What kind of customer do you have?

I was in two board meetings recently, and I was shocked at myself when I seemingly gave contradictory advice to two companies.  On the one hand, I told the first company to do whatever it takes to land that big account for the quarter, and on the other hand, I told the second company to push harder for a higher price or to walk away.  Shouldn't you always do whatever it takes to land a customer and continue building the pipeline?  Yes, in theory, but at the same time you have to understand what kind of customer you have: is it a good customer or a bad customer.  While there is no perfect definition for these two types of customers, let me give it a try.  In the first portfolio company's case, the good customer we were going after was going to be a marquee win and great reference for future prospects down the line, would help us validate our technology and team in a head-to-head competition vs. the big incumbent, and finally would be a repeatable sale where we could take and package our software to many other prospects.  In that case, we told the company to be aggressive in order to land that customer, including giving it away for free for a short period of time to get that first big win.  The great news is that we landed that marquee customer and did not have to go the free route.  Ideally a good customer is also one that is profitable.  In this case, even though the first marquee win may not have been profitable in year 1, we were able to see future profitability down the line from expansion opportunities in the existing account and from that customer serving as a great reference and industry leader in helping us close other deals.

A bad customer is clearly the complete opposite of a good customer - one that requires too much one-off customization, is not a marquee account or potentially a great reference for future sales prospects, and ultimately an account that does not lead to repeatable sales.  In addition, bad customers for the most part will be highly unprofitable as you will probably spend way too much time on the account trying to make it referenceable.  So in the second portfolio company's case, given that we had a bad customer, I told them that we should go back to them to charge more to at least make some money from the current deal or walk away.  Ideally, if it is a bad customer, you may just want to walk away altogether to go find that good customer which will lead you to many more great opportunities.  Starting your company with a handful of bad customers can kill your business so be ruthless with your time and carefully assess what kind of customer you are about to close.

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This post was written by who has written 358 posts on BeyondVC.

3 Responses to “What kind of customer do you have?”

  1. Harry S. Jul 3, 2007 at 4:27 am #

    Hi,

    thanks for this great article.

    It should be the normal case, that all the decisions in your company are based on this economical logic, unfortunately it seems sometimes like we forgot about this and don’t focus on the right customers.

  2. Glen Jul 4, 2007 at 6:46 am #

    There is another problem with customers. That is when companies fail to provide reasonable customer service to long term clients.

    For example, Packet8 decided any international calling over $10/month was “excessive”. I had been using $100/month for 18+ months.

    The result was a secret suspension of my service, and the loss of a $150/month client.

    I though I found a better service, Gizmo Project. However, now, I simply can’t fund my fathers account with $10 from my verified paypal account. Having been a customer since Oct 2006 and trying to increase their paying customer base doesn’t count for anything.

    To develope their business (Packet8 or Gizmo Project) they need to get away from the terrible customer support of the traditional phone companies and provide exceptional service to their good customers.

    Having excellent technological service as Gizmo Project does won’t support the business long term when the customer service offends and sends customers away.

    I orginally created the phonehell.com domain years ago when MCI and Sprint were billing domestic long distance calls for $2.95 PER MINUTE.

    The VOIP companies aren’t doing that (yet), but they are leaving customers without the ability to make (or receive) phone calls.

  3. Jahlife Jul 7, 2007 at 4:01 am #

    Great article.

    The customer relationship is just that, and it has a lifecycle. You can’t start a business with a bunch of high maintenance customers for short term performance. At the same time, you don’t always want to be a boat anchor for clients. Every business has to maintain it’s strategic advantage while fixing it’s core constraints for more business.

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