Selecting customers
One of the first questions entrepreneurs must ask themselves when starting a company is which customers they want to do business with. Many startups try to do business with as many customers as possible which often leads to suboptimal results and eventually failure. Entrepreneurs must remember that startup is a temporary organization in search of a way to do business therefore it must develop a customer strategy to select who they should do business with that allows them to be profitable. Entrepreneurs must ask: “Who are the most important customers at this time for my startup?”
Customers vary by size, needs, channels, and types of relationship so startups must know the size of customer, what they do, what problems that they have, what functions that they need, and what channels that you must use to reach that particular customer. When working on the business model, you must clearly identify the customer segment that you want to reach first.
Many start-ups begin by reach out for the biggest size customers possible such as big companies or government. This is often recommended by business textbooks and traditional business theories to aim at the largest market possible to maximize profit. Of course getting business deals with big customers is logical. However traditional business theories are based upon established company where market is defined, customers are known, product features are established and the basis of competition is understood. As startup, you are still looking for the right customers, your product is not established, as everything is a guess as you are still learning about market, competition, product features so you should follow different process. You must realize that your startup only has five or ten people but your customers may have five thousand or ten thousand peoples. The question is “Could you scale up to serve these customers and be profitable?”
Of course having big customers means a lot of money that will keep your startup running for a long time but these deals are often difficult to get and it will take the whole startup team to work on it. You will have to spend all your time, efforts, and energy to close the deal as it takes time. If you are not successful you may waste all of your little capital that you have and a lot of frustrations. Even if you get the business, you have to deliver high quality service levels to meet their demand. As a startup, you do not have enough skilled people to provide the best service or build high quality product. Your product may barely work in their environment and may have many “missing features” but your customers are expecting perfection. In that case, you must increase your development efforts, hire more people, provide quick training for new people to catch up and it will consume everything that you have. You will have no time for anything else. If things do not go well, these giant customers can consume everything you have and destroy you quickly. This is a common problem for most start-ups as big size customers will demand significant portions of your resources. When your startup could not provide, customers will drop you immediately.
A similar problem also happens if startups go for small-size customers. These small customers are everywhere but to get them you have to spend a lot of time, efforts, and resources because they scatter all over the place. You will have to travel, negotiate, demonstrate your products, discuss and convince them to do business with you. Small size customers prefer low cost deals so you will not make much money but you believe that you could make up in volume. I have seen many startups made that mistake by charge few dollars a month and hope that they can reach many customers to make up in volume. Some startups even do not charge money in the first few months to get the business then charge a low monthly fee later. In the end, they waste a lot of efforts but could not earn enough revenue to make it worth the efforts. Unless you can reach a massive number of customers like Facebook, Twitter or Zynga, low cost customers are nothing but an illusion. Basically you have to deal with so many customers; they all demand attention but only pay little. You will be splitting yourselves in many directions to serve them. My advice: Avoid the low end of the market as it is too hard to get enough money to make your startup profitable.
As startup, you must carefully select the best customers when working on your business model. Nothing worse than spending a lot of efforts to reach certain customers only to discover that you are losing money instead of making money. Selecting customer is the foundation for growth as you are learning about the business and expand your customer bases from one group to another. Selecting the right customer group in the beginning that allows startup to be profitable is the key for success. A medium size customer is now obvious choice. They have needs that you can provide; they have problems that you can solve. And when you do business with them, you make enough money to make it worth your efforts. Medium size companies are not so big that they can make huge demands on you for your product or support. They do not demand too much on your services. If you focus on these companies, you can negotiate a good terms and conditions with them. As a start-up it is important to focus on companies that are easy to serve, not as demanding yet can afford to pay you fair prices for your product. They allow you to stay focused on your strategy without having to compromise much.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
