Everyone knows the surest path for a start-up aiming to grow at breakneck speed: land one or two reliable blue-chip customers and hitch your company's star to theirs.
But finding a customer that's both sizable and reliable isn't as easy as it used to be--which helps explain why America's fastest-growing companies are more likely to gain a foothold by selling primarily to other small and midsize companies. A survey of the 1996 Inc. 500 companies reveals that only 23% of them were selling just to Fortune 1,000 customers in 1991, the base year used by Inc. to measure revenue growth. By contrast, 34% were selling exclusively to smaller companies. The trend was especially pronounced in two turbulent industries: computers and health care. The phenomenon also runs strong in business services, reflecting the fact that small companies are outsourcing to one another.
Given the chronic instability and rampant cost cutting that have come to characterize many big companies, entrepreneurs feel increasingly skittish about linking their fortunes to the behemoths. "The big guys crush you," says Maria Elena Ibanez, CEO of International High-Tech, a Miami-based distributor of computer equipment that serves small computer resellers abroad. "With their volume, they know they can go anywhere. They want prices that are almost at cost, and they want all the services--when they call, they want you to talk to them personally. The arrogance is incredible." The risks can be formidable, too. Richard Gordon, chief executive of consulting firm R.J. Gordon & Co., clearly remembers losing the client that constituted 80% of his business. "We had a falling out, and it really, really whacked me," recounts Gordon, whose company has appeared on the Inc. 500 for the past three years. "I'm a little gun-shy from that." He now focuses on smaller fry.
As customers, those smaller fry seem to appreciate--and reward--the attention they get from those of their own ilk. Such sentiments can translate into greater loyalty and less price sensitivity. "When they're small, nobody wants them," says Ibanez. "I just go right in and stay with them forever--and when they grow, they're mine." Rick Barry, president of Summit Technical Services, in Warwick, R.I., says that the relative lack of competition for small customers enables him to command higher profit margins. "There's just a huge gap out there," says Barry, whose company provides contract technical support.
It's not that growth companies don't watch their costs; it's that they need more from their suppliers and are willing to pay for it. "For most smaller companies, buying is a learning experience," says Kevin Davis, a sales consultant based in Danville, Calif. "They ask you, 'What do I need? Which option is best?' They have limited resources, so they don't have time to become an expert on your product." Large corporations, on the other hand, typically know what they want.
"The more the customer needs your knowledge, the more value you bring to the relationship," adds Davis, who studied corporate buying habits for his book Getting into Your Customer's Head (Times Books, 1996, $25). "And the price you can command is a function of the value you deliver."
Of course, the small-customer strategy has its own drawbacks. As John Burgess, CEO of consulting firm International Profit Associates, in Buffalo Grove, Ill., points out, it can require more resources--such as a large, geographically dispersed sales force--to build a reasonable sales volume. But it's worth it, argues Ibanez, who turned down business from a large computer chain after it made an endless list of demands. "Unless you have a lot of financial power behind you," she warns, "it's much better to do business with a smaller company."
KEVIN DAVIS, The Kevin Davis Group, 4115 Blackhawk Plaza Circle, Suite 100, Danville, CA 94506; 510-831-0922
INTERNATIONAL HIGH-TECH, Maria Elena Ibanez, 12285 S.W. 129th Court, Miami, FL 33186; 305-254-8731
INTERNATIONAL PROFIT ASSOCIATES, John Burgess, 1477 Barclay Blvd., Buffalo Grove, IL 60069; 847-808-5590
R.J. GORDON & CO., Richard Gordon, 9200 Sunset Blvd., Los Angeles, CA 90069; 310-724-6759
SUMMIT TECHNICAL SERVICES, Rick Barry, 355 Centerville Rd., Warwick, RI 02888; 401-738-9097