Customer as... | Customers, Etc.
Reflections on different ways to think about the customer
This post contains reflections from a recent lecture in my Management of Technology capstone class at Georgia Tech. Startup Reflections 1 was written in a similar style, slightly less edited and more stream-of-consciousness.
“Customers are people to whom you deliver value, not just the ones that pay you.” I’d like to spend some time reflecting on this sentence from a few different angles because I think there’s a lot to unpack. Let’s start by taking the opposite position—that is, customers are the ones that pay you—and then explore the more broad position that customers are people to whom you deliver value. Finally, we’ll see if we can find a way to integrate the two streams of thought while maintaining the broader definition that’s used in class.
Customer as Payer
In a strict definition, we can think of customers as the stakeholder who gives money to the business in exchange for some derivation of value. By focusing on the money aspect of the relationship, we can build a simple model of a business. Corporations are created where shareholders provide their capital (their money) in exchange for a claim on the business. The corporation pays employees and suppliers to deliver value to customers, and in exchange for that value, the customers give money to the corporation. If the business is successful, more money will be returned to the shareholders than they had originally invested in the business1.
Part of what’s helpful about this model is that it necessitates a focus on the customer because the customer is the only source of money (in the form of revenue) that is not making a claim on the business. Shareholders will gladly give you more money, but only in exchange for additional ownership in the company, which produces dilution for other shareholders. Customers are the only stakeholder giving money to the business that will at some point generate free cash flow.
Why is this concept important? Companies have a way of losing focus on the customer, with teams of employees getting trapped in their own individual silos and failing to collectively focus on the customer. When the business fails to focus on the customer, they risk losing revenue as customers churn and fail to expand their current relationship with the company. Knowing who pays you money—your customers—and consciously focusing your attention on them can be a powerful way to deepen customer relationships and ultimately generate revenue for the business.
Granted, the mental model I described above is probably most apt in an established business that’s large enough to have organizational inertia such that focus can drift away from the company sheerly by effect of the size of the institution. What about startups?
Customers as those who derive value
I’m reminded again of my time at Trello. We very consciously didn’t have a focus on the customer-as-the-one-who-pays-you-money. Our primary focus was on users. Joel Spolsky, our founder, had told the engineers, “take all of the money you would put into marketing and pour it in to making Trello free,” that is to say, make an amazing product that people love and enables a viral network effect. The long term strategy was “Grow to 100 million users and figure out how to get 1% of them to give us $100 per year.” A $100 million ARR business isn’t too shabby!
The initial strategy focused on users and growth, not revenue from paying customers. Revenue was only added later, somewhat reluctantly, both to prove to future investors that the business could generate revenue and to assure our users that we weren’t going to disappear in a few years due to lack of revenue. (Notably, the number one support request from users pre-monetization was a request to see the pricing page—when building a technology startup, many users want some sort of assurance that you’re going to be around for a while).
As far as startups are concerned, you could say the strategy worked. Trello iterated several times on its monetization model and the company had 100 employees in 2017 when it was acquired by Atlassian for $425 million. It had millions of users and a path to continued revenue growth. And yet, a business successful in serving users might still face challenges as it struggles to organize its business around focusing on the customer.
The primary customer
Building software that users love is basically the preferred business model for Open View Ventures and their model of product-led growth. However, something that can happen is that the product team might mind that focusing on user interactions on a screen is easier than focusing on the entire relationship with the customer. Focusing on the larger relationships of various stakeholders that exist in a customer-as-payer relationship requires additional effort and may be uncomfortable. By preferring a “customer-as-payer” frame of mind, the startup can still choose to deliver a stellar experience for users but also design an experience that comprehensively goes beyond just the user.
No doubt a focus on users is beneficial in the early days of the company. If you put too much energy into monetization, you risk getting distracted by making money and not building the product that will be successful in the long term. However, as the product exits start-up stage and enters scale-up stage, you benefit from introducing the concept of the “primary customer”, which can help clarify the team’s focus to understand who you need to focus on to generate revenue for the business.
Okay, so let’s return to the definition of the customer used in class: a customer is anyone who derives value from your product, not just the ones who pay you money. Is the idea of “primary customer” (the one who pays money to the business) still helpful? I’ll argue that yes, it’s helpful, but more about something you keep in the back of your mind, not as a main focus. Focus on those who derive value, but keep in mind that at some point you’ll need to develop a relationship with one of those stakeholders and ask them to pay you money.
What’s the risk of not keeping the primary customer in mind? Often in the search for problem-solution fit, startup founders will explore every possible avenue of value exchange without thinking too deeply about who in the value chain is going to be willing to make the hard decision to part with their money in exchange for value. This can lead, perhaps unconsciously, to a focus on the wrong stakeholder, or not enough focus on the stakeholder who will be paying money.
The failure mode here is less about making a product that people don’t find valuable. Rather, the failure mode occurs when a product that is otherwise valuable isn’t able to be successful in the market because the business hasn’t broadly considered who in the value chain is going to pay for the product.
It’s true that everyone who derives value from your product is a customer, but don’t forget about the primary customers that are paying you.