Who Pays, and Who You Wish Paid

Ask an owner who her customers are and she will describe a person. Ambitious, growing, values quality, ready to invest. Ask her for the list of who actually paid her in the last twelve months and a different picture appears. Some of the names fit the description. Many do not. A few of the largest are people she would never have chosen, and a few she would have chosen are on the list for a single small purchase and then gone. The gap between the customer she describes and the customer who pays is one of the most useful things a business model can show, and it only shows it if the list is written down as numbers rather than remembered as a type.

Here is what the list usually reveals when it is sorted by what each customer paid. A small number of customers account for most of the revenue. This is normal, and it is also a risk, because losing one of them is not a bad month but a bad year. Below them is a long tail of customers who paid little, and when the cost of serving each of them is added, many of the tail are losses. The business has been describing itself by the customers it wants and running itself for the customers it has, and the two groups are not the same.

Then sort the same list by margin rather than revenue, using yesterday's sums, and the order changes. The largest customer is often not the most profitable, because size buys discounts and demands attention. A mid-sized customer who pays on time, asks for little and comes back every year may be worth more to the business than the famous name that everyone is proud of. The owner's instinct about who her best customers are is usually about a year out of date and shaped by who is loudest.

I spent years watching large companies make exactly this mistake at scale. They would describe their market as one thing and sell to another, and the sales team knew it long before the board did. The data was always there. Nobody had sorted it.

The response is to sort the list, twice, and then to decide who the business is for, on the evidence rather than on the wish.

The first sort, by revenue, tells you where the risk is. If one customer is a fifth of the business or more, that is a fact the financial model needs to know, because the plan has to survive their departure. The second sort, by margin after the cost of serving them, tells you where the value is. The customers near the top of the second list are the ones to describe when someone asks who you work with, because they are the ones the business is actually built on, whether or not they match the picture in your head.

Then look at the tail and be honest about it. Customers who pay little, demand much and do not return are not customers in any useful sense. They are a cost that happens to generate an invoice. The business model should say, in a sentence, who it does not serve, and the tail is where that sentence comes from. Letting them go feels like losing revenue. It is usually gaining margin and, more importantly, gaining the hours that were being spent on them.

Finally, write down the customer you wish paid, and ask why they do not. Sometimes the answer is that the offer is not for them yet. Sometimes it is that the price signals the wrong thing. Sometimes it is that the business has never actually spoken to them, because it has been too busy serving the tail. Each of those is a decision the floor makes visible, and each is one the roof hides. Tomorrow we move to the second layer of the floor, and turn the business model into twelve months of numbers.

Continue reading: Twelve Months on One Page →

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