the sales force to get focused on that.
Tim: The most important part of strategies is often deciding what not to do. That focus, I can see that being critical, simplifying things for your team. I often hear the conventional wisdom on what is the minimum ACV to be able to profitably sell direct with an outbound motion. Even at $30K, you have to be quite efficient, right? Sometimes I’ve heard $50K, it depends a bit, but 30K, while $10K seems very, very hard, even to achieve $30K probably took some real discipline and streamlining within the org.
Paddy: Yes, it is because when you are coming from $10K, $50K, $100K deals felt out of reach for a lot of our sales folks. Part of this was also transforming our sales force, the sales leadership, and the first-level leaders. First level leaders in sales organizations are the most critical path of really driving this. Once we got ourselves to a point of defining the ACV right, and we started transforming the sales force and because no GTM transformation happens without people. There along, we started getting more experienced salespeople, and we started selling a lot of $50K, a lot of $100K deals. $30K was the threshold, and, essentially, we created another aspect of it, which was our business was hybrid. A lot of B2B SaaS companies still operate with hybrid sellers, hunting and farming.
The reality is hunting is significantly harder than farming. A lot of farmers really got themselves into sellers, so we separated hunting from farming, and that brought a lot more incision and focus on the craft of hunting. We changed the incentive structures and so those were some of the things that we did just from a focus standpoint in basically saying, “Hey, focus on this ACV, narrow down.” The next thing we did was to add a lot more fuel to the fire. When you have three products, your marketing budget and your capital allocation tends to become evenly spread. We took from 40 cents to a dollar on our IT product to 70 cents to a dollar and saying, “Hey, that’s our core growth engine.”
Tim: Double down on what’s working.
Paddy: Double on what’s working. We saw that there was uphill challenges with our customer service product. Customer service as a landscape was going through a lot of change. Zendesk went private, growth rates pretty much stalled down, stalled for all our competitors. One of the things that I learned in my life is like, “Hey, don’t push uphill. Something’s got momentum. Go double down on it.” But trying to revive, the normal notion is we go try and fix this product and go back and sell and market. It takes 18 months, a product fix takes for 18 months, a product-market fit had changed. AI had changed the landscape of customer service, the expectation of productivity was high as well as the fact that the product itself had become more conversationally oriented. There’s a whole bunch of things that happened in the customer service space and I think that decision was a really good one to say, “Hey, let’s make that an add-on product that we sell through a specialist on overlay sales force and focus on IT.”
Tim: Can we double click just for a second on the change management aspect here? You looked at the data, you made these decisions, but then you alluded to the fact that it can be challenging to implement all that. It’s hard. I think I’ve seen whether you have eight people in your go-to-market team or you have 800. Certainly, more can be more challenging. Any lessons learned from the change management, both maybe your other peers around the exec table about hey, we’re not going to do these things and kind of letting go and then especially rolling out these changes to the field? You mentioned having to change out some folks. Was it a lot of rehiring? Was it training? Communication? What were some of the advice on doing that change management effectively? I know a lot of companies are going through this right now actually.
Paddy: Change management is hard. I think a lot of people think go-to-market transformation is about changing people and leaders. The reality is you want to bring them along and you want to give them an opportunity to really try and scale up. What we experienced was from a change management perspective, we did all of these changes in 45 days. So we weren’t doing a great job. What we did is give people a break for the first quarter and make sure they picked between wanting to be a hunter or be a farmer. These kinds of changes were very, very important because people suddenly felt like a goldmine of existing customers that they sold to went away.
And so change management has to be gradual. It has to be thought through. There is no good change management simple principle that you can say — The only thing I can say is to over-communicate and make sure that you bring people along and set expectations that it’s going to take time for these changes to land. It took us 1, 2, 3, probably on the fourth quarter, at the end of 2023, we had the largest quarter in six quarters. North America did its biggest business. It takes time for all of these things to land if you will.
Tim: It can be hard to get people selling $10K deals to selling $30, $50, $100, but it wasn’t just a wholesale. We have to get rid of our existing sales force and add new ones, bring people along, retrain, communicate. Sure, getting the comp piece of it all aligned, incentives aligned with the direction as well. That’s good to hear. Patience and intentional communication sounds like the key. That’s often the right answer, is it? Even in our family lives.
Paddy: It’s harder to said than done. People always will say, “Hey, this did not work well. Mindset is not right.” But overall, I’d say as we went past the six-month mark, there were no questions asked. Everybody was like, “Hey, this is the right strategy. Let’s just go and double down and win here.”
Tim: That’s the other thing. Once you start winning, that’s what aligns everyone. Everyone wants to win. You alluded to something in that description around hunting and farming. You also said it’s much easier to kind of grow from your existing customers than to find new ones. That hunting is much more expensive than farming. That being said, new business is the lifeblood. It’s oxygen. You have to also add new logos to then do the expansion pieces. We can come back to the expansion side of it, which is super critical. I think, especially in a down market, we’re adding new logos is that much harder, but you were able to do both. Maybe talk about the new business piece. It’s the hardest and most expensive, yet you found ways to do that efficiently. How did you do that, Paddy?
Paddy: New business is probably the hardest part in any enterprise field motion. It’s not repeatable. It’s long. It’s expensive, it’s time-consuming. In the end, the only thing that people say there is a sales process that’s repeatable, but the magic of new business is hard. One of the things I talked about is the focus. We focused on North America. We focused on winning in our ICP, which was on $30K plus ARR, competing with ServiceNow, Cherwell, Ivanti, and some of the competitors. Once we put all of these dimensions, then we had to make sure both our recruiting changed to make sure we got the right caliber of people. We changed our enablement, which used to take six months, down to one month of enablement. There’s a set of things that you need to do to get your new business motion right. We changed the incentive structure for multi-year contracts and larger deals.
Tim: How did you pay on that? Did you pay for the full multiyear upfront or what was the from-to?
Paddy: There were kickers. There were kickers for multiyear, and essentially, one of the things that we did was to make sure we made a target that was quarterly coders. It was really about you can make a lot of money, but the idea around the fact that you only are surviving on hunting was a new notion in Freshworks. We really made all of these changes. Then the other thing was, as soon as we put 70 cents to a dollar on our marketing on IT, we started seeing some repeatability. Now storytelling is very important. The alignment between sales and marketing is critical. You get that right, and then you start seeing momentum.
Tim: Did you own marketing as well?
Paddy: No, I did not own marketing.
Tim: Okay. So it was another tricky alignment piece is to work with your peers who are running marketing to drive this alignment.
Paddy: This is an area where I would say there shouldn’t be a ray of sunshine between sales and marketing because goal alignment is important. You want to be able to make sure that everybody is talking the same language. Businesses are measured on quarterly revenue. Salespeople are running on quarterly revenue, but often you’ll find marketing teams being misaligned because they are on an annual incentive plan, annual plan, corporate plan. The reality is MQL (Marketing Qualified Lead) is no good if it is not converting into business. And so getting marketing leader and alignment in my view, ought to be much more closer to the sales incentive alignment on a quarterly basis.
Tim: That is a common one where the MQL is elusive. You, of course, need top of the funnel to get at bottom of funnel, but you can have lots of MQL that aren’t actually qualified. Did you pick sales opportunity? How did you align? What’s the marketing to sales funnel metric that mattered at Freshworks?
Paddy: MQL-to-SAL (Sale Accepted Lead) and then SAL-to-close, and the reality was MQL-to-close was also a number to really understand. In SaaS business, these are very, very hard metrics to really point to. I do think that once you align the leadership teams on the same goals, I think you will start seeing a lot more teamwork and collaboration on these areas.
Tim: With the lead-gen motion? I’m sure marketing was doing inbound programs where they’re kind of out doing marketing things, generating leads that get handed off to sales. What about the outbound motion? Was there a BDR function, and were those people under marketing, or were they under you? That’s another place where I feel like there are six of one and half dozen of the other can depend on the leaders that are in place, but that’s a place you can often get the alignment wrong.
Paddy: And I think we got it wrong. I do believe that the BDR team belonged to my organization and the CRO organization. The reality is if you align your BDR team and marketing teams much closer and if they’re on that team, everything from messaging, because when a customer picks up the phone or is a response to an email, the language, the words, the nuances, that’s where you learn your messaging, outside of talking to your existing customers and talking, why did they buy you and what was the trigger points? The reality is BDR (Business Development) teams actually see tremendous synergy with marketing and putting them together, making sure that everything from MQL-to-SAL is all well packaged together, is probably one of the things I would say is a better alignment from a sales and marketing perspective.
Tim: What was the dominant lead gen source? Was it the BDR function or was it inbound or was it pretty evenly split?
Paddy: It was the BDR function.
Tim: BDR function. So getting that tuned was critical.
Paddy: Getting that tuned was very critical. BDR function is hard, especially post-COVID. It’s very hard for people to pick up phones, emails are hard to read. And so really using new innovative methods, trying to understand how to get better on LinkedIn. Those were the types of things that one would do. I would still think that getting these two functions tightly aligned would really change demand generation. Demand generation is hard. It’s a crowded marketplace. It’s hard to get your message out there. I feel for marketing leaders because simple storytelling is hard today. A big part of what’s missing in today’s industry is the ability to tell a story that a fourth-grader would understand. That’s the compelling message and that stays memorable, right? With SaaS, that’s very hard in a crowded category. Of course, if you are Copilot for GitHub, you got it all easy.
Tim: Let’s shift gears to retention. So this is the other side of we were talking about new logo, but customer retention is you have to do it. It’s more profitable, it should be easier. On the other hand, coming out of this period of time where every single dollar in the budget is under scrutiny from the CFO, can be harder. I know with some of our companies in 2023, I sort of said, “The theme this year, first and foremost, is retention.” We have seen even with that focus, net retention rates have dropped across SaaS. If you look at the overall numbers, certain things like seats weren’t growing naturally, consumption wasn’t growing net as naturally. How did you think about customer retention? Sort of interesting since your AnswerIQ is sort of in this support retention kind of area, but critical for you at Freshworks, how did you approach that side of the coin?
Paddy: Freshworks had a unique challenge. One, because of selling to SMB, churn tends to be natural on one end. On the other hand, with 60,000 customers with the PLG motion, you tend to see higher churn rates in some of those types of businesses. What we did was to simply start, and I have a very simple equation, which is retention = adoption + engagement + advocacy. These are the three core pillars, but it all starts with adoption.
Tim: I like that retention = adoption + engagement + advocacy. Let’s decompose that a little bit on those different pieces.
Paddy: That’s how I set up the entire team’s charter. The customer organization was thinking about this, but the most important thing for SaaS businesses is adoption. It all starts with product. Understanding product telemetry, picking up the right telemetry that you know as a business that will retain your customer or the customer will stay with you for long is critical. Most businesses, if you ask me, they’ll collect tons of metrics, tens and tons of metrics, but can’t make sense of what does retention really mean. We used a framework saying, hey, let’s look at cohorts of customers by revenue sizes, by industry, by usage scenarios across all of these. And basically said, how do we look at the top five to seven features that essentially a customer that has been staying with us for long is using? That’s what we call a pack called essentials.
We created a package called advanced and one for ultimate. It was deeper usage of features. Feature usage and adoption, not as a feature, but in the usage scenario is critical. Being able to see from a telemetry and understand was important. We go CSMs and our customer success and account management organization saying you got to move customers from essentials to advance to ultimate. The ultimate, we knew all the integrations. We knew when people were bringing data into our system, they were less likely to leave. There’s a framework you can think through, but it all starts with telemetry and being strategic about telemetry is very, very critical in today, in the way you think about product adoption.
Tim: That’s fascinating. I think most of the companies I work with realize, hey, we need to have this telemetry, otherwise, we’re flying blind. The customer’s actually using it and the product, of course, has to be compelling that draws people in, et cetera. The packaging, the SKUs as a way to not sort of drive more monetization but actually to drive more usage. That’s a really interesting insight.
Paddy: It was not only usage, it was an upsell strategy too. It was a little bit of both because we knew if someone was in advanced or ultimate, they would actually go to higher, higher-level plans of our product. The second part of it was onboarding.
Tim: If you don’t set people on the right course, it’s hard to get them saved over time.
Paddy: Absolutely. And the first hour in PLG SaaS business, the first day in SaaS business is important in a trial period, but the onboarding experience that you offer and what you learn from that is the Achilles’ heel in SaaS business, because some businesses take 30 days for time to value, some take nine months for time to value. The reality is you’ve got to understand what is it that the customer is asking for and how do you understand what are you setting up for the customer and taking that, feeding that back into the product team.That’s where a self-service onboarding can become significantly better. We created a package for digital adoption where we took onboarding for free for six hours for 15,000 plus customers. It was massive in our churn reduction initiative.
Tim: Before that digital pack, was this not offered or did you charge for it?
Paddy: It wasn’t offered. It wasn’t thought through. A big part of this was to create a simple package. Once you had essentials advanced, go take essentials, get it done with customers, and we knew the customer had a higher opportunity to stay with us.
Tim: Do you do any free trial or POCs before people decide to adopt? And at what point did you layer on this digital pack for the kind of free onboarding training?
Paddy:All our products have a free trial, and then for a field and enterprise, you take them through a POC. The reality is go live is a misnomer. Usually, it’s a .one, it’s an MVP, but there’s a lot of work to make that product work after that, and so understanding those pieces were critical from the churn perspective. Onboarding was a critical path in making sure that you can make it very easy as well as you can do it at scale. That was one of the things that helped us reduce churn.
Tim: Onboarding needs to start at the free trial or POC, or you probably don’t convert to paid, but also once they’re converted to paid that go live, that’s a misnomer too because it has to continue to make them successful.
Paddy: That’s right. Yeah, because to see value takes a lot more than just the go light that they have. There’s more work to be done. The third area was around customer service and support, right? Think about it. It’s a goldmine of signals, ongoing touch points, with the customer. This is a place where you see customers reach out to you because the product is not working in a certain way or there are certain things that can’t work and even developers tend to think about is a simple feature, why can’t the customer use it? We learned a lot from the contact rate. Reducing contact rate, understanding contact rate, and getting the right codification on that is critical from a churn perspective.
You get this right. We had an amazing partnership with the product team where we said we want to bring down contact rate by 5% every quarter for the top contact codes, but contact coding also requires a lot of strategic thinking in terms of how you do the coding, so that way, you can really take that feedback back to the product team. All of these three areas are very core to what I call product related and product telemetry related in terms of an adoption perspective.
Tim: Your first part of your attention equation adoption, just to summarize, first, the product has to be wired so you have the right telemetry in place and you use it. Second, you have to get the onboarding right to really get them to adopt. Then there’s this ongoing contact rate, which is probably a segue to engagement, which that’s the next part of the equation to how do you solve retention.
Paddy: Right. So engagement is an overused term in the industry. People do QBRs with the person they meet on a weekly basis, and they will talk about how’s the health of the system and what have you. The reality is engagement really works when you have a strategic relationship with an executive on the other side. One of the things that we did was enforce this thing called the executive business review. In that, we wanted to ask the business leader on the other side, your simple questions like saying, “Hey, here are the best practices. Here’s what other customers are seeing from the product and how they’re benefiting from this.” Then ask the straight question, if you were to ask you today, would you renew or not? There’s no point in asking a lower-level stakeholder. You want to take this to the right level.
Executive business reviews are hard. Generally, you will not find the ability for a lot of sales leaders, account leaders, success leaders, being able to go and ask the questions saying, hey, I want to talk to a C-level person on the other side, because conversations are simple. The conversations are, hey, are you doing something to improve their customer experience? Are you doing something to reduce their cost? Are you doing something to improve their avenues? If it’s none of these three, and then what is the practice that’s used by their competitors that you can take to them? That is where the executive business reviews really works.
We had the top 100 customers adopted by execs. Every C-suite person inside the company had to own 10 customers. For example, we had a voice of customer once every month. We would get three customers to come and speak into the management team and just keep their verbatim feedback without being any coaching, without giving any coaching. Those were signals that we would learn from the engagement perspective to understand, hey, in the top tier, mid-tier, the bottom tier of customers, how are customers perceiving their relationship with the company?
Tim: That executive buy-in, it sounds obvious, but it’s so critical. I’ve seen so many times where, hey, the customer’s using it, they love it, the daily champions, but then you might get the legs cut out from under you a time of renewal because execs didn’t see the value, got rid of budget, or maybe were getting sold to by a competitor that comes in top down. When you talk to teams, it’s like, “Are the executives buy in?” “Oh, yeah, yeah, yeah, they are, they are,” right? Because if you might be just listening to your champion and they might not have it. So this point about enforcing that discipline and creating some mechanisms to ensure that those EBRs happen, et cetera, I think that’s really good advice.
Paddy: That’s right. Companies tend not to spend as much focus on this, but I do think that being very disciplined around the executive focus is a sure-shot way to make sure that you have customers who are happy.
Tim: We’ve been talking about change management and org alignment. There’s also interesting on your side. You referenced different execs across Freshworks that had customers, but there’s also always this question of was this an account management function? Was it a customer success function? Did you have both? How did those orgs dovetail to accomplish this set of things?
Paddy: We did an interesting exercise and one of the things was, how do we put the customer at the center and have these teams work with each other? If you look at what was what happens, it’s a blame game between, hey, this is not an expansion opportunity. This is a retention opportunity option thing. CSM works. CSM tells it’s a renewal opportunity and account managers take it. What we did is we built a pod. We made the account management and CSM function under one same set of customers. Account manager focused 70% on expansion, 30% on churn. Customer success leader manager focused on 70% on churn and 30% on expansion, and they worked like magic. Now, you put the customer in the center, EBRs and QBRs were happening, adoption packages were being sold in. There are things that we did that essentially structurally brought, which makes sense because hey, it’s the customer is at the center, why do we have two teams in two different organizations to really work with the customer?
Tim: Okay, last piece of the retention equation, advocacy, I would guess that’s the one. It’s like, okay, what does that mean exactly? I kind of get the, they got to use it, and we got to engage over time, but what is the advocacy piece and how does that bring it all together?
Paddy: Advocacy is the network effect, and I think if you see customers like to talk to other customers because being in a community is also a sense of, well-being, being part of something, learning from others, learning from others experiences. Advocacy became one of the goals where we say, if we can get a company to publicly say with us, say that they’re using us and this is the benefit that deriving, you would get CSM incentives and points on that. Driving that became a critical factor. One of the best things we found with advocacy was that when our advocacy worked well, we bought a lot of net new customers. The new business customers, when they came into some of these forums and they felt like, hey, they’re seeing other customers talk, that was probably one of the magical moments for them to say, hey, I think these guys are transparent. They’re talking about the product, the company’s listening, and the magic happens for new business there.
Tim: Retention = adoption + engagement + advocacy.
That’s good to remember. By the way, Paddy has published some blogs in some of these learnings, so we can point to those later. You can go and read more and learn more about some of the details here. Let’s move to one other key area here, and you alluded to it. There’s new logo, there’s keep the logos that you have, but then how do you expand within them? When you were talking about account management and CSM alignment, you teased the expansion question different ways that you can expand in accounts. There’s upsell, there’s cross-selling, other products, SKUs, et cetera. What was your approach to driving expansion and keeping customers happy at the same time at Freshworks?
Paddy: First principles, expansion can’t happen unless you have deep product adoption, you have advocacy, and you have a happy customer. To go back at renewal and say, “Hey, I want to expand my revenue or plan three months before,” is not necessarily the best path for expansion. Expansion, in my view, is one of the areas where product managers, product leaders, have to be very, very strategic about thinking about what is the roadmap for growth from an existing customer. It’s not so much of an account management function, but really the set of SKUs, the offerings, how do you package AI beyond Copilot?
Those are the types of things that product leaders need to think through because that is where the rubber meets the road. When I look at product management today, pretty much most SKUs are designed around T-shirt sizing: small, medium, large. You look at a competitor, you say, “Hey, let’s don’t match that.” The reality is you can learn from telemetry, you can think about usage. How do you increase usage and consumption in different ways in the way you design your SKUs, right? A big part of what I think about expansion is making sure that you have a slew of offerings that account managers have in their armory when they go to customers, and then be able to really talk with the best practices that other customers are using so that they can get them.
Tim: Were there any mechanisms internally to take all those learnings from your go-to-market org and feed it back into product management? Was it as simple as, hey, we communicated a lot, or was there anything that you did there to make sure that those learnings transferred in the right decisions that you referred to ultimately got made?
Paddy: A lot of it would come through the quarterly product reviews. In our business, we have a quarterly product review, and so in the core quarterly product review, you have sales, account management, CSM, everybody bringing in the feedback, customer success, customer support, onboarding teams to the product teams. It was, while it was not so structured, it was a forum every quarter to bring some of this back to the product teams. The second aspect is when you think about the amount of effort that businesses spend in the amount of money, in resources, in marketing, in sales towards new business, expansion marketing teams are relatively underfunded in most businesses. It is a lost opportunity.
It is a lost opportunity in the sense that, hey, not only can you drive more advocacy, you can drive more adoption, but systematically thinking about expansion marketing is very, very critical. I do feel that it is underfunded in most organizations, because everybody is basically smitten by the new business growth that one wants to get. One other aspect I will add is how do you make this more product led? The reason why I was putting it back product leaders is because making expansion more discoverable, which is how do you get more features, aspects of your products, your cross-sell upsell more discoverable in the experience of the product is critical. I think there is still a lot of room for growth in SaaS businesses to do that better.
Tim: You brought up earlier the pricing packaging aspect of this. Is there anything you did around structuring contracts that was also helpful in encouraging expansion or any tips on that side of things?
Paddy: From a contracting perspective, it’s pretty obvious. One of the things that you’ll find is most SaaS businesses discount heavily on year one and sometimes end up discounting for multiyears because of the desperation of winning that deal. It’s very important upfront to start thinking about whether it’s expansion rates that you apply, limits you apply for usage in how you package your structure of the deal in such a way that you continuously get on renewal rates, ARPA improvements, as well as expansion of the new expansion dollars that you can see. And I think that is definitely one of the areas I would say that SaaS businesses ought to do better. The big guys like Salesforce and Oracle, they steamroll you and do that. But generally, when you see startups and midsize companies, they struggle to find that voice and that muscle to be able to do so, and I would understand.
Tim: Panic a little bit right in discounts. So the advice is maybe like yes, as a startup, you have to realize you don’t have the pricing power of Salesforce, but maybe don’t get desperate too quickly.
Paddy: Yes, especially at the point of sale.
Tim: It’s harder than you think to make it up in year two and year three.
Paddy: You have the customer. The customers agreed to buy. I mean, I think at this point, you don’t give in on some of these areas.
Tim: Wow, what a fascinating journey and amazing success at Freshworks. If you tie this all the way back to startup founders and thinking back to your time leading founding AnswerIQ and having been a CRO here for these last several years, what do you think about org building there at earlier stage companies? This is always a question, when do we bring on a CRO? Any advice about that or general org building now for the early-stage companies that were maybe in that kind of first three-year journey that you took AnswerIQ through?
Paddy: Most startups go with head of sales to start with, and then they bring on a CRO at a later stage. CRO to me is a strange title, right? The title by itself has so little leverage. The customer’s only thinking about getting discounts from you. There’s no value conversation you can have with the CRO title because you have the name revenue written on it. Besides that point, the three things in a startup, you have to build are, you got to sell, and you got to tell. In the initial stages of a startup, a CRO is the seller and the teller because you’re learning from your customers and you’re building your story as you go along. It’s a critical function that you bring on early that is lockstep it the way you’re building your product and you drive growth for your business.
Tim: Paddy, this has been absolutely terrific. I know that the absolute most common set of questions we get from founders are all of these things we’ve been talking about around go-to-market, the decisions, the organization, the levers, what good looks like. This is incredibly useful to our audience. Again, Paddy has written some blogs that go into more depth. We’ll have links to those in the episode notes, but I can’t thank you enough for sharing your time and your insights with us here today in Founded & Funded.
Paddy: Thanks, Tim. Thanks for having me.