It’s tough to start a business that gets traction with paying customers. Data indicate that less than half of US start-ups survive beyond three years. But it’s much harder to grow. Even for businesses that attract venture funding, fewer than 6% achieve more than $10 million in revenues and fewer than 2% more than $50 million. The increase in angel groups, the advent of crowd-funding, the slow but steady spread of VC money beyond its traditional few cities, and mechanisms like incubators make it more possible to start a business. But as one investor says, “It has never been easier to start a company, and never harder to build one.”
One big reason for failure to scale is the ad hoc process that many start-up teams use in their initial customer acquisition efforts. Because cash is king, founders have a tendency to accept any business at any price. As one of my business partners once told me, “Frank, if we don’t survive the short term, we won’t need to worry about the long term.” But not defining a firm’s core customers is deadly. Without that clarity, selling is ultimately a function of individual heroic efforts in the field, not a scalable platform for growth.
Here are three things you can do to build that platform, drive effective selling, and increase the growth potential of your business:
First, understand the impact of customer selection decisions. Every customer is not a good customer. A sale represents a stream of interactions, which has a domino effect on your business.
Customers always come embedded with transaction costs for the seller. Some orders are easier or harder to process: stocked versus non-stocked items in a manufacturing business, for example, or customers that do or don’t require multiple proposals and changes in a service business.
This affects capacity utilization: both the mix of what is made (what kind of capacity is utilized) and throughput (how that capacity is utilized: which production lines, or the types of people and skills utilized in a service business). Orders also affect pre- and post-sale economics and organizational requirements: who requires lots of customization or service, who doesn’t, and thus the cost-to-serve different customers can vary dramatically. Together, these factors determine the net cash flow of that account, the price needed to make that customer profitable, and the margins available for any other business needs.
But few firms clarify their customer selection criteria. Either directly in meetings or implicitly in the compensation plan, most are saying to their salespeople, “Go forth and multiply!” That’s what salespeople do: sell to anyone (often at a discounted price in order to make a volume quota target). That generates an unwieldy array of account management tasks that fragment selling effectiveness, dissipate the firm’s resources in other functions, and make profitable growth difficult. To avoid this trap, you need to make, and put into practice, another distinction.
Second, Clarify Benefits versus Status Quo. Buyers are high-inertia creatures who resist change. They weigh the loss of a current usage system much higher than commensurate gains, a phenomenon called “loss aversion” or the “endowment effect.” Hence, it’s not enough to deliver better or more benefits. New products typically require customers to change behavior. Those changes may bring benefits, but they always entail perceived costs: either economic (e.g., activation fees), or learning costs (e.g., using a new software program), and/or obsolescence costs (e.g. Seeing my CD collection as a stranded asset if I switch to streaming media). These costs equate to “losses” in relation to status-quo behaviour.
Unless gains significantly outweigh the perceived loss from change, customers will not buy. How much better must you be? That is a situation-specific issue. But consider this: on average, according to research, consumers overvalue losses by a factor of roughly three; and sellers of new products are naturally biased in favor of their products and so overvalue the benefits by a comparable amount. The result is often a mismatch of nine-to-one between what sellers think customers want and what customers will (or will not) do.
To deal with this mismatch, you must answer questions such as: to deliver value, what kind(s) of change am I requiring of potential customers? Is their problem or opportunity big enough to justify the change? Can you establish with customers a credible and shared language for documenting value and benefits? And if so, can you then demonstrate value in advance of usage (demo’s, ROI calculators, and other tools) and so get prospects to self-select, lowering your selling costs and accelerating growth?
Third, Know who your Lead Users are, and why. Another option for dealing with buying inertia: target customers who highly value the benefits you provide or, conversely, lightly value their current system. Identifying these lead users is often key to growth, especially in markets where network effects or social media can accelerate referrals or positive word-of-mouth. Geoffrey Moore called these early adopters “visionaries” who are willing to take risks others in that market do not initially take.
What characterizes lead users? Despite what you often read on blogs, there is no simple answer. And simply labeling early adopters as “visionaries” or “evangelists” does not help in establishing target criteria and planning sales calls. To identify lead users, start by understanding what is behaviorally compatible with the established usage system. A seller has a higher probability of success if he or she can identify customers who are already dealing with the issue (e.g., Intuit selling check-writing and bookkeeping software to early PC adopters and accountants) or can adapt their product in a way that minimizes the customer’s need to change (e.g., Dropbox allows you to keep your current means of saving and sharing files while using Dropbox).
Notice that all of these distinctions–high versus lower cost-to-serve accounts; perceived benefits versus the status quo; lead users versus all-others in a market-are characteristics of the customer, not the seller. That focus is essential for growth.
And we should care about this for reasons that go beyond any individual entrepreneur’s sales practices. Small companies create the bulk of jobs in our society. But most small businesses, even if they survive beyond three years, stay small. Job creation, according to NBER studies, is predominately driven by the relatively few start-ups that can scale. They’re adding lots of social value, not only top-line results.