400: Identifying & Focusing on Growth Customers
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Today on The Startup Chat, Steli and Hiten talk about identifying & focusing on growth customers.
In the startup world, it’s common to want to prioritize customers that pay higher for your products, however focusing on these customers might not be the best way to optimize your business, as this customers might not necessarily be growing.
In today’s episode of the show, Steli and Hiten talk about what a growth customer is, the 2 types of money that come into any business, what is negative churn and much more.
Time Stamped Show Notes:
00:00 About today’s topic
01:00 Why this topic was chosen.
01:15 Who is a growth customer?
03:45 What is negative churn.
03:54 The 2 types of money that come into any business.
04:09 Why you need to identify your growth customers.
04:40 Why growth is a really crucial criterion to measure.
06:45 How identifying a growth customer can help you prioritize.
07:43 What companies are truly trying to do with their business.
3 Key Points:
- When most startups look at a customer, they just identify today’s needs
- Negative churn is the amount of revenue that’s being lost that is made up for by the amount that comes in.
- There are 2 kinds of customers that’s coming in – new money, and existing customers paying you more money.
Steli Efti.: Hey everybody, this is Steli Efti.
Hiten Shah: And this is Hiten Shah.
Steli Efti: And today on the Startup Chat, we wanna talk about identifying and focusing on growth customers. Here’s the deal, in episode 399 we talked about how to create an ideal customer profile. The ICP, Ideal Customer. Today what I wanna briefly talk to you about and share with our listeners is the concept of a growth customer. And here’s what prompted this. So I’ve heard and thought about this in the past multiple times and we went through a transition in our company of starting to think and focus and identify growth customers a lot more. But recently I was talking to a company, I can’t quite discuss who they are, but their VP of sales had a much stronger focus on this than I’ve ever seen before and I felt that that was fascinating and interesting to dissect. What they’re doing, they’re building the sales organization. They’re focusing on only selling to a specific type of customer. And one criteria that an Account Executive has to check off to even be allowed to sell to somebody is that they’re going to be a growth, what they call a growth account. What that means is that whatever the needs is of the customer today is going to significantly grow within next 12 to 18 months. A simple example of this is today they have … Whatever, let’s say three people that work in their marketing team, would need seats or access to this product, but their hiring plans are so that the marketing team is gonna grow from three people to 11 people in the next 12 months, so they’re gonna need 11 seats and they are a growing marketing organization. So, their criteria of selling, being able to close a contract and close a deal is that the customer, it doesn’t matter how big the customer is. It can’t stay still. It has to be a growth account. It has to be a customer that’s gonna grow significantly over the next 12 months. I thought that that was very interesting, but I thought also that it related interestingly or usefully to our ideal customer profile episode of the, I think, this mindset that a lot of times, when startups look at a prospect or at a customer, they just identify today’s needs, right? How big is the customer today? What is their use case today? What are the requirements today? One thing that a lot of startups don’t do a good enough job is to identify how are these needs, these use cases and the potential revenue we can make with this customer? How is this going to change over the next 12 to 18 months and is this going to stay the same? Or is it going to significantly grow or change over time? That’s a really important thing to figure out, and I think a lot of times, most startups don’t worry about this or don’t think about this. I wanted to talk about growth customers with you and see kind of what your thoughts are, what your experience are, and what kind of tips we have to give to the audience on this topic.
Hiten Shah: Yeah. So, especially for a SASS business, this is a really fascinating topic, because what you’re really looking for is negative term. So, one of the main reasons from a metric standpoint of business metric standpoint. A business KPI, is to have negative turn. So, negative turn is basically the idea that the amount of people, amount of revenue. Let’s talk about revenue. The amount of revenue that’s being lost in a given month, is made up for, and then some, by the amount that’s coming in. And there’s two kinds of money that comes in. New money and existing customers paying you more money. So, to me, by being able to identify your growth customer and include that in your ideal customer profile, you will get customers who will pay more over time, and your business will essentially be that much healthier for it, because you will have negative turn. Which means that, of the people that are, of all the revenue that’s being lost, you’re gaining more than what’s being lost.
Steli Efti: I love that. It’s as simple as that now. I think the first thing that I would wanna give to people as a tip is to identify that as a criteria when you talk to prospects or when you think about your ideal customer profile or the qualification process, because, growth is a really crucial criteria. If you think about it, if you have two customers. Let’s say, all you have is two customers. And all you’re gonna have to do is service and support and invest in those customers. If you had to prioritize the two and you have one customer that pays you $1,000 a month and the other customer pays you $500 a month. If that’s all the information you have, it’s very easy to say, “Well, we’re gonna prioritize our top customers, the thousand bucks a month customer. A second customer is the $500 customer and we’re gonna spend double the time with the 1K customer than we’re gonna spend with the 500 buck customer a month. Now, if I add the growth criteria to this, and I tell you that the $1,000 customer has been operating at this size of business for the past ten years, and they’re planning to stay this amount of people and revenue and whatever the setup is for the next five years. But, the $500 customer just raised, let’s say, a series A, just raised 50 million dollars and they have plans to tenex they’re team and they have plans to go from $500 a month to $5,000 a month over the next 12 months. How does that change now? Who’s your top customer? And who’s your second customer? Now, again, with two customers, it’s probably not that big of a deal to prioritize them, but having that knowledge can make a big difference not just for revenue purposes, but also when you hear what their feature requirements are, right? Just knowing that this is a company that today needs feature A B and C but because the drastic growth that they’re about to go under, these feature requirements might drastically change, but we might have to stay more ears to the ground, and much more in touch with the customer, because they’re gonna be hiring all these people and changing their processes and kind of growing hat they’re doing and changing what they’re doing at such a fast pace that we can’t just say, “Well, we talked to this customer four or five months ago and we still feel like we know what’s going on over there and what their needs are and what they’re looking for, right?” So, identifying who’s growing and who isn’t can help you both prioritize and also understand how much time you’re gonna have to spend in checking in with a customer and re-confirming they truly understand the value they’re getting from your product today and what their needs are and what their feature requirements are and who the people even are in the company that you need to build relationships with.
Hiten Shah: I think it’s such a powerful concept. I mean, like, you just described exactly how to get there, right? And do it. And I think, this idea of a growth customer’s probably gonna start becoming a to more popular. I haven’t really heard a lot about this. I don’t know if you have. So, I’m glad you brought it up and I’m glad that it came up because all we’re really trying to do in our businesses, especially when it’s a SASS business and it’s a subscription business where people pay you and ideally, they keep paying you, is build a healthy business, and even when you think about like, as much as people might have opinions about investors, and things like that, at the end of the day, the biggest thing here is that an investor looks at your business to determine how healthy it is, and whether they should put their money in it. You can look in your business in the same way, whether you have investors or not. And say, “How do I build a healthy business that I wanna continue that is worth continuing?” And one of the key areas there, is to have it so that you build a business, a product, a sales process or marketing process. The whole company. Around the fact that people who start paying you, pay your more money over time because they’re getting more value, or they have a really good reason to pay you more over time. So, I would say that like, this is super super powerful. And, it should definitely be like, double clicked, underlined, all the good stuff. So that people start really thinking about, “who’s my growth customer and how do I get more of them?”
Steli Efti: So this is a topic I don’t hear a lot of people talking about. I know that we have both started thinking about this and putting some process in place around this over the last couple of weeks and then I’ve been bringing this up to more and more people to see if I can learn from somebody about this concept and I talked to this VP of sales that has this kind of surprisingly strong point of view around only selling to growth customers. So I think this is going to be bubbling up more and more and I’m happy we’re early in sharing this with our audience. I think that most companies, we all worry so much and over index on who the customer is today and what their needs are right now and that’s fine, but it’s just a starting point. Especially in [Sass] where you sell a subscription service. I think it becomes more and more important, not just to understand your customer right now, but kind of try to understand where they’re going in their future and trying to focus on the ones where the future is gonna rapidly change. And I think that as more and more businesses are moving faster and growing faster around the world, servicing growth customers its not just a good, selfish thing in terms of your revenue. It might just also be a competitive advantage of understanding companies that are going through a lot of change of a fast-paced change environment. Since I think that’s what we’re gonna see. More and more broadly businesses and companies around the world and customers around the world more frequently. So I think the big tip here that we have to people is to start thinking about growth customers and not just ideal customers and my number one tip in getting started with this is just to identify those. So if you have a sales team, start asking customers what they’re growth plans are. If you do this all self-serve, maybe you want to have one drop-down menu that asks people not just about how big is the team right now, what’s your industry, but also maybe future hiring plans or some other criteria. You could probably do a bunch of stuff if you ever wanted to do intelligent stuff, you could probably go and look back on some public data that you could capture about a prospect or a customer. Their traffic, has it been growing? Or the same? Do they have job posts up there? Are they hiring? Is there anything in the news about series A or series B or financing? There’s a bunch of criteria that you could probably identify and automate that could give you a good glimpse of if this is a prospect or potential customer that’s gonna go through growth over the next 12 to 24 months, or not.
Hiten Shah: I really like that. So everyone’s got a task after this, if you’ve got a business and are working in it. If it’s your own or not, which is go figure out what type of customer is your growth customer and start really thinking about that so that you can create a healthier business.
Steli Efti: Beautiful. That’s it from us for this episode. We’ll hear you very soon.
Hiten Shah: See ya.