Small Is Beautiful
It may feel good to sign up big customers when you're starting out in business, but in the long run, your salvation lies with the small ones
Not long ago, I received an E-mail message from a young man who was launching his first company, an advertising and marketing business. He said that he had everything he needed to get started -- money, contacts, experience in the industry, a well-equipped office, and so on. There was just one problem: he wasn't sure what kinds of customers to target. "I don't want to bore myself with small clients," he wrote, "but bigger clients seem out of my reach. Any thoughts?"
My advice was to forget about boredom. Growing a business from scratch is never boring. Instead of shunning small accounts, he should sign up as many as he could handle and charge premium rates. In the long run, he'd be much better off with a lot of small customers than with one or two big ones.
Small customers are the backbone of a solid, stable, profitable business -- especially a service business. I'd like nothing more than to own a service company with 10,000 small customers, each good for about $5,000 a year in sales. That's my ideal. Not that there's anything wrong with having big customers. Sooner or later, most of us need them in order to grow. But you should never look down on your small customers or take them for granted. The more you have, the happier you'll be.
Why? I can give you three reasons:
1. You get better gross margins with small customers because they pay more for your services. They have no choice. They simply don't have the negotiating power of large customers. As a result, you can charge small customers the top price.
I'm not talking about gouging anyone. In my industry, the records-storage business, for example, most companies have a book rate. That's the price per box they charge any customer who's storing up to, say, 500 boxes. A customer with 10,000 boxes usually will pay a much lower rate. It's a matter that has to be negotiated. I would never let the price go so low as to undermine our gross margins, but I have to offer some kind of discount because we're competing with other suppliers for the business. With small customers, it's a different story. I can afford to insist on the book rate, which helps strengthen our margins.
2. Small customers bring stability to a business. If you treat small customers right, they'll stay with you forever. That's partly because they're loyal, and partly because -- like most of us -- they tend to resist change. It's also true, however, that they're much less likely than big customers to be lured away by competitors. Why? Because most companies don't seek out small customers.
When I was in the messenger business, for example, everyone knew where to find the big accounts -- the law firms, advertising agencies, and so on -- and everyone went after them. It took almost as much time, effort, and money to locate and sign up the guy who'd have only five messenger calls a week as it did to land one of the big fish. What's more, you'd need 200 of the small customers to provide you with the same volume of business as one large customer. So our competitors' salespeople generally ignored the small accounts. When we got one, it rarely left.
3. A broad base of small customers makes your business less vulnerable to the loss of any single customer. That's why -- when you apply for a loan -- a bank will ask you to list all your customers that account for more than 10% of your sales, as well as the percentage of sales that each one represents. If you do more than 30% of sales with any customer, you're in trouble.
When you rely too much on one big customer, you have to be at that customer's beck and call. If you're on vacation and the customer wants to have a meeting, you have to drop everything and come back. If you have a contract with the customer, you sweat bullets when it comes up for renewal. The truth is, you're not in control of your own business. The large customer can pretty much dictate the prices and terms it wants, and you can't afford to put up too much resistance. It's a lot like having a boss, which probably isn't what you had in mind when you decided to go into business in the first place.
Of course, you may not have the luxury of starting out with a base of small customers. A lot of people don't. Instead they launch their businesses on the cash flow from sales to one or two big customers, and there's nothing inherently wrong with that. But you can't let yourself become complacent. You need to immediately begin expanding and diversifying your customer base with small customers, or you'll quickly become a slave to the big ones.
What's the goal? I don't think any company can be considered secure until its biggest customer represents no more than 10% of its sales -- and I wouldn't stop there. As much as I love my large customers, I can't feel comfortable being as dependent on them as I am. So I continue to add as many new customers as I can get, especially small ones.
That's not easy. For the same reason that small customers give your business stability, they are hard -- and expensive -- to find. You can't ask salespeople to devote all their time to looking for them. Instead I instruct our salespeople to drop by three or four potential small accounts when they make their cold calls on large accounts. If all the companies are in the same building, the additional visits usually take another hour or so, and the results add up over time.
I don't think any company can feel secure until its biggest customer represents no more than 10% of its sales -- and I wouldn't stop there. I'd keep on adding as many customers as I could.
Sometimes you get lucky. About six months ago I signed a deal to acquire the accounts of another records-storage company, an old family business whose property had become so valuable that it was converting its buildings into residential property and office space. In the course of the negotiations, it became clear that almost all of the company's accounts were small ones. There were literally thousands and thousands of them. I couldn't believe it. I asked Jack, the owner, how he'd managed to sign up so many small customers without having large customers to provide cash flow.
"Well, we used to have large customers," he told me, "but we lost them to guys like you. All that was left was our base of small customers. Of course, it took us 60 years to build that base, so it's substantial."
To be honest, I'd rather have Jack's customer base than mine. If I lose a 40,000-box account, it hurts. He would have had to lose about 200 accounts to experience the same level of pain. Fortunately, I don't have to spend the next 60 years trying to build a base like his. In about 24 months, we'll have finished moving all his accounts to our facility.
Now I just have to figure out how to keep them.
Norm Brodsky is a veteran entrepreneur who currently has six businesses including a former Inc. 100 company and a three-time Inc. 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at www.inc.com/keyword/streetsmarts.
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