Monday, August 18, 2014

FIT: The Most Important Thing in Business?

I can't recall how the topic came up, but the other day someone asked me if it bothered me to lose clients.

My answer: "it depends."

If the loss is due to poor service quality or slow response, I hate it.  Fortunately, this has been rare, mainly because my staff works hard to make sure that any problems that arise get fixed ASAP.  We also do root cause analysis to figure out ways to prevent it happening again.

But if the loss is because our services are a poor fit with a client's needs, then I'm fine with losing them.  In fact, at some point, if our clients are successful, their needs outgrow our ability to provide effective service.  Rather than attempt to hold onto them or expand our services, we encourage them to "graduate" which usually means helping them hire their own, dedicated staff as our replacements.

In terms of new customer acquisition, because we aren't under pressure from investors for fast growth, we don't try to work with everyone.  Instead we focus on determining if there is a good fit between what we can do vs. what the client needs.  I estimate that I end up declining (or referring where possible) about 25% of the prospects who approach us because of poor fit.  "Poor fit: doesn't mean that the client is bad (although "nice people" is one of our fit criteria).  It means that after 5+ years doing this, we have a pretty good idea of who we can help vs. who we can't and have experienced the consequence of working with clients with whom we were poor fit. So while it means we may be giving up revenue, it also means we give up:
  • Conflicts with clients who have different expectations about the work being done.
  • Overextending ourselves into areas where we lack expertise.
  • Arguments about our fees.
We look for fit along the following dimensions:
  • Fit to our standard offerings vs. having to develop custom capability. 
  • Fit to our flat fee revenue model vs. traditionally hourly billing
  • Fit between our people and the client (i.e. we don't work with people we don't like)
  • Fit between our response time capabilities and the client's response time expectation
  • Fit between our quality levels and the client's expectations
And I don't think it actually has hurt our revenue growth.  For the past three years, we've actually grown our business at rates even a VC would find acceptable.  In fact, paradoxically, our focus on fit may have actually contributed because:
  • Our sales cycles are short because we have a sharp focus on the value we can provide and what we cannot. We try to be clear telling new prospects what we do, and more importantly to them, what we don't do.
  • Our standard operations are tailored to deliver that value making it easier to scale.
  • It allows us to focus on improving adding new capabilities valued by the majority of our clients (vs. one offs) in a way which is clear to both parties that these are *WARNING* new services.
  • We have high client satisfaction and loyalty which fuels referrals.  In fact we are at the point that over 95% of our new business is by client referral.  This is actually one of the metrics indicative that a business has achieved product/market fit.
In order to adopt a focus on fit, you first must accept the fact that not all revenue is good for your business!  That's tough to do when you are short on sales.  Then you must have an idea of what  your target customer profile is AND what value you provide.  For specifics on how to do this, see two earlier posts:

Monday, August 4, 2014

Thrice Around the Block Top Blog Posts of All Time!

The nice thing about blogs is that viewership can grow even when you neglect it.  Having only recently returned to blogging after an 18 month hiatus, I was pleasantly surprised to find that the average monthly viewership rate had doubled.

In any event, I thought it might be interesting to share what people have been hitting.  Here are the Top Nine Posts on Thrice Around the Block:
  1. Developing a Customer Profile
  2. How to Set Prices:  Pricing Strategy
  3. Applying the Customer Profile
  4. How to Set Prices:  Tangible Pricing Methods
  5. The Growth Mystique: A Silicon Valley Parable
  6. Education for the Small Business Entrepreneur
  7. Process vs. "Product" People
  8. My Top 25 (and counting) Business Books
  9. How to Set Prices: Revenue Models and Pricing Mechanisms

Tuesday, July 29, 2014

The Good Problem (is Still a Problem)

I'm back! (I think...)

Since my last "real" blog post in March 4, 2012 (Pushing Past the Growth Plateau), I've been dealing with the "good problem" of rapid growth.  For Silicon Valley startups, these are the good times, and for my company - which provides services to startups - it's been challenging to keep up!  In the last 18 months, we've doubled in size, launched an entirely new line of marketing services, and entered a new customer segment.  It's a good problem to have, as everyone likes to remind me and which I wholeheartedly agree.

But it's still a problem!

How can growth be a problem?
  • Growth consumes cash:  In a seminar I give to entrepreneurs on cash management, one of the more eye opening exercises is where I show how fast growth can drive them straight into bankruptcy even when the P&L says they're turning a profit.  (I also show them simple steps they can take to reduce this.)
  • Growth strains systems:  This in turn, leads to service problems, which can quickly stall growth.  Memory is no longer good enough to track the exploding detail.  Processes have to be defined to ensure all the bases are covered, in the proper order. 
  • Growth strains your people:  And hiring actually increases the strain on your people.  New hires have to be trained and fixing the inevitable newbie mistakes creates more work.  Relationships shift and confusion increases as job duties are shifted away from existing staff to new people.
  • Growth can lead you off track:  New customers can place new demands on the business.  It's easy to drift into new products and services in the name of customer service.  Whether this is positive or negative depends on how well they align with the startup's vision.  Not all revenue is good revenue!
So what are the keys to overcoming this?
  • ADD:  Automate, Diversify, Delegate.  See my previous post, Pushing Past the Growth Plateau.
  • Focus on Fit:  The first step is to acknowledge that not all revenue is good revenue.  So what is good revenue?  It's revenue which your company is designed to deliver and comes from adding new customers that meet your target customer profile, which means you have to know what your ideal customer looks like.  While this sounds simple, what makes it challenging is recognizing when off-target revenue represents an unanticipated, lucrative opportunity or is merely off-target and a drain on resources.  I'll have more to say about fit in a future post.
Stay tuned!