How Fractional CX Boosts Enterprise Valuation

Early-stage companies must focus on CX earlier than typical, but they cannot afford to hire the right CX leader now. A fractional CX leader is the answer.


Joseph Loria

7/30/20233 min read

The Evolution of CX

In a previous post, I covered how customer experience has evolved over the past few decades, including the misunderstanding created around what “customer success” is. To recap, Customer Success is…

  • 🚫 NOT onboarding

  • 🚫 NOT training

  • 🚫 NOT services

  • 🚫 NOT support

  • 🚫 NOT account management

Customer Success is its own discipline, additive to those others.

  • ✓ Customer Success = the function inside CX that ensures customer value realization

  • ✓ Customer Experience = the seamless sum of all post-sale functions

In early-stage startups and scaleups, your focus must be on the seamless overall Customer Experience, NOT simply on Customer Success.

The Impact of CX on Valuation

The reason for this CX focus has to do with Net Revenue Retention.

The brutal truth is that 9 of 10 startups won’t make it 5 years. The top 3 reasons are:

  • ✅ Business Plan;

  • ✅ Selling Mindset;

  • ✅ Timing.

And these three get maximum attention. Early spending is on product strategy, product-market fit, demand gen, and sales. Thus, failure here still happens, but it’s something systematic in the offering or just bad timing.

But other top reasons for failure get less attention, namely:

  • ❌ Timing of Scaling

  • ❌ Cash Runway

  • ❌ Founding Team Makeup

Less attention because the typical founder is a sales-oriented visionary, not a risk-averse, process-oriented operator (and rightfully so!). Thus, deep post-sale expertise gets added too late, and resulting churn and lack of upsell and expansion lead to cash issues.

So why CX? Well, that has to do with Net Revenue Retention (NRR).

Look at two businesses, both at $1mm in Annual Recurring Revenue (ARR), all else equal:

  • Company A NRR = 85%

  • Company B NRR = 105%

Five years later, Company B’s ARR will be 230% greater due to the compound effect of the higher NRR. Also, the multiple upon valuation will be higher, so this shift gives you more than 500% extra of enterprise valuation. Or, put another way:

  • 👉 Shifting NRR 5 points can double the value of your company.

And since NRR is a measure of customers staying longer and buying more, increasing it only happens with a killer CX.

Measuring a Good CX is Easy

CX measurement and dashboarding are pretty easy. They look something like this:

  • 📊 Time to Value < 60 days

  • 📊 Product Adoption (key use cases) > 80%

  • 📊 Customer Health (top 20) > 85%

  • 📊 Gross Revenue Retention > 90%

  • 📊 Net Revenue Retention > 110%

Specifics will vary, but measuring time to value, adoption, and health as lead measures, and then GRR and NRR as lag measures, will give you a decent idea of CX health and impact.

The hard part is how you get there.

Value Realization is Hard

It’s hard because of the process of value realization in a business, which looks like this:

  • Usage ➜ Process Change ➜ KPI Change ➜ Value Realization

Thus, the typical approach of focusing on usage and adoption, and then crossing your fingers and waiting, is a recipe for failure.

You must actively manage this process flow in the customer. This is what a good CX does – it owns this value chain and drives discussion to the right.

What Poor Value Realization Looks Like

When your CX stops at usage and doesn’t drive realization, you see symptoms like this:

  • ⛔ Onboarding takes too long;

  • ⛔ There is a lot of surprise churn;

  • ⛔ Long-term customers don't buy more;

  • ⛔ You don’t objectively know the health of your top customers;

  • ⛔ You cannot accurately forecast retention.

Only by owning the value realization process can you eradicate those symptoms.

The CX Framework for Value Realization

True business value realization through CX comes from these 5 competencies:

  • ⏳ Time to Value. Delivering key components to show value quickly.

  • 🩺 Prescriptive Methodology. Understanding health and driving success with authority.

  • 📦 Packaging & Offerings. Whole-product packaging driving value.

  • 📈 Technology & Data. Visibility into performance, and the mundane is automated.

  • 🧑🏽‍💼 Culture & Engagement. The team develops mastery to exceed objectives.

Only by getting exceptional at these competencies can you drive world-class NRR.

Why Fractional CX

There are two competing truths here for early-stage companies:

  • 🟢 You must focus on CX earlier than typical;

  • 🔴 You can’t afford to hire the right CX leader now.

The latter is what keeps many founders playing the waiting game, and thereby gambling with their businesses. It’s hard to justify spending over $250k annually on an experienced leader who knows exactly how to construct this customer experience, who’s been there and done that not just once, but multiple times.

But you can hire a fractional leader. And if you do that, here’s what you get:

  • ✅ Cost-effective executive experience in earlier;

  • ✅ Keeping founders focused on product marketing fit and sales;

  • ✅ A better way to promote CX team growth;

And let’s not forget – vastly better enterprise value.

It’s time to consider a fractional CX leader in your startup or scaleup.