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.