The early days of building a business are tough but in many ways very straightforward. You can focus on a single objective that gets you to the next stage of growth. Simple, right?
There’s just one thing. As you scale, you acquire more people. Getting 10 people aligned and moving in the same direction is one thing. However, you’ll soon have to scale that same objective to 50, 500, maybe 1,000+ people.
To succeed, you know you need everyone on the same page. You also need to make sure you have the right sorts of customers. That can be more of a challenge. Particularly because you’ll have to say “no” to some of them.
So let’s look at how to make it happen. Using concrete, hard-won, sleeves-rolled-up examples from our own journey. Buckle your seatbelt and let’s go.
How to figure out your best-fit customers
Here we’re going beyond the Ideal Customer Profile concept. Alongside defining best-fit customers, this is about discouraging bad-fit customers. This latter segment poses a bigger risk to your success.
When you’re at the 0–100 customers stage
At this stage, there’s an element of, “Throw spaghetti at the wall to see what sticks”. To identify strands with the most stickiness potential, start by interviewing customers. As many as possible. Yes, it’s labour-intensive, but will shine a light on the most important issues to solve. We still have a mandatory routine for product managers to make five calls per week to people that responded to our NPS survey, the digital feedback is great, but the stuff you hear on a phone call is what’s truly actionable.
Once you’ve got 25 customers, you’ll start seeing some data. Some will love what you do. These ambassadors give you 0% hassle and 100% willingness to pay. Other customers will be the complete opposite. They’re likely to request custom-built solutions – without generating the revenue to make it worth your while.
The group of ambassadors is your target. So drill down into their profiles. Explore the problems you solve for them. Analyse how many similar customers are out there in your market. With this information, you can adjust your messaging, marketing, and overall brand. You’ll put off some leads, but that’s fine. You’re now going after best-fit customers only.
An exchange between a popular tech YouTuber and the Head of Instagram
When you’re at the 100+ customers stage
Now you have some reliable data that tells a story. It’s time for a proper analysis. Take a cohort of customers you closed 12+ months ago and find out:
How many remained at the end of the 12 months?
For those who left – what do they have in common?
For those who remained – what do they have in common?
Armed with these insights, you’ll start to know who to target, and who to avoid or say “no” to. By now you might be thinking this is easier said than done. That’s why below we’ve shared some of our own experiences and data-driven findings.
The Upsales experience
Do you remember the buzz of launching a startup? Exciting, intense, and involving more than one wrong turn. This mixture led us to build some seriously crazy stuff for our customers. At one point, our CRM handled logistical flows for a company selling candy. Another time, our system became a fully-fledged restaurant order-taking solution.
Those are just two examples of how we custom-built solutions to maintain revenue. We built many more. So when we grew to 20 employees, it was like running into a wall. Nobody could keep track of all these custom-built solutions. Something had to change if we were to keep growing.
The end (of the beginning)
In 2019 we made a huge strategic decision. A new direction. Something that wouldn’t please some of our customers.
We took away almost all the custom-built solutions. No more lengthy patching, fixing, and waiting for the next custom request.
Instead, we’d mostly build standard integrations. Freeing up our resources to focus on best-fit customers. They still needed support and maybe some customisation, but it wouldn’t be at the expense of our own growth. At least, that was the plan.
In the end, that huge strategic decision had an equally huge impact on our E40. It jumped from 20% to 60%. Alongside giving us a newly streamlined business.
E40 = ARR growth rate + Free Cash Flow margin
We weren’t aiming to solve every customer’s every problem. Instead, we focused on being the best at solving specific problems. And only working with customers experiencing those exact same problems.
We still worked with smaller companies. However, we made sure these still matched our best-fit criteria. This included factoring in the pricing. You may have clients bringing in monthly revenue ranging from thousands to hundreds of thousands. Consider drawing a cut-off point, with no customers below a certain level. Whatever figure you decide, build this into your future pricing. Give your sales team an absolute “we can’t go any lower” base. They can build on this and use it in negotiations.
Our customer groups
We knew what type of services to offer. We also had a clear understanding of the pricing levels. Next, it was time to understand more about our customers. In particular, the companies driving the most, and least, revenue for us. This involved analysing their:
- ARR: Total ARR from the three segments (when signed)
- Churn: Over the first 12 months
- First-year growth: Overall % of expansion in the first year
This yielded three segments:
- Micro clients: Generating 8% of our ARR, with 17% churn, and the smallest % growth
- Tiny clients: Generating 10% of our ARR, with 13% churn, and small % growth
- Growth prospects: Generating 82% of our ARR, with 6% churn and highest growth
For an in-depth exploration of this process, see How Net Revenue Retention tells the real growth story in SaaS.
A minority of customers were experiencing high growth, churning less, and contributing the most to our growth. In other words, these were our best-fit customers. Naturally, we started focusing on this segment. In the process, we freed up 60% of our time, further accelerating our growth.
Saying no builds trust
It may seem counter-intuitive to say “no” to any type of customer. However, it’ll become more common as more companies access data showing when costs of retention outweigh the benefits. According to Gartner, this knowledge will lead to 75% of companies “breaking up” with bad-fit customers by 2025.
Ultimately it’s about going after customers that support your growth. If you have a group of dissatisfied customers, they’ll probably form around 10% of your overall base. However, they’re likely to consume much more than 10% of your resources.
So even though your instinct is to try to rescue things, it’s better to end things. You can then focus on the 90% of happy customers. They’ll generate more returns for you by their word-of-mouth recommendations. Meanwhile, bad-fit customers can then find other companies where they’d be a better fit. You also reduce the risk of them saying negative things about you.
A clean break and saying “no more” will benefit every party involved. You just have to define what you will work on, and what you won’t.
/ Daniel Wikberg
CEO & Founder of Upsales