Law 1: Sell to the Right Customer

Author: Ted Purcell, Senior Vice President of Sales and Customer Success, Clarizen

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Executive Summary

Selling to the right customer and being completely aligned with your product market fit (PMF) is a mission that growth companies need to focus on throughout the entire organization. The excitement of closing net new deals, especially ones involving common and well-known brands, is exciting for everyone. This is especially true if they are within your PMF, because then the revenue machine is empowered and your specialized handoff from pre-sales to post-sales can be templatized and scaled to help ensure expansion and reduce churn.

But if your customer isn't the right customer, the impact on your organization can be disastrous. The wrong customers can inhibit your organization and take you away from efforts that drive success, efficiency, and scale. On the other hand, this may be a fine line because these customers can also become critical design partners to help you extend your use case and PMF. The critical point? Be aligned on the aspects of what the right customer for your company is and is not!

The customer is the north star of a company—and its most valuable asset. For a company to live up to its aspirations and expectations at scale, the CSM needs to be the host responsible for the complete customer journey, both inside and outside the company—the ultimate trusted adviser. The end result may be increased expansion and decreased churn, but that is icing on the cake compared to the details that enable that goal.

Revenue doesn't just speak, it shouts. That said, your PMF screams! Your PMF must drive your complete corporate alignment, from product development to operations and throughout the go-to-market funnel. As you grow, customers may begin to surface use cases that ideally build on the foundation of your PMF. If not, they may drive your organization into chaos. An organizational commitment to understanding the data that surfaces during your customer engagement life cycle and to ask whether this is the right customer for you is extremely important. The right customers hone your company's vision, your content, and your onboarding of employees, partners, and customers. And they help optimize your corporate direction. The wrong customers, even those who may come with great brands, the promise of large up-front or potential revenue, or referenceability, may take your valuable resources, mindshare, and company down a very dangerous rat hole.

To maximize effectiveness as a SaaS growth company, you will be confronted with this question—Is this customer the right one for us?

In your efforts to optimize a SaaS revenue machine, alignment at all levels and aspects of the company drives focus, specialization, and the ability to effectively scale. Although the product teams must focus on delivering to the PMF, they still need to be aware of and responsive to customer needs and the reality of the market as it evolves. If this alignment is not strong, it can erode a company's focus and ability to execute and scale—to enable and ultimately deliver for the right customers as they start showing up at high volumes and velocity. The right customers may help mature and calibrate a company's PMF and innovation agenda. The wrong customer, who is not aligned with your target market and core PMF, may put constraints on every aspect of your company's go-to-market motion. The key is building a communication mechanism and a process to surface risks early on. Presales, sales, and scoping within the services/statement of work (SOW) build phase are critical points in the feedback loop to mutually surface risks and ultimately change customer direction or put a stop to the sales process with a particular prospect. For this to be effective, your sales team must have a clear and complete picture of the customer context beyond simple product features and functionality. Your sales team must understand the perceived business value and who, how, and why it will affect and influence customers.

Marketing, sales, and customer success, fully aligned with the product, provide a strong enabler of the myriad requests and demands that come from an evolving and maturing customer base. It is incumbent on sales and customer success teams to manage growth and drive scale in concert with the feedback loop from the customer base to maintain alignment with your target market and PMF. This requires strong leadership and a commitment to understanding that the right customers will enable us to be more responsive to the target market and help focus resources on the right efforts, making not only your customers but also your own employees more successful.

How Do You Define the Right Customer?

Does it encompass a particular use case or line of business, a particular industry vertical, or a particular size of customer that fits with your existing product? Is it based on analyzing your current customer base and what's working today or analyzing the size of various addressable markets where you are not currently playing and deciding which ones to target and, potentially, which customers to deprioritize or completely abandon? In the end, it includes a bit of all these factors, but the CEO must be aligned with and committed to the PMF, including the right target customer profile.

Once you have defined the profile of the ideal customer or ideal customer segment, your operational go-to-market engine needs to align with that profile. Operationally, it all starts with selling to the right customer, which means starting at the very top of your revenue funnel. Marketing must target the right kinds of customers, and sales must quickly disqualify those who aren't a great fit, going beyond typical methodology and key qualification steps such as budget, time frame, and executive sponsorship.

The churn itself is only the tip of the iceberg; the cost of signing customers that you can't make successful could be enormous. First, you incur the customer acquisition cost (CAC) of bringing these customers onboard. But the biggest cost is the opportunity cost of applying resources to the wrong customers and, inevitably, doubling down on those customers when they struggle. These resources could have gone to helping other customers who have a greater opportunity for higher customer LTV.

Your message and your brand are empowered by the right content, which needs to be put in the right context in front of the right people at the right time. The customer profile must be assessed at every stage of the funnel, with a commitment to providing a consultative and trusted adviser approach to your customer interactions—even when it is to prevent customers from going down a path that creates complexity, cost, and ultimate derailment. This approach requires investment, including continual messaging to your teams to establish and reaffirm this commitment.

There may be instances when the right target customers are not met with the right internal customer alignment, therefore putting them at potential risk of becoming the wrong customers. Sales and customer support hygiene is critical here. Surprisingly, some customers have become our storybook customers even though they were not the right customer profile initially. Establish executive sponsorship and reach higher and wider in an organization not only to position your product in the right context but also to showcase your customer success–oriented culture to drive a successful customer engagement life cycle. This will help you establish the right cadence with the customer as well as preserving your trusted adviser brand, ultimately helping you ascertain whether solving for the internal customer context will drive you to the right customer profile.

When a company is in scale mode, the communication and message of the right customer commitment must be consistent and continually reaffirmed. This alignment will drive the top of the funnel activity through your marketing and demand-generation efforts: to sales, to onboarding/professional services, to customer success, and back to product again, building on your referenceability and ultimately leading to reduced churn and improved expansion results.

Sales and customer hygiene are also important, and the process enables the data, which leads to decision making that drives the right results. In an ideal world, a company would sell only to its ideal customer, but we know that growth companies face tremendous pressure to drive revenue growth. As such, it may be necessary to expand the definition of the ideal customer to optimize growth. In that case, it's important to also have a scalable mechanism in place to capture the customer profile so you're able to track and assess the ideal customers, including important metrics such as resource allocation, CAC ratio, net churn, and customer LTV. Various SaaS tools such as Salesforce, Marketo, Gainsight, and Clarizen have the ability to leverage the open application programming interface (API) architecture of these systems to connect them for seamless data flow, so it's possible to capture customer-fit criteria early in the go-to-market cycle and track these data throughout the revenue funnel.

You may also choose to define unique processes for less-than-ideal customer segments. For example, you may choose different business requirements, such as requiring a certain profile of customers to purchase a specific services package. You may choose to invest in a higher-touch process during key risk points, such as deeper CSM engagement during the adoption phase to work to neutralize risk early and to get the customer on the right track. Alternatively, you might choose to minimize investment through lower-touch and one-to-many approaches, such as webinars and self-help, web-based resources to focus limited resources on higher-LTV customers.

Prioritize a scalable system to capture churn reasons and to analyze these data on a regular basis, with product and customer teams to slice and dice the data across various customer segments. Understand what percent of churns were driven by poor adoption, what percent were driven by product fit issues or product gaps versus customer needs, and what percent were driven by factors that were hard to affect, such as merger, acquisition, restructuring, and bankruptcy.

It's also important to analyze your incentive processes across the company and determine how to align them to reinforce the need to focus on the right customer segments. Clearly, your customer success leadership is incented to reduce churn and partner with sales to accelerate expansions. Are your sales leaders incented to reduce churn, thus incenting them to not sell to the wrong customers? How about your product leadership and an incentive on customer retention? If we've established the point that customer LTV and minimizing churn are some of the critical key performance indicators (KPIs) for any SaaS company's success and valuation, doesn't it make sense for all functional leaders to share those variables in their incentives?

Another factor to consider is organizational structure and how it does or does not align to focus the organization on selling to the right customers. Do your sales and customer success organizations report to a chief revenue officer who holds a holistic view of both new business and retained business to help drive the right decisions about which customers to target and which ones to walk away from? If sales and customer success are independent silos, do you provide your customer success leadership veto power over deals that are not a fit?

The feedback from sales and customer success is tremendously important for any high-growth SaaS company to evolve your product and strengthen your PMF. It's critical if you choose to broaden your lens to nonideal customers or to adjacent customer segments beyond your core market. It's also key to capture customer segment information for new feature requests. Without that designation, your product team may incorrectly assess and prioritize where they dedicate product development resources. It's also important to define processes and data flows that scale as the business grows, and it becomes harder and harder to align on priorities because of communication challenges.

Of course, your agenda and your strategy may evolve and mature as you scale, as will your target-customer profile, to set the example for the organization and the company. Referenceability is everything to a company, and building the right content in a value-oriented context should drive the right behavior—not only to acquire more customers but also to set the agenda for your own people, especially as you hire and bring on new employees.

The right customer journey, in combination with the right PMF, with top-down alignment on the priorities of the organization, driven by a collaborative and transparent agenda for your employees, partners, and customers, will help minimize noise and drive operational excellence throughout your customer engagement life cycle. Moreover, it will ultimately help you focus on selling to the right customer.

Additional Commentary

Dave Kellogg, CEO at Host Analytics, recently said this to me: “Ninety percent of all churn happens at the time of sale.” In other words, at least in his business, almost all churn happens because they've sold to the wrong customer. This is probably true to varying degrees across all businesses. And the actual cost of selling to the wrong customer is enormous. The wrong customer is always harder to onboard, taxing your team's time and abilities. This often leads to greater demands on your product team as well. The burden then gets passed on to the customer success and support teams when the onboarding project is complete, and the struggle exacerbates when your customer success team has to scramble to configure and execute an outside-the-box use case on behalf of the customer and then train the customer on how to use it. Then, the bell rings 90 days pre-renewal and, with the customer at risk, a SWAT team is assembled to “save” the customer, often including an executive or two. In this situation, the renewal is secured about 50 percent of the time and usually only by dropping the price, refunding some money, or extending the customer some free months due to their challenges. All this does is kick the can down the road with the same difficulties still unresolved in the new contract term. For the 50 percent of customers who do churn at this point, the lost dollars are painful. But the opportunity cost of all the hours and effort poured into the customer only to have them fail hurts much more. Think of that time and energy being channeled instead into good customers with the opportunity to grow and thrive. The last negative might be the biggest one—the word-of-mouth that will go forth from this failed customer. Although much of the blame might actually fall on him, that's not likely to be the story when that customer talks to friends and colleagues about you.

High Touch

High-touch businesses are especially affected by not selling to the right customer. By definition, high-touch customers are your most valuable, and that means they are most likely the highest-paying ones, too. However, there are more than dollars on the line. Also, every other part of the post-sales world is staffed to provide these customers a better experience and a higher likelihood of success. This means that a 10 percent or 20 percent increase in the burden of onboarding, training, support, and customer success is 10 percent or 20 percent of a much larger number than in your low-touch or tech-touch world. The brand value and brand recognition of these customers is almost always much higher, too, so the cost of their negative advocacy is more painful than from a lesser-known customer.

Low Touch

The pain of losing a low-touch customer is not as great as a high-touch customer. However, there are more customers of the low-touch variety, so if you are not diligent about selling to the right customer, you may find yourself with a significant burden here. And, because they are low touch, your ability to manage the resulting crises adequately or to find the resources to save the customer are slim. This can be just as costly as with your high-touch tier. It may be even more costly in one way. Because there are more of these kinds of customers, they will, in aggregate, know more people, so the negative word-of-mouth might even be greater than for high touch, even if the brand value of each individual customer is lower.

Tech Touch

Now take the problems defined previously for high touch, multiply that by 10 (or more) for low touch because of the volume, and multiply that again by 10 for tech touch. Each tier downward gives you significantly less chance to save an individual customer. Think of the impossibility of saving a customer who is not really a good fit for your product, simply by sending them e-mails or getting them to attend webinars. Highly unlikely to bear fruit, right?

So, how do you mitigate the chances of selling to the wrong customer since it's so important to not do that?

• Use data, not just anecdotes. If you are going to be rigorous in who you sell to, it needs to be data driven. You can't just say, “I think we sold before to a customer like that, and it didn't work out.” It needs to be more along these lines: “We've done deals with 31 customers who match the same industry, discount, use cases, and price-point profile of this one, and 14 of them churned at the time of first renewal and another four at their second renewal. Eight of them have not had a renewal come up yet. The remaining five renewed but at an average contract decline of 14 percent. In addition, our average NPS score across the remaining 13 customers is 5.2, and their average health score is 38.7.”
• Give your vice president of customer success veto power over deals in the pipeline. This is bold and a little dangerous, but it can work. It's a little bit like giving your customer support team veto power over whether a release should go out. You can make the argument that they should have that power because they'll have to live with the result of the decision. If retention is truly a key focus of your company, then the person who owns retention needs to wield a lot of authority.
• Put your customer success team under your sales VP. We don't recommend this as we discussed in Chapter 3. But, if it's a major problem that sales continues to sell to the wrong customer, making the same VP who makes the selling decision have to suffer the consequences of those decisions will definitely change their focus. That's why we had a sales leader who also owns customer success write this particular law. If you don't put customer success under sales, and, to a lesser degree, even if you do, your CEO will need to be deeply involved in balancing the need to sell more new customers with the need for a high retention rate.
• Make sure your VP of sales (and all executives) is incented on retention, not just new business. You could take this argument all the way down to the individual sales reps, but they don't typically worry about a year or more down the road so that may not have the impact you are looking for. But, if your sales leader, who is probably also compensated on overall company performance, is incented on retention just as he is on new business, you'll find this will definitely have an impact.
• Read Law 10 carefully. Customer success has to be a top-down commitment, which means the CEO needs to drive the company with long-term, retention thinking, not just grabbing deals to make quarterly numbers. Most likely it will end up being his call to say “no” to deals and certainly to properly incent and enforce the right company behavior. He and the board are incented above all else on long-term company success.