If you believe the hyperbole pushed by social media, your business should be a rocket ship. The pursuit of growth at all costs, your main priority. Targeting ever bigger customers for their logos, prestige, and massive wallets.
While I don’t disagree completely, the priorities and motivations are just plain backward. As entrepreneurs, we are force-fed this dogma at every turn. It’s no wonder first-time founders often think they need venture capital at the outset. Before they’ve even started.
That’s why I love to see founders pushing back. Bucking the trends of the day to grow organically. No external funds needed. Just happy customers, willing to vote with their wallets.
Along that line of thinking, I’d like to offer another idiom to the mix. This isn’t always obvious at the outset. In fact, even if it was, we’re often driven by emotion, making irrational decisions as a consequence.
You’re Better Off Running From Some Revenue
Not all companies should be your customer. Some examples are immediately obvious. If you’re selling crude oil, Tesla isn’t likely to be your target customer. Yet I’m not talking about a specific customer, it’s more about the type of customer.
I’m confident you have a dream client. A big company that would provide your business with instant credibility. You may have even gone so far as to envision a perfect future raining down accolades and fat stacks of cash.
But at what cost to your business, your team, and your sanity?
You see, I’ve done that and I’m here to share why it almost killed my business. There were trade-offs made that I failed to account for because I was in love with the opportunity.
This was irrational thinking at its peak. I was new to owning and running a business. While I had read several books and dozens of articles, I was woefully unprepared for the journey ahead.
Setting out with two partners, we hung our shingle, open our doors, and smiled at passersby. All figuratively of course given we had created a professional services firm. We spent our time talking to contacts at companies from our days at past employers. These companies were often several states away or in different countries and timezones.
The effort paid off and we landed a massive first customer. The prestige felt by our small team dulled any other award we’d ever received. We had achieved something none of our perceived competitors could have done. Or so our thoughts led us to believe.
What we failed to understand — or rather, rationalized away — was how difficult it would be to keep this customer happy. Their needs were insatiable. We would grow, only to see more demand burst forth, never able to right our ship.
And they accounted for almost all our revenue. Given they were our first, this is likely obvious, yet it is still notable. We were beholden to them and they knew it.
What had felt like a win to us, had really been a win for our large customer. The expertise we offered had attracted them. Plus, the billable rates, that had seemed respectable to us at the time, were (way) less than what they would have spent with a bigger firm.
In truth, we had traded our new-found autonomy, as business owners, for vast amounts of revenue. You could even say we had traded our jobs for new jobs — ones with a higher income ceiling.
If we wanted to keep the gravy train moving, there was no pushing back when our big customer wanted anything. The implied threats surfaced any time we struggled to meet their needs.
While the allure of landing a big company as a customer can be intoxicating, reality is often more sobering.
Quickly, we had a team of several dozen employees. Most working for our first customer, the big one with enviable prestige. The threat of them pulling work or, gasp, inviting another firm into the fold, kept me up at night. There were so many livelihoods at stake so we did whatever it took to remain in their good graces.
Adding other customers was a strategic motivation, yet always took a backseat to our main source of revenue. When you’re beholden to one customer, all other customers suffer. That’s not to say we didn’t manage to delight new customers. We did and that revenue began to grow.
Determined to dig ourselves out of the hole we had naively jumped into when first starting out, we worked long hours. Over the course of several years, we rebalanced our business. Eventually, achieving a revenue mix that minimized the threat of our largest customer.
They were still the big customer as a percentage of revenue, but if they disappeared, at least we could survive. We were blessed. Many businesses never survive such a scenario.
Since then, I’ve sold that business. Now I spend my time writing and helping first-time founders avoid the pitfalls that befell me. The lessons learned fuel my writing and have even begun forming frameworks and rules of thumb.
A Framework for Evaluating Big Customers
I vowed never to let any customer have outsized influence over my businesses ever again. Nor those of my clients.
In doing so, I built a framework to test potential customers for fit. While I’m an optimist, I also favor sustainable growth. I will sacrifice massive increases in revenue if the perceived cost to the business is too high. This may make me unpopular in some circles, but I’ll sleep better at night.
Rule #1 — Never Let Any Customer Rule Your Revenue
Allowing a single customer to represent too much of your revenue can be harmful, if not fatal. This may sound intuitive yet businesses fall as victims every day. While the allure of landing a big company as a customer can be intoxicating, reality is often more sobering.
There is real danger in biting off more than you can chew. When one customer becomes “too big to lose” you compromise your business in ways that can stunt its growth. Not only that, but your other customers end up paying the ultimate price. They can’t be a priority if the big one is throwing its weight around and demanding special treatment.
That’s where a handy rule of thumb can help. A rule that allows you to aim a bit lower when targeting your next customer. After all, your goal is to grow your business, not bankrupt it.
Dr. Tim Wilkinson calls this “the ten percent rule” in his book, The Customer Trap: How to Avoid the Biggest Mistake in Business.
Putting a lot of eggs in one — or even a few — baskets can prove wonderful so long as those big customers stay profitable and loyal. However, change in business, as in life, is inevitable. The minute big customers change their minds, leave, or threaten to do so unless dramatic concessions are met, catastrophic situations can arise. Such moments can cause grave harm, or even threaten the entire future of a company.
The Customer Trap shares many stories where successful businesses land big customers, only to end in tragedy. Those big customers make demands that push other customers away and crush margins. Leaving owners with nothing afterward, except perhaps, regret and a valuable lesson.
I wish I had read that book when first starting my entrepreneurial journey, but it didn’t exist yet. Sadly, I probably would have ignored its advice anyway. The allure of easy money and quick growth was overwhelming.
Rules are meant to be bent, if not broken. Especially in B2B, orders or projects can skew your revenue mix for a given calendar year. When this happens, it would violate the ten percent rule I called out above. For our purposes, I wouldn’t consider this a problem worth pursuing unless it happened two years in a row.
Rule #2 — Never Take On Work You Can’t Afford to Give Away
If bringing on that new massive customer means your existing cash flow isn’t enough to sustain you, that’s a red flag. You shouldn’t have to go into debt to onboard a new customer.
Your income must cover your current costs and help you prepare for the future. When one customer will consume that income, that forces you to make trade-offs. Those trade-offs will undermine your other customers and impact other investment opportunities.
It’s with that knowledge, having lived through it myself, that I developed my second rule of thumb.
Never take on work you can’t afford to give away. This means that if the customer never pays, you can still carry on without that revenue. No single customer should prevent you from covering payroll or paying your suppliers.
If landing that massive customer requires you to gamble with your business as collateral, politely pass. Your problems will only get bigger once you start doing the work to get paid.
No one says you can’t circle back in the future. A customer that is too big for you today may be just the right size in a couple of years. Just remember to be open and honest with them now.
There is one caveat to this rule. When first starting out just about any customer would look massive. You have little to no cash flow and will be betting your fledgling business on producing exceptional results. For this scenario, I direct you to my third rule below.
Rule #3 — Never Take On a Customer You Can’t Clone
Neglect kills relationships and relationships create customers. So what happens when that big, new customer needs more from your business than you can provide?
The sad truth is that your other customers get neglected. While they may understand a brief delay or lack of focus, they won’t stick around if a pattern emerges.
This ends up making you even more dependent on that big customer. Compounding the issue as the percentage of revenue they represent keeps growing.
That’s where my next handy rule of thumb enters the picture. Not only does it help established businesses, but it helps guide those that are just starting out.
Never take on a customer you can’t clone. This rule is more complicated than the first two. The idea is to step back and take a hard look at the customer, asking yourself two questions:
1. Can you LAND many more customers like them?
This is about balanced revenue and reasonable growth. It speaks to your ability to find, attract, and service the next big customer. All the while, meeting and exceeding the first customer’s needs. And then do so several more times over, until none represent more than 10% of your total revenue.
Adding some color to this line of thought, you also need to be able to do this in a reasonable timeframe. For B2B, 18–24 months is reasonable given the typical sales cycle and the hands-on approach required.
If your answer is ‘yes’ at this point, let’s move on to the next.
2. Would you WANT many more customers like them?
It’s all well and good if you have the capabilities to take on the big customer, but if it doesn’t benefit your business beyond revenue, I urge you to reconsider.
Your goal should be continuous improvement. Not merely at an operational level (although that is important), but to the extent that your core competencies improve as well.
Said another way, is the work needed by the big customer challenging, ground-breaking, or aspirational? If not, you’re chasing revenue and growth at the expense of becoming something great. The world doesn’t need yet another mediocre business.
There is a real opportunity cost at play here if you’re filling your day with drudgery and unable to accept work that will inspire you to do great things. Fulfilling work attracts better people to your team and it also attracts even better customers.
Your combined answer should be YES to move forward from here.
If the answer is ‘no’ to either of those questions, you should seriously consider walking away (for now). It only makes sense to pursue a big customer if they will help make your business better.
With any choice, there is an opportunity cost. Jumping at a big customer only due to the fact that you see the revenue potential, may very well leave you longing for more.
Who knows, that next big customer could be the one that launches your business into the limelight, allowing you to do the best work of your career.
Knowing when a potential customer is too big for your business (right now) isn’t always intuitive. That’s where an objective-ish framework will save you countless sleepless nights agonizing over the ‘what-ifs’.
The Condensed Version
- Never let any customer rule your revenue. By avoiding “The Customer Trap” and ensuring no single customer exceeds 10% of total revenue, you’ll preserve autonomy and prevent stunting your business.
- Never take on work you can’t afford to give away. No customer should ever prevent you from paying your team and covering your expenses. You shouldn’t have to go into debt to onboard any customer. Live to fight another day, don’t gamble away what you’ve worked hard to build.
- Never take on a customer you can’t clone. Big isn’t always better. Make sure the big customer will inspire greatness. And ensure you can replicate them over and over again. If you can’t rebalance your revenue, in a timely fashion, you’re headed for disaster. Or, even worse, your business becomes a glorified “job”.
The world doesn’t need yet another mediocre business. Don’t chase ever bigger customers unless you can do so sustainably and with real purpose.
This article originally appeared in Entrepreneur's Handbook on Medium.
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