The education services function, in most software companies, is treated as a cost center. The mindset is about allocating budgets, controlling spend, and minimizing the resources allocated to training customers, and the main metric of success is adherence to the budget. Each year, during the planning process, there is a risk that some budgets (maybe yours) get cut. Inevitably, the CFO will look at the education services line item and ask, “Do we really need to spend $420K training customers? Can we deliver the same training for $280K so we can free up some budget for customer success or product?”
You may have created a solid business case. The CFO may even have seen your case. But the risk remains that the CFO does not make the connection between your budget request and the benefits you promise to deliver.
We definitely don’t want to be in this position. It requires a significant amount of time justifying our existence and hoping we get the budget. Our success becomes securing a budget, not driving results.
A budget is a license to spend, a forecast is your roadmap to profitability
We need a mindset change. A mindset that says, “We are going to create an education services plan that drives companies results in one or all of the following four areas: direct sales from training, new product sales, upsells and cross sells, increases in net revenue retention.”
As Greg Crabtree describes in his book, Simple Numbers, Straight Talk, Big Profits!: 4 Keys to Unlock Your Business Potential, a budget is a license to spend, a forecast is your roadmap to profitability. What Crabtree means is, when you ask for a budget you are saying, I need a certain amount of money that I can spend, so I can do this job.
Spending comes first.
With a forecast however, you are saying, “I believe we can create training revenue (or product sales or upsells to existing customers, or net revenue retention) of X, Y, and Z, in January, February, and March. In order to deliver on that forecast, we will need expenses of A, B, and C. If we don’t achieve X in revenue, we will not spend B in expenses.”
Results drive the budget, not the other way around.
However, running education services as a profitable enterprise is not just about revenue and margins. It’s also about a mindset that creates a plan, makes a forecast, and develops the willingness to act on the plan to drive the company forward in four mains ways:
- Direct sale of training
- Product sales to new customers
- Upsells and cross-sells to existing customers
- Increased retention rates (more precisely, net revenue retention
Let’s discuss these four education services success drivers.
Direct sales from training
First, paid training programs clearly drive revenue through the direct sale of training offerings. However, what many organizations fail to realize is how significant this revenue stream really is.
One example of the direct revenue from training services comes from Elastic. Elastic reports that 91-93% of their revenue originates from the sale of their software. Naturally. This is how software companies generate the majority of their revenue.
However, they share that the other 7-9% stems from professional service offerings, of which Elastic states primarily consists of training.
Therefore, Elastic demonstrates that the sale of training services can be a significant source of revenue for companies. Significant enough that they mention it in their SEC filings.
Product sales to new customers
Many new customers struggle to successfully implement new software, and 22% of all reported problems to successful software implementation are people-related or linked to user adoption. This problem could be eliminated with effective education strategies that guide a company’s transition into the use of a new software in order to familiarize employees with the software and teach them how to make the most of it.
Training is essential when considering implementing any new technology—every new software adopted by a company is going to require training so the employees can use it.
According to Infopro Learning, training promotes user adoption in a couple major ways. First, training builds confidence—employees who feel confident in their ability to use a system are more likely to do so. A recent survey by Really Simple Systems found that 45% of participants reported using less than half of their system’s functionality. Giving employees time to practice using a new system will give them a deeper understanding of the program before they must implement it.
Training also highlights the solutions the software is supposed to deliver. Software is implemented by companies in order to solve an issue the company is trying to fix. Training gives the opportunity for users to fully comprehend the ways in which the software is supposed to aid in their daily lives—users are more likely to adopt new systems if they recognize how it will benefit them.
Employees that have never heard of a particular software product are the most likely to resist adoption because they do not understand how it will benefit them. By supporting these users and exposing them to the new technologies, they can better understand the purpose of the software and advocate for its implementation.
Additionally, providing training to new customers increases their chances of recommending the software to others, helping companies gain more new customers. In fact, a study from CX Solutions found that proactively providing your customers information on how to get the most out of your products creates a 32% average lift to repurchase or recommend the product.
Upsells and cross sells
Customer training has proven to be extremely beneficial for boosting customer success, making customers much more likely to expand through upsells and cross sells. In this way, education services can indirectly drive a significant amount of revenue for organizations.
One testimonial of customer success and growth driven by education services comes from Sarah Sproehnle, former VP of Customer Success at Cloudera. Sproehnle spoke about how shifting the company’s focus toward customer success transformed Cloudera.
In order to address customer success, Sproehnle worked with Cloudera to build a training organization to help customers leverage technology. By tracking expansion rates, Sproehnle discovered a major correlation between customers that took training and their success rates—customers that were trained well tended to be much more successful.
Sproehnle furthered this observation by stating that training is a critical component to customers getting a good start and then expanding through upsells and cross-sells. Conversely, she found that customers that consume less training tend to not renew or grow as quickly.
Quality education services also boost customer retention—and customer retention is vital for organizations. In fact, research from Bain and Company has shown that boosting customer retention rates by just 5% leads to a profit increase of 25% to 95%. Therefore, retaining customers through education services can drive significant revenue growth for organizations.
As explored in the last section, education services helps boost customer success. When customers are successful, they are able to reach their desired outcomes while using a company’s product or service.
Retention rates dramatically increase when customers are able to reach their desired outcomes with a company’s product. In fact, in a series of interviews conducted by Training Industry, about 70% of participants shared that product education programs increased customer loyalty to the company.
Furthermore, the software company Elastic, as mentioned earlier, reports similar sentiments regarding the impact of customer training on loyalty and retention. They found that inadequate training can result in the incorrect implementation or use of their software, which leads to customer dissatisfaction and churn. When customers are successfully trained, they are much more likely to successfully implement a software and therefore remain loyal to the company.
Therefore, education services not only boosts customer success—it ensures that an organization is able to retain and grow customer accounts.
Learn to forecast
It is clear that education services drive revenue in a variety of ways—through the direct sale of training and indirectly through new product sales and increased retention rates. Now, we need to take these four results and learn to forecast. Instead of asking for a budget, we create a plan that says we will contribute to one or more of these four results, make a forecast of what those numbers might be in each month of a year, then forecast the resources we will need to deliver on these results.
This is our new order of operations; 1) forecast results; 2) create a plan to achieve those results; 3) act on that plan.