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:

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