Why That Big Customer Will Kill Your New Business
3 reasons big companies make bad early-stage customers.
Who doesn’t want a big customer with a big appetite? It looks like easy money and a sure-fire way to grow your business. The holy grail of business wins is landing a massive customer. A company with impressive brand recognition and deep pockets.
At least, that is what social media and business books love to portray. Yet they do little to highlight the dark side.
Sure, you will likely grow, but it won’t be all sunshine and rainbows. Why? Because big companies eat little businesses for breakfast. Probably, not on purpose, but due to critical needs that don’t align.
What are you to do, if you want to punch above your weight class?
Many small businesses focus on rationalizing the positives while downplaying the negatives. Before you answer this question for yourself, let’s explore some of the harm that is likely waiting for you.
The downsides of going too big, too early
1. Big companies represent too much of your revenue
A new business, almost by definition, has a small number of customers. This translates into dependencies on a subset of them. Getting input from large customers is fantastic. No one would argue that point. Yet taking their money can create pressure to make them happy. Oftentimes, at the expense of what is best for your business in the long-run.
Once they’ve become your customer, pressure mounts.
What if you discover an opportunity that would be great for your business in the long-run?
Now you have to consider whether it will hurt your big customer. The company that is paying your bills. It’s a real risk.
Can you survive losing them? That answer may very well stunt the growth of your new business. Once you depend on their money to pay employees and run your business, losing them could kill your business.
Sadly, this scenario plays out every day in business.
How many new businesses shy away from promising futures only to preserve the early revenue from customers deemed too large to lose?
2. They need more than you can provide
Big customers need big results. That can translate into large projects or sales for your fledgling business.
Perfect. All sounds wonderful so far.
But what happens when you can’t keep up with their needs? Your rate of growth, while great in relative terms, may not line up with the volume your big customer needs.
This can put tremendous pressure on your new business. Assuming you have at least a few other customers, who gets priority?
In practice, it’s difficult to make everyone happy when growth fails to keep pace with demand. Where do you focus? Who do you disappoint?
Stress breeds poor decisions and poor decisions create stress. Now you’re caught in a downward spiral and not even Trent Reznor can help you.
Let’s flip the script.
What happens when they pull an order or delay a big contract? Now you’re left scrambling to unload inventory, cancel orders, or redeploy people. All at an incredible cost to you.
These are problems that can kill your new business. What will you do to minimize either extreme scenario?
3. They decide what and when they will pay you
Big customers are bureaucratic. That translates into complex procurement processes and large accounts payable departments. These groups strive for favorable financial outcomes for their company. This comes at the expense of your new business.
When it comes down to brass tacks, they don’t care about your cash flow nor will they offer terms that help you grow. This will be an uphill battle for your new business.
You’re probably out-gunned too. Tim Williams, the author of Positioning for Professions, calls this match-up “an unfair fight”. Professional buyers are well-trained and well-armed whereas most new businesses are not.
Timelines are also problematic. While you work on the basis of hours and days, these juggernauts view time on the basis of weeks and months. Sales cycles are long and onerous.
This elaborate dance doesn’t end once the sale is complete. Now you need to get paid. Invoices are the preferred device within large companies where even more gatekeepers step into the fold.
Over the past few decades, payment terms have become borderline abusive. What was once 30 days has become 120 days, even 180 for some. While you have some wiggle room here, you’re often outmatched by professional buyers. They know all the tricks and hold most of the cards. You just want to land the big customer and get paid.
What you don’t discover upfront is payment terms describe the best-case scenario. There are approvals needed and contract language often favors the big customer. The payment day countdown may not start until the invoice has been formally approved. That could mean weeks of delays.
Are you ready to float your big customer until payments start to land?
Real-world feedback from a blockhead
I lived this scenario.
In my first professional firm, our earliest customer was massive. And they offered more work than my small team could handle.
It felt like an incredible win
Yet we had no idea what it would cost us in the long-run. The trade-offs were enormous yet the allure of fast-growing revenue overruled our concerns.
While landing this customer allowed us to hire fast, the demand was relentless. Always at least one step behind our customers, our team worked long hours.
There was no time to hire potential talent and train them. Instead, we chased experienced people and threw money at them. With some, we promised roles that failed to materialize.
The big customer loved the results
Paying for individual contributors yet getting people that could lead teams. What incentive did they have to call out the resourcing mismatches?
As time went on, demand would relax sporadically. Leaving us holding the bag. Wondering how to redeploy our employees so we were not paying them to sit on their hands.
With the rapid cadence of parallel projects, contracts with scopes of work and resourcing plans were rare. We operated in good-faith with the large customer. This worked out more often than not.
But other customers paid the ultimate price
While we worked hard to build statements of work with most customers, the pressure was high to remain flexible for our large customer.
We deployed fancy project management software. For most of our customers, this helped us better manage projects and our team. Our pipeline became easier to visualize.
But no matter what, our large customer never colored within the lines. They would sometimes provide timelines for new projects, but they were rarely accurate.
Those pesky trade-offs came back to bite us
We had agreed to a blended hourly rate. It felt like a safe decision when our team had been 3–4 people with zero overhead.
Once we had a team of several dozen people, the margins no longer seemed so compelling. But raising rates felt nearly impossible.
We did manage to raise our hourly rates after a few years. Yet I suspect inflation likely wiped out any true gain.
Tiered rates were an option, but our customer had little incentive to change. Why would they agree to pay more now?
It didn’t help that they were aware of our reliance on them. While I had taken great strides to grow our revenue elsewhere, they still had excessive bargaining power. And they knew it.
Until I could grow my way out of the hole their departure would create, I needed to toe the line and pick my battles carefully.
A final takeaway
If nothing else, know you are making trade-offs when pursuing big customers. Go in eyes wide open. The problems and inequities that you see early on will only grow in size and complexity over time.
I learned a lot from that first customer. Lessons that helped grow margins on other accounts. And discovering new pricing strategies like recurring revenue to smooth out cash flow.
In the end, that large customer paved the way for several awards. For example, several consecutive years on the INC 5000 list of the fastest-growing private companies in the US.
Also, several decision-makers from the large customer went on to work at other large companies. And they often called in my firm as the logical choice when project needs arose.
Maybe it was more sunshine and rainbows than I thought. Maybe.
Casey is the founder of Fullstride, an advisory firm for mid-sized businesses pursuing their first Warehouse Management System (WMS).
