Customer-Level P&L: When To Say No To Customers
Startups and entrepreneurship are all about finding ways to say yes and make things happen, including and especially the types of things people say can’t or won’t work. Status quo, mediocrity, and taking no for an answer are antithetical to people drawn to startups. Indeed, startup success and rapid value creation come from dynamism, optimism, and the ability to get to yes.
In addition, an often overlooked skill of the best startups and entrepreneurs is the ability to say no. No company can be all things to all people, especially on a startup budget, and so the ability to focus (even maniacally), avoid distractions, and say no to everything but the core mission is critical to success. That means saying “no we can’t get three more engineers; we have to reprioritize our roadmap and make do;” or “no we’re not getting into the [shiny object feature] the sales team keeps pushing us on;” or “no we’re not pursuing leads in [industry or segment] because they are not in our ICP.”
Among these, it’s hardest to say no to people who pay your bills: customers and investors. But it’s exactly here where startups can go off the rails by tying themselves to bad agreements with customers (we’ll tackle investors in another post).
In pursuit of growth and rapid value creation, startups SHOULD “bend over backward” to understand a customer’s strategic priorities and tactical workflows, identify champions and stakeholders and their budgets, and work to deliver something better (10x better) than the status quo. They should NOT bend over backward to cater to every whim and vicissitude of the customer in order to make them happy. Customer happiness is obviously important, but ultimately happy, valuable customers pay you for your good or service.
So where does one draw the line when a customer — big or small — starts tipping into annoying, hard to work with, never satisfied, or generally gives the sense that there is no finality to their asks of the company’s resources?
This is where it’s helpful to analyze customer-level profitability. Pretend the business has one customer. Build a P&L with just that customer’s revenue as the top line and just that customers’ share of variable and fixed costs (roughly COGS and operating expenses) underneath. If possible, start tracking the amount of time CS and product teams spend with them. Make note of how much time and energy YOU spend with that customer. Assign costs to the team’s fractional time and calculate the customer’s profitability.
This is a different from a LTV/CAC/payback analysis that determines how to deploy sales and marketing resources in order to get to yes (i.e. win business). On the other hand the customer P&L analysis helps figure out when to say no (i.e. reset or end the relationship).
A common result of the customer P&L analysis is finding that the customers you think are your best customers may actually be your worst customers, causing you to hemorrhage time, money, and energy. At that point the only thing that can be done is resetting the relationship, ending it, or simply establishing boundaries by saying no.
Another common finding is that a smaller customer or customer segment that may not use a lot of support resources is actually the most profitable, has expansion potential, and therefore should be treated more flexibly.
A side benefit of the customer P&L is finding money in the form of less than optimally-utilized team capacity. Firing a customer or charging them more to cover support costs can have the same impact on a team’s capacity as hiring more people. In fact, there’s no better exercise to determine the productive capacity of a company’s main asset — it’s people.
I’ve seen companies lulled into a sense of security with steady growth and large happy customers until a big customer churns or threatens to churn. The knee jerk reaction is to discount the contract to prevent a full churn. A few of these discounts pile up, growth slows, burn increases, and suddenly no one is sure what to do. Spending money to reignite growth doesn’t work. Not spending on growth to reduce burn doesn’t work either due to high expense load.
In these situations, it’s not the end of the world to deliberately shrink the business temporarily in order to scale on more solid foundation with profitable customers.
You must get better before getting bigger.
In summary, customers must generate profits for the company to remain customers. Customers that generate consistent losses are not and cannot be customers; they are charity cases.
Ultimately, startups are an exercise in doing more with less, in harnessing the creativity, innovation, and urgency of the opportunity to achieve more than previously thought possible. They must get the most out of their resources, and they must know when to say no.
