Focusing on the Top

June 4, 2008

I’m a big fan of Seth Godin — he’s a smart marketing guy, he’s built a good niche for himself. I still remember something he wrote in his blog about the best customers being worth way more than average customers.

Here at Ideal we bend over backwards to sell to every possible customer no matter how small and no matter how perilously low the margins become. We also have a piece of equipment in the warehouse that a customer bought for $3,000 into which we’ve sunk $15,000 in support and repair costs. We occasionally have to pay the sales guy a commission puts us in the red.

We have customers who refuse to upgrade from Windows 98, or who refuse to accept our web based product because they want the Windows client (which is the Yugo of law firm management software).

Bleeding Dry

Cash Money

These are exceptional cases for which Ideal pays dearly. We have perhaps 4 of 21 technical employees in order to service this segment. It costs us around half a million dollars per year to deal with these people, and for what? What type of customer refuses to upgrade from Windows 98 to Windows XP in mid 2008? The cheap kind who didn’t pay us much to begin with.

We are also paying in quality. By supporting this very low minimum requirement we are barred from using the previous two generations of Microsoft technology, which have several key features which would allow us to unify and simplify the code base I have to design. For example, instead of maintaining two entirely separate code bases for the Web based version of our software and the windows client version, we can use the newer technology to fill the gaps between the capabilities of the web and client versions, allows us to eliminate the client version entirely, along, incidentally, with the lowest performing member of the team.

Our sales figures aren’t organized enough for me to make an air tight case that this segment of our customer base is actually costing us money, but here’s the E-mail I sent to Ben:

Hi Ben,

I sent an E-mail to Mark about our customers – I am hoping you can shed some light on the numbers behind Mark’s point that the Client software is important for smaller sites, and that many of our other clients use and will continue to use Windows 2000.

Is there any way to determine how much of Ideal’s revenue is tied to customers that need the Client or still use Windows 2000? If there is, can we find out what our profit margin on those sites is?

The reason I ask is that my gut tells me we’re spinning our wheels on these guys. I have a feeling that the headache we endure by continuing to support these products on those platforms is literally not worth the revenue we bring in by doing it.

Of course the sales guys get their commission whether the customer is profitable for Ideal or not, so they want the lines to continue because it makes it easier to sell. On the other hand, I’m thinking about the resources I need to continue supporting this, and the cost to us of not being able to use modern development techniques, or to have a unified code base that all our developers can work on.

I’m guessing we can save big time and money by upselling the current clients to Web, getting everyone onto at least Windows XP, and not renewing support contracts with those who refuse.

I’d like to find out if my gut, hunches, feelings, and guesses actually make financial sense. Do you have any information that would help me?

Thanks a lot!
Ken Sharpe

I talked it over with Ben, and I told him that my budget would go much further if I could eliminate those customers. He wasn’t able to give me the numbers I was looking for, but he agreed in principle and he took it to David who is mulling it over.

I’ll do what makes financial sense, but my gut feeling is that Seth is right, we should chop off our problem customers, and focus on the top.


One Response to “Focusing on the Top”

  1. JJAstor Says:

    Great post. One thing that you need to factor in is the long term total associated value of that customer. For example, are they your first customer in a potentially lucrative new industry for you? How much is experience/a case study in that new industry worth to you? You might consider taking the loss if they are a well respected participant in an industry you’re trying to break into.

    Also, with whom does that customer talk? Do they have strategic partnerships with companies to whom they could spread positive/negative opinions about your company? In other words you have to factor in both the increase in goodwill from keeping that customer, as well as the loss in goodwill from dropping them.

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