Customer Strategy
An Ideal Customer
I was in my London office, working at my desk. It was early morning. The day stretched before me. I was the co-owner and CEO of CloudSense, a B2B tech start-up. My three co-founders and I had reached our one-year anniversary, which we’d celebrated in a local Lebanese restaurant one week earlier.
Today, though, I was facing the coming hours in the grip of self-doubt and without much optimism.
Optimism had been my trademark as I spearheaded our new B2B SaaS business. Getting our company off the ground had been no easy task. During our celebration we reminisced how far we’d come in a year, from the four of us with laptops working in bedrooms; now we had customers, an office and we’d managed to keep some cash flowing in. Most start-ups don’t even last one year; but we had done that, and now we felt, we were in the game.
The self-doubt crept in that morning because our financials now showed a difficult story. No matter that we’d kept the cash flowing all year, now it was running out. To be precise, it would be all gone within six weeks. What would we do, and what would I tell my wife, at home with our first baby?
During our first year, we’d survived on hard work, and hustling. There were two big things going in our favour, we built great software and this created a reputation which helped us sell.
Yet the company was about to run out of cash because of two unwanted results that had both landed in my inbox that morning.
First, our shopping cart software had been rejected by a major airline that I’d been speaking to for months. The plan had been that they’d co-fund critical work and that was out of the window.
Secondly, we’d been in trials with a chemicals company, but they’d emailed to say they were so unhappy with the results that they would not pay our invoice. The trial was finished. Worse, we’d been really relying on that payment to keep going.
That lunch time, I had arranged to meet a prospect, a boss from my old industry but I was in no mood for eating. So instead, I listened and began hearing a familiar conversation from my days at the TV broadcaster. A story about more competition, squeezed margins, complex products, and “if only we could be cleverer and more personal with our customer offers, then we could win more market share.” My follow up questions must have come so naturally after those years living with the same challenges. My prospect turned to me and said, “I took this meeting because I’d heard you are an expert in the field.” So I talked more about the origins of my own business, then she added, “This is the first time anyone’s been able to demonstrate they’ve actually solved these problems in our market. Most vendors I speak with don’t really get it because they haven’t got the first-hand experience. You know this space inside and out.”
Despite the problems of the day so far, I finished lunch thinking this had been a great first meeting for us both. The discussion had flowed naturally around topics I understood well, and I knew we could help. Walking back to my office, I reflected how much easier it had been discussing industry problems I really knew about, rather than the frequent dance I’d been doing over the last year, trying to convince airlines, chemicals companies, and many more businesses with their own customer experience problems that we were their answer.
As I sat down at my desk, the words “you know this space inside and out” kept running through my head. She was right. I’d spent the last hour talking to our ideal customer and the other businesses we’d been putting so much effort into, only to fail them, were not ideal at all. In fact, in our hurry to move forward, get customers, and create sales, I’d been chasing the most lucrative looking opportunities rather than the ones I truly understood, the ones that were a perfect fit, and as a result achieving customer success and getting paid was painfully hard.
Owning A Niche
That afternoon, I scoured through our prospect list. I knew what I was looking for. I’d spoken to Quadstar, a telecoms and media company a week earlier. A friend was working there, helping them to personalise their services and customer experience. I’d slow peddled on the follow up because it looked small compared to our existing customers, and rather than there being an immediate software opportunity, instead they’d wanted me to be an advisor to them. Now I realised that the most important thing was that they fitted my ideal customer profile. The industry and problems they were solving were ones my team knew well. Customer success was close to guaranteed, and the cost for us to quickly serve them with this expertise was zero, so we’d not have to spend time and money closing our own knowledge gap. It wasn’t the software opportunity I’d been looking for, but they needed a solution from me, and it could keep the business afloat.
Two weeks later, we had an initial work order hashed out with them. The speed of the deal astonished me, but they were so pleased to be getting some expertise, and so happy with our credentials that they moved fast to secure us. They also accepted weekly invoicing and seven-day payment terms, which saved our cash flow, saved the business, and eventually allowed us to expand further.
Finding an ideal customer can be described as finding a niche, which the dictionary defines as “denoting products, services, or interests that appeal to a small, specialized section of the population.” Call it niche or specialist, having a very exact understanding of an ideal customer is the difference between success and failure. Limiting ourselves, allowed us to play to our strengths.
Being niche meant we were dealing with a repeating set of specialised customer needs within a single profile of company. Our experience created traction with new customers who saw us as the authority in our field and they felt the empathy of understanding for the challenges they faced. What is more, with few competitors so tightly focused, it was easy to stand out, with marketing we could use again and again, as the right partner to work with. So much so, that we found customers would forego their usual procurement processes in their haste to use us.
Being niche meant we could deliver innovation more quickly and cheaply. Our research costs were minimal as we understood the problems well, and our development was lean, as the same intricate, specialised capability was needed across our customer base.
By knowing our ideal customer inside and out, we were surprised how much extra value we had to offer above and beyond our intended software product. Quadstar had first paid for business process advice, technical expertise as they planned their future state, and then eventually they bought our software too. By focusing on this ideal customer, it became easy to find added value beyond the core, creating more sales opportunities and a much richer, more helpful customer relationship.
Over time our market analysis remained cheap too, as we were naturally well connected in our space. We were able to talk to industry insiders whom we knew and find out what they thought was changing. Having an ear to the ground in this way proved invaluable as we adapted over time.
Our career experiences had finally led us back to our ideal customer. It was time to learn more about the size of this opportunity and more about who those customers were.
Sizing the Target Market of Ideal Customers
Sizing up our niche became a priority for me as I went through our list of opportunities and started deleting all the other industries that I knew nothing about. In those early days, we were fortunate that our area of expertise was in a problem domain big enough to sustain growth but small enough to be a specialty, and not the strategic focus of bigger competitors; but we couldn’t rely on that without much better understanding of the direction the business was heading.
Over the next couple of months, I spent spare moments researching our total addressable market. “Total addressable market” (TAM) assessment is a measurement of the total demand that exists for a product or service as it relates to your ideal customer. As I did the work, I realised that I was looking at a much bigger trend. The problems facing our local customers were happening elsewhere in the world, and I needed to learn more to help us specialise and track down more customers.
Understanding the changing size of the market for the problems we could solve became a primary business planning task for me that was revisited each year, as we sought to ensure long-term growth, not as a mainstream software vendor but as a specialist, immersed in solving problems for a single community.
I calculated our TAM by counting the number of companies that might buy from us and estimating the average size of their annual contracts if we sold to them all. How many companies in our chosen industry needed software like ours? What did we approximate they spent on technology every year? And finally, how much of that could we likely capture?
Doing a mix of online research, I found big consultancies doing great work on our market, and many of them were giving vital information away for free online. There are podcasts offering deep analysis in many sectors and tools like LinkedIn and Glassdoor to deep dive into business examples.
As well as web-based research, I messaged four or five people in my focus sector and asked to have a conversation.
I spent some of our profits and bought a specialist industry report that I’d come across. It went in depth about market size, and it was money well spent, even for a cash strapped start up. A little cost up front could save the greater cost of backing a non-viable business idea.
The cost of online advertising keywords was also a reasonable proxy for competition. Over time as our market heated up, the Google auction cost of our keyword terms, went from costing very little to becoming $50 per click. Competition is always a reality, so understanding the direct and indirect competitor dynamics was a must.
When it comes to understanding the market, though it may feel like the time investment is wasteful, compared with the many years spent on a business plan that’s never destined to take off because of a lack of market, it’s a small commitment.
The Target Account List
As we grew, our product and market expanded. We found adjacent business functions within our customer’s organisations that we could serve with software.
To be effective, we needed to move from understanding the market broadly, to knowing the target accounts specifically that we could sell to. Investing time and money in that targeting would save us doing the wrong business development based on superficial understanding.
Using external data sources that provided company data broken down by industry, geography, revenue, structure (parent, subsidiary), etc. we began the work to pick out specific businesses that were in our ‘strike zone’.
The definition of our Target Account strike zone became:
“Communications or media businesses with revenue greater than $500 million in ‘English-friendly’ markets: United States, Canada, United Kingdom, the Nordics (Denmark, Finland, Iceland, Greenland, Norway, and Sweden), Benelux (Belgium, the Netherlands, and Luxembourg), ANZ (Australia and New Zealand), Singapore, and Hong Kong.”
We eventually had a distributed but largely English-speaking go-to-market team across 11 offices worldwide, and this type of specific planning was very helpful.
As we matured, we filtered this down by querying the data to refine the list: The desired company needed to be profitable enough to invest in our solution, targeting a total addressable spend of more than $1 million in the first 12 months.
Strike zone work meant that we knew that the businesses we’d focus on were our ideal customers, and what we offered would be a close fit for them. By applying our filters to the industry list we had, we’d eliminated 70 per cent of the companies as too small, not speaking a common language, too remote, or being focused on the wrong aspects of the sector. If we’d not done the work, then 70 per cent of our effort and investment in business development would be wasted before we’d even begun. Now we had a fighting chance of expanding and becoming a leader in our sector.
Final thoughts:
In this note, I recount a pivotal moment in CloudSense's early days when financial pressures and failed deals led to a crucial realization: the importance of focusing on ideal customers within industries I deeply understood.
Key Takeaways:
Identify Your Ideal Customer: Concentrate on clients whose challenges and industries align with your expertise to enhance success rates.
Leverage Personal Experience: Utilize your background to connect with clients facing familiar issues, building trust and credibility.
Focus on a Niche: Targeting a specific market segment can streamline your efforts and improve outcomes, especially in the early stages.
Learn from Setbacks: Use failures as learning opportunities to refine your customer strategy and business approach.
Adapt and Pivot: Be prepared to reassess and adjust your focus based on experiences and insights gained during your startup journey.
By honing in on the right customers and leveraging personal industry experience, startups can navigate early challenges more effectively and build a solid foundation for growth.