The Biggest Cost your First Customer has to Bear

I have already written about how your cost does not equal your price. Normally price is only a small part of the overall cost that a customer suffers from doing business with you. However, as a startup what is your biggest cost to a B2B customer?

To answer this we have to get away from thinking that we sell to companies and instead recognise that we sell to people. Your biggest cost is not to the company but to the person in that company that is taking the risk of doing business with your startup. 

You biggest cost is career risk. The person who is purchasing your product or service is genuinely taking a real risk that you won’t deliver and they will forever be known as ‘that idiot’ that decided to go with an untested startup rather than a stable alternative. 

Recognise this when you are selling.  Not only do we have to convince the company that you will give a Return on Investment, you must also convince the person you are talking to that it is worth the career risk. 

Your job is to make them a hero – after all they are the one suffering the largest cost. 

Declutter your Business

Everything you own has an ongoing cost. A cost that is distinct from what is cost to acquire it in the first place. It takes up storage, it needs cleaning or maintenance, it gets in the way – making it difficult to find other items. At a very minimum, just knowing that you own it takes up mental cycles.  This is why we all know that decluttering our house is a good idea, yet very few people actually actually do what’s necessary and get rid of the stuff that gives them no value. Instead it goes in a drawer, attic or suburban storage.

It’s exactly the same in business. Every initiative, partner, customer, feature comes with an ongoing cost that is distinct from what it cost to start. 

I worked with several companies that are nearly paralyzed into inaction by volume of clutter. Products with features nobody uses, marketing campaigns where no one has mowed the lawn in the last year, reports that have no value and sometime no audience and whole departments created for an initiative but nobody knows if it is successful or not. 

All of this happens because of lazy belief that once the initial cost of something has been paid that it comes with no further costs. Product bloat is a great example of this. Once the code has been written, tested and shipped then there is no further costs – right? So even if no one uses it you might as well leave it in the product?  Wrong. 

That code adds complexity to your product – it makes every future line of code more difficult to write and every historic line of code more difficult to maintain. Your product managers will still talk about it and report on it and sales people will occasionally ask about it. It’s the same with break-even customers or marketing campaigns or poorly performing resellers.

This is compounded by the fact that killing features, initiatives, customers, etc. forces you admit you were wrong. No one likes admitting they were wrong. We need a process and structure to force us to do it.

So if your company doesn’t have a process for periodically examining all aspects of your business with a view to decluttering I can guarantee you suffer from this problem.

Every new initiative should be timeboxed with clear success and failure criteria set before the initiative starts. There must a rigorous process to review them and not just let things slide. If results indicate failure then the initiative is binned, if success then continued and if somewhere between the two then a new time boxed and criteria defined. 

This is not sufficient as everything changes over time – maybe that feature in your product was wildly popular 5 years ago but the world has changed and now no one uses it.

Create a culture in your company where you clean up behind you.

The First Warning Sign of a Market Problem

What is the first warning sign that your target market might be about to run out of road? Is it revenue? Is it churn? Is it price sensitivity? Is it sales?

It is none of those – it is new business sales volume. The number of new clients signed up each period is down but this has been compensated by increasing the value of each sale thereby allowing the sales team to hit their number. 

This is frequently disguised as a good news story that is easy for everyone to believe because no one wants to face up to the reality that there is likely to be a market problem.  

Sales hit their number, so they are happy. The CEO suspects something but feels that they have to be positive and and a narrative is created that runs something like.

Great news. Our customers are willing to pay us more. This means we will be able to spend more per customer on marketing and we will quickly be able to make up for sales volume.

This ignores the fact that the natural instinct of sales is to close every deal. They will do this even if it requires discounting to the maximum allowed level. This means that they only way sales was able to hit their target was by going against their instincts and increasing pricing. 

The hard truth is that customers are becoming more difficult to find and the inescapable logical conclusion is that your market is running out of road. 

If ignored, customers will become progressively more difficult to find compounded by an uncontrolled push to increase prices to compensate. It normally takes a few periods but eventually it all comes crashing down with sales not just missing their number but missing it by a country mile.

At that point the market problem becomes a crisis. Sales are dramatically reforecast, budgets redone over and, if the company is undercapitalized, redundancies ensue. 

The sad part of this is that there is typically enough time to adapt from the first signals before it becomes a crisis. New markets can be found, product can be developed, hiring delayed, but this can only be done if you recognize that there is a market problem in the first instance. 

I can’t say this is true all of the time but I’ve seen this at least 6 times now. Twice in my own company (I spun the good news story and even managed to deceive myself), twice with companies that I’m on the board of and twice with client companies. I’ve gotten good at recognizing the pattern and ringing the alarm now – hopefully you will too. 

Scaling is Tough especially if you don’t have a consistent language

“What’s a customer?” It sounds like a simple question. Yet when I talk with companies that struggling to scale I get different answers everywhere I look in the company. It is the same for nearly every metric that are being used to manage the business.

When has a customer churned? The second they stop paying, or are they still a customer till the end of the month? When does a sale turn into a customer? When they are invoiced, or maybe when they pay or maybe it is when they start using the product. If you offer a paid trial are they a customer during the trial? Can a trial customer churn?

Definitions change from department to department. They change from report to report and sometimes they even change even within the same report. Definitions change over time yet are still benchmarked historically.

This isn’t unusual and it’s not just semantics.  It is the rule for companies that are trying to scale past the €2M annual revenue mark. Everyone is reporting and held accountable on metrics but there absolutely no consensus on what those metrics mean beneath a surface level of understanding.  

If you think something is important enough to measure then surely it is important to know what it is that you are measuring? When you ask for a report you want to be confident that the person creating the report has the same understanding of what the subject of the report is as you do. Tring to manage a company where everyone is working off of a different version of the truth is very difficult. Trying to scale with this level of uncertainty is a near impossibility unless you have strong market winds behind you. 

Define your metrics. You will be surprised at how difficult this is but remember unless it is already written down in a well communicated then everyone is defining it for themselves. Have a company glossary or dictionary of terms and definitions that everyone report should reference. 

We all know that communication is the largest challenge in scaling businesses. How can we effectively communicate if everyone is using a different language of the most important aspects of the business?

How to End Every Meeting

Every time you meet with a customers, partner or investor end the meeting with the following phrase.

“Can you introduce me to three other people that I should talk to?”

Three is the magic number because if all you ask for is one introduction then that’s all you will get. Asking for four feels like too big a imposition. But when you ask for three they will generally be able to give you one immediately. They’ll have to think for a bit before they come up with a second and then promise to get back to you with a third. 

Mostly that third introduction never comes, however that gives you an open invitation to reconnect with them at a later stage to ask for that third introduction that they promised.

No matter how useless a meeting felt always ask for introductions. That each meeting lead to the next opportunity.

Strategy 101

Everytime I meet a startup for the first time, I ask the founders what their ambition for the company is.  Normally I have to clarify that “I’m looking for what the company will do for them at the end, not at some intermediate point”.  What I’m looking for is the end point – the destination.

Frequently I’m talking to idealistic young entrepreneurs that honestly answer that they don’t mind where they end up, they are doing it for the experience – for the journey. Other times co-founders look at each other and it is clear that not only is there no consensus but it hasn’t been seriously discussed before.  Both answers makes having a strategy impossible.

Strategy defines how you get from where you are today to where you want to go. Strategy tells you how you are going to get from Point A to Point B.  If you don’t know where you want to go then you cannot even have a conversation about strategy, let alone actually have one.

Many people get confused between tactics and strategy. Tactics define how you are going to hit some interim goal, strategy defines how the tactics combine together to achieve the ultimate purpose of why you founded the company. That should be in terms of you, afterall you’re setting up the company. What will the company have achieved for the founders when the game is over?

Do you want to exit the company through trade sale? If so, for how much? After how long? Do you want a comfortable lifestyle? What does that comfort look like? Do you want to leave a legacy? What legacy?

Imagine your friend says that they want to go on a journey – but they have no idea where they want to go. How can you decide if you should walk, drive, take a bus, fly or boat. How can they convince anyone else to join them? How much money will they need? This is all impossible until they eventually decide on an actual destination, then everything becomes simpler.

Whatever your destination, it defines the strategy, not the other way round. If your ambition is to trade sale the company for €10M then a strategy to raise €20M to fund growth is not compatible. Similarly if your ambition is to sell the company for €1 Billion then a strategy of bootstrapping the company is incompatible.

Once you know your destination it is normally possible to work backwards from that destination. For example if you are going to trade sale to €100M then who is likely to buy you? Why are they going to buy you?

  • For your IP?
  • For access to your customer?
  • For your revenue?
  • For your Profit?

Once you can answer these questions it becomes clearer what type of company that you need to build to achieve your ambition.

Strategy starts with knowing where you are and where you want to go

Ask Questions that Force People to Think About Their Breakfast

Whenever you are looking for feedback from customers try and avoid asking questions that are easy to answer. Rephrase the question in a way that forces the customer to think before they answer.

It doesn’t matter what stage your company is at: customer discovery, product/market fit, market entry, scaling or exiting. Customers will typically answer questions the way you want them answered or in a way that gets rid of you the quickest. This is not what you are looking for – you are looking for insights and understanding.  These are revealed when your customer is forced to think about the problem and in the process not only answers the question you want answered but also provides a lot more context and detail.

Don’t ask

“Did you have breakfast?”

Ask

“What did you have for breakfast?

Don’t ask

“Is breakfast the most important meal of the day?”

Ask

“If you could only eat one meal tomorrow, which one would it be and why?”

Don’t ask

“Do you like eggs for breakfast?”

Ask

“Can you tell me what you ate for breakfast every day this week?”

Don’t ask

“Do you often have Starbucks for breakfast?”

Ask

“In the last month how many time did you buy breakfast at a coffee shop – how often was this at starbucks?”

Don’t ask

“Do you like maple syrup on your waffles”

Ask

“When was the last time you ate waffles? What did you put on the waffles? Would you have preferred to put anything different on them? Why didn’t you?

Think about the questions you are answering and the insights that you are trying to get. If you don’t spend time thinking about how to phrase the question don’t expect your customer to think about the response.

Stop Using Funding as Market Validation

It drives me mad when I hear startups use the fact that one of their competitors received €X Million in funding as market validation. Customers are a measure of success, so is revenue, so is profit. Funding is not.

Investors put money in high growth companies because they expect a high return but they also accept a high degree of risk. A typical Series A VC is hoping that 10% of their investment will be a huge success and a further 20-30% will return their money. The remainder are going to fail. So on an investment basis they expect that only 1 in 10 companies will achieve their ambitions.  

If you use funding as a measure of success you will be wrong 90% of the time. Being wrong 90% of the time isn’t good.

No one should set up their company for the purposes of attracting funding. You take on funding as a means to achieve a much larger ambition. Funding is a vanity metric. It is a metric that people use to make themselves feel important, to boast about and to intimidate others. But funding is nothing to be proud of, it is what you do with the funding that matters.

Prioritizing is Difficult but Vital

Prioritizing is difficult for startups because there are so many uncertainties and not a lot of solid information to base the prioritizing on.  Most of the time it is a judgement call which is uncomfortable because it is easy to be wrong and, as humans, we don’t like to be wrong.

Frequently this difficulty means that startups don’t aggressively prioritize and even if they do they work on multiple priorities at the same time. This is staggeringly inefficient and is indicative of a weak management team that is afraid of committing to a course of action. if you don’t decide you can never be wrong, but you will also never succeed. Human beings are naturally more afraid of loss then they are excited by gain – you have to fight this instinct.

You should only work on your top priority, unless you can no longer efficiently devote more resources or time to it. For example your top priority might be selling to a particular customer – if you’ve done all you can with the customer and you are waiting for them to hold an internal meeting and you can no longer do anything to increase your chances of winning the customer, then you should feel free to work on priority number two.

Imagine that you have two priorities: A & B. Each priority will take you one week to complete and each priority has a 50% chance of revealing something important about your market. There are two approaches

  1. Work on both priorities simultaneously (in parallel).  Since each priority takes a week you will have both priorities completed after 14 days and no results before then.
  2. Alternatively you can work on the top priority first and only when you have completed it do you work on the second priority (in series). After 7 days you have completed the first priority and after 14 days you have completed both. The bonus is you will frequently discover something important about your market from the first priority
Many thanks to Adam Hodgson for the Diagram

It should be clear that working through your priorities in series rather than in parallel is dramatically more efficient. Have you taken the time to prioritize and do you re-examine your priority order everytime you learn something significant?

Frequently startups pay lip service with prioritization and cheat by pretending to themselves that they are prioritizing.  This is easily done by working on projects that are actually multiple different priorities.

Ideally you should prioritize using solid data to back up your prioritization, however given how little information many of you have scientific prioritization is going to be impossible.  THIS DOES NOT MEAN YOU CAN’T PRIORITIZE. Even a blind guess at prioritization is better than no prioritising at all. Startups must be good at working with ambiguity and have tremendously limited resources – make sure you applying those resources efficiently.  

Your Job is to Make Tough Decisions

As CEO of a startup, it is your job to make tough decisions and if you aren’t making them you aren’t doing your job.

Tough decisions are decisions where you don’t have enough data to be fully informed but you need to make one anyway. Tough decisions are where you decide to fire a staff member who is trying their best but isn’t up to the job. It’s going back to a long term customer and telling them that they aren’t going to be your customer anymore because you have decided to pivot the business. It’s telling your co-founder they aren’t performing.

Easy decisions are obvious and by their very definition anyone competent would make the same decision. It’s the difficult decisions that define you and your business.  If you aren’t making these sorts of decisions then the company could have any CEO – you are letting circumstances control your business. It is through difficult decisions that you shape the future of your company.

We all face difficult decisions every week. How we address these decisions decides the fate of the business. Never let difficult decisions slide, they rarely become easier. Bear in mind that consciously deciding not to make a decision until you have better data is a decision and can often be the best course of action. However, do not use this an excuse not to make the tough decision when you need to. You do not have the luxury of time and resources that these unnecessary delays will require.

At the end of each week ask yourself what difficult decisions you made. If those painful decision aren’t front and center in your mind then you’re probably not addressing the real problems in your business.  We all want to ‘kick the can down the road’ but we all know that is a losing strategy. Be a winner, be brave, make the tough decisions.