80% of Your Customers Will Bankrupt You Ep 478

Summary Notes


In this insightful discussion, the host of the podcast shares his transformative experience at a conference where he learned the power of strategic customer targeting from a speaker at Vista, a private equity fund. The speaker emphasized the importance of focusing on the top 20% of customers who provide the most value, a principle derived from Pareto's Law but applied more aggressively. The host applied this knowledge to his own businesses, including gym launch and acquisition.com, detailing a four-step process: surveying customers, ranking them by value, identifying common factors, and executing targeted messaging and reverse-engineered sales processes. This approach led to significantly higher profits and customer retention by serving a narrow, well-defined market segment. The host encourages entrepreneurs to adopt this strategy, emphasizing the long-term benefits of serving high-value customers and the compound growth it can generate.

Summary Notes

Valuation of Enterprise Customers

  • Enterprise or Fortune 500/100 companies are highly valued as customers.
  • They tend to stay longer and pay more, making them valuable for businesses.
  • Serving high-quality customers enhances the business itself.

"Note, there's a reason that companies that serve enterprise or Fortune 500 or Fortune 100 companies get the highest multiples when they sell. It's because those customers are the most valuable and they stay the longest and pay the most."

This quote emphasizes the high value placed on enterprise-level customers due to their longevity and financial contribution to a business.

Perception of Business as a Game

  • Wealthy individuals view business as a competitive and strategic game.
  • The podcast aims to share lessons from building a successful business portfolio.
  • The goal is to help others grow their businesses and potentially collaborate in the future.

"The wealthiest people in the world see business as a game. This podcast, the game, is my attempt at documenting the lessons I've learned on my way to building acquisition.com into a million dollar portfolio."

The quote reflects the speaker's perspective that business is a strategic endeavor and the podcast is a means to share valuable insights from their experience.

The Importance of Customer Selection

  • Selecting the right customers is crucial for reducing churn and increasing profitability.
  • The speaker had an epiphany about customer selection at a conference.
  • A speaker from a $50 billion private equity fund shared insights on customer analysis.

"80% of customers will bankrupt your business and keep you poor forever. So here I was sitting in this conference while I was at the cool kids table because we had our software company, Alan, that just had crossed 10 million ARR annual recurring revenue, and we got recognized for being awesome."

The quote introduces the concept that a majority of customers may not be profitable, setting the stage for the speaker's realization about the significance of customer selection.

Vista Equity Partners' Customer-Based Acquisition Strategy

  • Vista Equity Partners focuses on customer base when acquiring companies.
  • Their goal is to triple a business's size in three years.
  • They analyze customer data to identify the top 20% of customers and focus on them.
  • Vista cuts acquisition channels for the less profitable 80% of customers.

"And so what they would do in the diligence process, where they actually do research on the company before they buy them, is they actually do more research on that business's customers than that business already had."

This quote explains Vista's meticulous approach to understanding a target company's customer base before making an acquisition.

Application of Pareto's Principle in Business Growth

  • Vista's strategy applies Pareto's Principle (80/20 rule) to focus on top customers.
  • By targeting the top 20% of customers, a business can significantly increase its size.
  • The speaker realized the importance of focusing on the right customers for growth.

"And so what I realized was this was Pareto's principle, but on steroids."

This quote connects Vista's strategy to Pareto's Principle, highlighting an intensified focus on the most profitable customer segment.

Strategic Decision Making in Customer Selection

  • Strategy involves choosing which customers to serve based on limited resources.
  • The market served is a key lever for business success.
  • Targeting the right market segment can lead to substantial growth.

"Because if you think about the definition of strategy, which is how you allocate limited resources against unlimited opportunities, this is a strategic decision."

The quote defines strategy in the context of business and customer selection, emphasizing the importance of deliberate choices in targeting customers.

Implementing Customer-Focused Strategies

  • The speaker sought to implement customer-focused strategies in their businesses.
  • They developed a four-step process to apply to every company in their portfolio.
  • The process began with surveying customers to gather detailed information.

"And so I went really deep on this, reading lots of different SaaS metrics books. So I could come down to a simple process that I could apply to every single company in our portfolio@acquisition.com."

The quote indicates the speaker's dedication to developing a systematic approach to customer analysis across their business portfolio.

The Four-Step Process for Customer Analysis

  1. Survey existing customers for demographics, before and after stats, aspirations, and buying process.
  2. Sort customers by the amount of money spent with the business.
  3. Identify commonalities among the top 20% of customers.
  4. Focus on acquisition channels that attracted the top 20%.

"The first step is that you survey all of your existing customers, past and present."

This quote introduces the first step of the process, emphasizing the importance of collecting comprehensive customer data.

Survey Results Analysis

  • Begin by sorting survey results by customer spend, focusing on the top 20%.
  • The objective is to identify common characteristics or "threads" among this top tier of customers.
  • A single unique commonality would be ideal for targeted marketing, but often it's a combination of two or three shared traits.
  • Detailed analysis of the top 20% can reveal shared needs, origins, business sizes, and other demographics.

"Step one. Step two is that you sort the results by the people who have spent the most with you and for the purposes of this exercise, take the top 20% and ignore the rest."

This quote outlines the initial steps of the analysis process, emphasizing the importance of focusing on the highest spending 20% of customers for the exercise.

"Step three, and this is the money part, is that you see what they have in common."

This quote introduces the critical step of identifying commonalities among the top customers, which is key to refining marketing strategies.

Execution of Findings

  • Change messaging to cater to the identified qualifiers of the top 20%.
  • Be explicit about who the business serves and does not serve, repelling non-ideal customers and attracting ideal ones.
  • Implement a new level of discipline by turning away customers who do not meet the new criteria.
  • Reverse engineer the sales process based on how top customers found and chose the business, optimizing the channels and triggers involved.

"You'll also still catch some of the bad customers that you had before. This now means that you have to have a new level of discipline."

This quote speaks to the necessity of maintaining strict adherence to the new customer criteria to avoid falling back into old patterns of attracting less ideal customers.

"The second step of execution is reverse engineering the sales process."

This quote highlights the importance of understanding and replicating the successful sales journeys of the best customers to attract more of the same.

Value Creation and Pricing Strategy

  • Providing services to more qualified customers can increase the value you deliver and justify higher pricing.
  • The value created is not due to the provider's effort but due to the scale of the customer's business.
  • Charging more is justified when the provider's work results in significantly greater financial gains for the customer.

"So if I did CRO so, conversion rate optimization for an ecommerce business that was doing a million dollars a year, and I added 10%, they would go from $1 million a year to $1.1 million a year."

This quote illustrates how the same effort can yield different values depending on the customer's business size, influencing pricing and value creation.

"Who do you think I can charge more? This guy. Which one was more work? Neither."

This quote reinforces the idea that the provider's work is the same, but the value created varies, allowing for different pricing models based on customer qualification.

Guidance for Startups with No Customers

  • Leverage past industry experience to understand the market and customer needs.
  • Y Combinator values founders with industry experience for their depth of knowledge and reduced learning curve.
  • Utilize any relevant experience, even from family or past jobs, to gain an advantage in a familiar industry.

"There's a reason that y combinator, one of the best startup incubators out there, picks founders who have past experience in the industry that they're trying to pursue."

This quote points out the importance of industry experience in startup success, as recognized by a leading incubator.

"You'd be amazed that if your father was a mechanic, how much you know about cars."

This quote emphasizes that indirect experience, such as family background, can provide valuable industry insights.

Niche Focus and Expansion Strategy

  • Target the customer segment that you can serve best and create the most value for.
  • A narrow focus allows for specialization and avoiding competition with larger companies.
  • Start with a small niche and expand gradually, mastering each segment before moving on.

"I'm going to go laser focused on this one person. And I think that I could beat the best company in the world at this tiny slice."

This quote encapsulates the strategy of focusing on a narrow customer segment to outperform larger competitors in a specific niche.

"But for right now, if you're starting out, you focus on that slice and you learn that slice like the back of your hand."

This quote advises new businesses to concentrate on a small market segment and become experts in serving that particular customer base.

Case Study: Gym Launch

  • Gym Launch identified demographic and business characteristics common among their top customers.
  • Demographics included being right-leaning, conservative, married, male, aged 25-45, and US-based.
  • Business characteristics of top gym owners included having a lease, at least one employee, a minimum monthly revenue, and a customer base.

"From a demographic standpoint, our customers were right leaning and conservative, which is pretty common for small business owners."

This quote details the demographic profile of the top customers for Gym Launch, providing insight into their target market.

"Businesswise, the best gym owners that we worked with had a signed lease. They had at least one employee."

This quote outlines the specific business characteristics that Gym Launch found to be common among their most successful customers.

Identification of Commonalities in Customer Behavior

  • The speaker discusses the importance of identifying common behaviors among customers.
  • They found that not all questions asked in their survey were important, only those in common mattered.
  • They discovered that their gym owner customers had aspirations such as owning a million-dollar gym and opening more locations.
  • Common problems included insufficient leads, bad location, not enough profit, and difficulty finding good employees.
  • A significant commonality was that 78% of their customers had consumed at least two long-form pieces of content before purchasing.

"Their aspirations were to have a million dollar gym, not work so much inside of the gym, stop teaching sessions and open more locations."

This quote summarizes the goals and aspirations of the gym owner customers, which is crucial for understanding their motivations and tailoring the sales approach.

"The last piece that they all had in common was that they had each consumed. It was 78% of them had consumed at least two long form pieces of content prior to making a purchase."

The quote highlights a key behavior pattern among the customers, which is the consumption of long-form content before making a purchase decision. This insight is pivotal for the sales strategy.

Refinement of Marketing and Sales Strategy

  • The speaker details how they refined their marketing messaging to target a more specific avatar of their ideal customer.
  • They changed their marketing to focus on gym owners with specific criteria, such as having a lease, making at least $10,000 a month, and having a minimum number of employees and customers.
  • The messaging was consistent across all marketing materials and company communication, emphasizing who they served and, importantly, who they did not.

"We stopped talking about aspiring gym owners, trainers, fitness professionals, whatever, and we got laser focused on gym owners that had a signed lease."

This quote explains how the marketing strategy shifted to focus on a more narrowly defined target audience, which improved the efficiency of their marketing efforts.

"Our ad set it. The video set it, the creative set it, the landing pages said it, the application said it, the phone team said it, everybody said it, all the way across the company so everyone could understand exactly who we served."

The quote emphasizes the importance of consistency in messaging across all platforms and company levels to ensure clear communication about the target market.

Implementation of Long-Form Content in Sales Process

  • By identifying that the best customers had consumed long-form content, they made it a requirement in the sales process.
  • They injected multiple long-form content pieces into the sales process to pre-sell prospects and create the ideal customer profile.
  • Content was created to address specific pain points mentioned in surveys, and a "greatest hits" list of content was used by the sales team to provide value and demonstrate expertise.

"So we'd force everybody to consume two long form pieces of content to make them just like the people who spend the most money and stayed the longest."

This quote reveals the strategic decision to require the consumption of long-form content as part of the sales process, aiming to replicate the behavior of their most profitable customers.

"And then to go even higher or deeper on this, what we did was we created an all time greatest hits list, or excel sheet of the content."

The quote describes the creation of a curated list of the most impactful content, allowing the sales team to provide targeted value to prospects, further enhancing the sales process.

Contrast with Competitor's Results

  • The speaker compares their metrics with a competitor's, revealing a stark difference in profitability despite serving the same number of customers per month.
  • They attribute their success to selling to the right people and having a more tailored sales process and fulfillment.
  • The competitor accepted anyone as a customer, leading to high churn rates and complaints.
  • The speaker's company focused on serving a small percentage of the fitness industry very well, which resulted in higher gross margins and profitability.

"But he was making 70 times less profit than me. Yes, 70 times less."

This quote highlights the dramatic difference in profitability between the speaker's business and the competitor's, underscoring the effectiveness of the speaker's targeted approach.

"We were only serving a very, very small percentage of the entire fitness industry."

The quote emphasizes the strategic decision to serve a niche market exceptionally well, rather than trying to cater to a broader audience less effectively.

Importance of Branding and Value Provision

  • The speaker emphasizes that hard selling often indicates poor branding and a lack of provided value.
  • They suggest that providing more value upfront can lead to easier sales and the manufacturing of goodwill.
  • The content provided to prospects was valuable and not just disguised sales pitches, demonstrating expertise and solving problems.

"The valuable content, the long form pieces of content we provided them, were not disguised sales pitches."

This quote stresses the importance of providing genuine value in the content, which helps to establish trust and demonstrate expertise.

"The easiest thing to sell more is provide more value before you ask."

The quote encapsulates the philosophy that providing value before making a sales pitch can lead to better sales outcomes and customer relationships.

Target Market Differentiation and Results

  • Different avatars in the same market yield different business results.
  • Premium pricing and longer retention rates lead to more referrals and repeat business.
  • Competitors struggled to replicate success due to lack of commitment and removing key steps in the process.
  • Removing qualification steps increases volume but decreases quality and profitability.

"And the crazy thing about this is that my business and this other guy's business were serving the same market but a different avatar, and as a result, got monstrously different results." "And most times they paid Vera dealer for it because they wouldn't make as much money."

These quotes highlight the importance of understanding and targeting the right customer avatar, which leads to better business outcomes. The second quote illustrates the consequences competitors faced for not maintaining the integrity of the business process.

The Importance of a Structured Sales Process

  • Maintaining a structured sales process with qualifiers is crucial for long-term success.
  • Cutting out steps for immediate gains leads to lower quality and less revenue per advertising/promotion unit.
  • Merging marketing and sales into an acquisition department aligns goals and optimizes the sales process.

"Every time I've cut out qualification steps, my volume has gone up, but my quality has gone down." "By putting them together, it aligned all the teams."

The first quote emphasizes the negative impact of removing qualification steps on the quality of leads and overall revenue. The second quote explains how merging marketing and sales can create a cohesive strategy focused on closing deals.

Strategic Investment in Customer Acquisition

  • Investing more in acquiring high-value customers is more profitable than acquiring many lower-value customers.
  • Understanding the ideal customer journey and focusing on long-term business health is more beneficial than short-term gains.

"I would rather pay $5,000 to acquire a $45,000 customer, than pay $1,000 to acquire a $5,000 customer." "Knowing your ideal customer journey forces patience."

These quotes convey the strategy of investing in high-value customers and the importance of patience in understanding the customer journey for long-term business success.

Lifetime Value and Market Positioning

  • High lifetime value (LTV) customers lead to significantly higher profits and margins.
  • Narrowing focus to serve high LTV customers can initially decrease revenue but increases long-term profitability.
  • Serving better customers enhances business quality and sustainability.

"Our lifetime value is north of 45,000." "Serving a better customer makes you a better business."

The first quote presents the speaker's business's success in achieving a high LTV, while the second quote implies that focusing on high-quality customers improves the overall business.

Actionable Steps for Business Growth

  • Survey customers to understand their needs and preferences.
  • Rank customers by value and tenure to identify the most profitable segments.
  • Conduct a common factor analysis to pinpoint shared characteristics among top customers.
  • Implement a two-part plan that refines messaging and buying processes to target high-quality prospects.

"Number one is that you survey your existing customers and you ask the questions." "You execute the two-part plan."

These quotes outline the initial step of surveying customers for insights and the subsequent action plan that includes targeted messaging and tailored buying processes for optimal lead quality and profitability.

Business Scaling and Profit Maximization

  • Tailoring marketing to attract high-value clients leads to exponential profit growth.
  • The process of refining the target market and sales approach is work-intensive but acts as a force multiplier for business efficiency and brand reinforcement.

"You get more clients because your marketing becomes far more tailored to the specific type of people that spend the most money." "Getting this process right and doing this research will act as a force multiplier on everything else you do in the business."

These quotes summarize the benefits of a focused marketing strategy that targets high-value clients, resulting in more profit and a stronger brand. They also emphasize the compound effects of getting the targeting process right.

Acquisition.com's Proven Success

  • The speaker's company, Acquisition.com, applies these processes to achieve significant profit increases for portfolio companies.
  • The methodology is effective across various business sizes and stages.

"This is just one of the handful of processes that we do@acquisition.com." "For our portfolio companies, which acts as a forcing factor for us to have three x increases in profit in twelve months, 4.7 x increases in profits in 24 months of the portfolios that we have."

The quotes provide evidence of the success of the speaker's company in applying these strategies to achieve substantial profit growth, reinforcing the effectiveness of the approach.

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