Don’t Let Your Customers Wag the Dog
As entrepreneurs, we're told to give customers whatever they want. But I've found giving customers too much choice can be a detriment, especially if you're trying to build a company you can scale and ultimately sell. I learned this the hard way.
Trying to scale a service business
It all started after I read a glowing article about Jupiter Research (now part of Forrester), a technology firm that provided research studies to customers through a subscription offering. Jupiter would do one piece of research and present it to all of its customers. Finally, I thought, a model that brought some scale and leverage to the consulting business.
I spent the next weekend plotting how to shift my consulting firm to a similar model. I decided my company would publish six major research reports each year with an annual subscription price of $50,000. For a single company to commission one report would cost more than the subscription, but now the company would be getting a total of six reports – a good deal, I reasoned.
At $50,000 per subscription, all we needed was 100 subscribers to have a $5 million business. The prospect energized me.
I'm a Pareto kind of planner, so once I thought my strategy was 80 percent of the way there, I cobbled together a makeshift brochure and hit the road to start selling subscriptions.
A, B & C prospects
I divided my prospects into A, B and C leads. The As were our long-terms clients, Bs were sporadic customers, and Cs were people we'd never met. Interestingly, the plan sold best with B customers. They knew us better than the Cs but were not so entrenched with us that they viewed a cookie-cutter offering as a step back in our relationship.
The problem was, I burned through our B customers quickly. I managed to get 17 subscribers, which amounted to $850,000 on an annual basis. A nice chunk of revenue to be sure, but not enough to make it worth walking away from our other clients. If I was going to make the subscription model fly, I would need to convince my A customers to join the 17 Bs who had already committed.
However, my As simply weren't interested in the subscription. Some thought they were giving us so much consulting work that we should throw in the subscription for free as a thank you for their business. Others didn't like the cookie-cutter nature of the model. Each time I met with my A customers, I would listen carefully to their feedback and assure them that they could continue to do business with us using the old model.
And that was my mistake. Giving our A clients the choice ensured they would never make the move to the subscription offering. Our A customers had become As because we were providing value to their business, and they didn't want to mess with a formula that worked for them.
Failure to lift off
With 17 customers, and $850,000 in revenue, the subscription offering represented about 25 percent of our revenue at the time. Important, yes, but not enough to cover payroll, rent and all of our other expenses. With my A clients saying no, I decided to run the subscription program while at the same time continuing our consulting business. Things went downhill from there. Client deadlines and demands eventually overshadowed the subscription business, and the quality of the reports suffered. Employees preferred to work on custom consulting projects instead of writing formulaic reports. I felt as though I was trying to take off with an overloaded plane—I could get the front wheels off the ground but didn't have enough torque to get the heavy plane airborne.
With B clients starting to question the value of the subscription and As no closer to making the leap, I decided to shut down the program.
Over the following five years, I often thought about what went wrong and continued to dream about transforming the business into something scalable. I concluded that my biggest mistake was giving my A clients the choice to continue to do business with us under the old model. I decided to relaunch a version of the program but force our customers to make a choice: either subscribe or end our business relationship.
Giving customers an ultimatum actually worked in most cases, and we quickly made up for lost consulting revenue with new A subscribers. As we got more focused on the offer, the As and Bs started talking it up, and we received more inbound leads from Cs.
The business started to take off. My only regret was not having had the courage to turn off the old business the first time I tried to scale up.
JOHN WARRILLOW | Columnist | Sellability
John Warrillow’s new book, The Automatic Customer: Creating a Subscription Business In Any Industry will be released on February 5, 2015. John is also the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a company dedicated to helping business owners improve the value of their company.