If You Leave the Low End of the Market … You Probably Can’t Go Back
As we begin strategic planning season for next year, there one topic a lot that comes up a lot: Should We Just Let Our Smallest Customers Go?
Even once you hit just $2m-$3m ARR — fairly early — the trade-offs start to become clear for startups with customers both Smaller and Larger:
- Small customers consume just as many sales, success, and marketing resources. Probably more. And produce a lot less revenue per interaction. That often starts to not feel worth it after just a few million in revenue. Every call takes the same amount of time, but the small ones produce so much less revenue. And so you start to get push back from your team on marketing budgets, on sales priorities, on support and success. “The small guys take too much time.” Which is true.
- Small customers churn at a much higher rate. Small business go under more often. And they tend to pay out of their own pocket. The combination generally means net negative churn here is close to impossible for most vendors. Your large customers keep adding seats, while your small ones cancel with no notice. Frustrating.
- Small customers sometimes are a lot less happy. They don’t have an IT team, or a deployment team. They don’t have anyone, in fact. SMBs generally end up much less happy with products that don’t auto-deploy than larger customers do. Larger customers have a team, or at least someone, to manage deployments. A month of change management is downright swift in the Fortune 2000. SMBs often only have an hour to get going, by contrast. The CEO has something else to do next.
So many of you will be tempted to let the small customers go. And that’s often the right choice. But before you do … just a few thoughts:
- If they are happy, small customers can be your army of marketing warriors. 1000 small customers may be a death of small cuts to your sales and success teams. But 1000 super happy customers out there, talking you up? Blogging? Tweeting? Singing your praises? That’s a strategic weapon. A weapon you lose as soon as you let the long tail go. The long tail can be the highest ROI marketing initiative available to you. If they are happy. The startups I’m involved with that have happy SMB customers have much higher brand awareness around $10m in general than those that don’t.
- Small customers make you and your product better. Often, much better. They make your onboarding smoother. They make your product slicker. They make the hacky features more robust. Because they won’t use your product otherwise. Small customers can’t deal with work-arounds, or complex on-boarding. Or POCs. So you can’t cut the same ease-of-use corners with SMBs than you can with enterprise customers. This makes your product better for all segments. Including the biggest guys.
- Small customers are great for training the sales team. Give the new reps the leads for the smaller customers. This is a top way to train them without burning your top big $$$ leads. This makes the SMB leads worth a lot more than just their direct lifetime value.
- Small customers have short sales cycles. Later, you may not care. But they can give you an amount of repeatability you just don’t get out of Big Deals. Having a mix makes making the quarter at least a little less stressful. And the misses milder.
- Small customers are more like you. You can get up to speed faster on what they need. They are closer to consumers in their behaviors. Fortune 2000 companies’ workflow and other needs likely are very different from what you know.
- Small customers grow up. If you can keep them … and you are or become enterprise-grade enough … why would they leave? They may still, but at least you have them to start.
- Someone will win here. Are you OK with it not being you? Are you OK with your competitor getting all the press and attention that comes with owning the higher volume, lower-end segment of the market?
Net net, my general advice is at least keep a toehold in SMBs if they are happy. Now this isn’t often the case. If the business process change and onboarding in your app are complex, then often, the smallest customers are the least happy. In that case, letting them go makes sense. Don’t stay in SMB if your NPS there is 5 and your NPS in enterprise is 40+.
But if your smallest customers are among the happiest … at least keep a small team on them. One rep, a customer support rep, and a little bit of the dev budget. 1000+ super fans in a strategic asset. At little more on that here.
And if you don’t let them go entirely, at least maybe you can come back and invest more later. But if you let them go entirely, that DNA will be gone from your company. Almost no one ever re-hires SMB DNA, or gets it back, once they’ve optimized around mid-sized and larger customers. Once you get good at just closing $100k+ deals, it’s just too hard to make money from a $1k customer. It stops adding up. You’ll have the wrong people, wrong culture, and wrong DNA to work with the small guys any longer.