Let’s talk about fallback strategies for when your biggest customer breaks up with you.
It’s incredibly difficult for a startup to go from scrambling stage — where we’re taking on bits and pieces of business and trying to execute and grow at the same time — to survival stage — where we land enough steady business to grab a little breathing room and plan for growth.
Too many times, the path from scrambling to survival runs through one single large customer. A simple example is the first time we license our software to a Fortune 500 company. In other cases, it’s one large group of customers whose business was triggered by a single event, like a direct-to-consumer retailer who launches just before Black Friday.
Those are, of course, celebratory moments in the history of any company — that first big sale, a huge influx of revenue, the big windfall. But there are two mistakes that can turn the party into a nightmare.
- We haven’t prepared for landing the big fish before it happens
- We start focusing all of our attention on the big fish.
Those two mistakes are easy to make, sometimes almost subconsciously. I’ll prescribe a fix, but more importantly, I’ll lay out a strategy for prevention.
It’s Not You, It’s Us
Every entrepreneur has gotten that breakup call, or email —
Hopefully it’s a call. A breakup email is so cold. But the absolute worst is when it happens in person. Like I want to have lunch with you before you dump me.
We’ve all had that moment when the person representing our largest chunk of revenue tells us the relationship is over. So let’s shortcut through denial and anger and go straight into acceptance and aftermath. Unfortunately, if we haven’t already taken some preventative measures, there’s not a lot of happy ending to lean on for the fix.
The first thing we need to do is pragmatically assess the damage. If that customer’s business is anything more than, say, 90% of our total revenue, we’re probably effed and we can stop here. That said, if it’s less than that, we need to take the following steps.
Once we get a sense of the hit to our present situation, the impact on future business may not be as bad as we think. So we’ll revisit the pipeline. Once we remove 100% of that single customer’s business, the hope is that there was some sort of demand-side network effect from that customer, and the momentum we got from landing them gave us a small sustained increase in our original bottom line.
Now that we’ve measured twice, we’re going to need to cut once. In other words, we’re going to need to scale down appropriately, so let’s do it and get it over with. This means we’ll need to make cuts to every part of the company that isn’t essential to keep revenue coming in.
Now we go to Plan B. The door has closed, so look for an open window. Don’t jump out. Whatever our plan might be, its purpose is to get us back to our feet with the customers we still have and the new ones we can land quickly.
And let’s not ignore the fact that this is an opportunity to reinvent our business model. An optional step, but we should analyze why we lost that customer and adjust our model to make sure we don’t let it happen again.
We do that by taking preventative steps before and during the ride with one big customer, thereby avoiding the two mistakes I listed above.
To put our prevention strategy in context, let’s look at a case where customers are completely transient: Turnkey eCommerce, which means putting up a Shopify storefront and running ads to sell another company’s product, which is then drop-shipped by a third company.
Turnkey eCommerce is relatively easy to start and just as easy to bring to revenue. The problem, however, is that in almost all cases, these are one-time, never-returning customers.
The cost to acquire those customers (CAC) is cheap, usually just a well-designed, perfectly optimized Facebook ad, paid for by the storefront owner. The lifetime value of those customers (LTV), is slightly higher than the CAC, just enough to lure storefront owners into the notion that they’re going to spend $1.99 in ads to get $2.00 in revenue, millions of times over.
There’s actually nothing wrong with customers that come easy and cheap, but those end customers were never the storefront’s customers to begin with. The storefront is essentially just a passthrough from the end customer to the product producer.
But the thing is, the end customer isn’t the product producer’s customer either. The drop shipper is actually the product producer’s customer. A scenario like this is how a startup ends up with one single customer in control of the bulk of their revenue.
So let’s make ourselves the product producer in this example. We land our first big customer, a drop-shipper who has a ton of turnkey eCommerce storefronts working for them. They agree to offer our product through their system.
What happens in this scenario looks like any customer funnel, with tons of end customers coming in at the top of the funnel. The problem is we have no connection to the top of the funnel, just the bottom, where our drop shipper is. If we lose our single connection down at the bottom of the funnel, we also lose all the connection to the top, and all our revenue.
This is because all we’re doing is pushing our product from the bottom of the funnel up to the top. We need to start pulling customers from the top to the bottom. We do this with a second offering, one that isn’t available through the intermediary.
In other words, we give the end customers a way to get directly to us and a reason to go directly to us. This is not stealing customers from our customer, it’s building track and trap into the deal.
Track and Trap: A Real World Example
At Automated Insights, we created content from data. Our first big customer was Yahoo Fantasy Football, where we automated recaps of fantasy football matchups for millions of players every week, written as though those matchups were covered by a real human sports writer.
Huge windfall, single customer.
We negotiated one small but very important detail in the contract: Attribution. At the end of every recap, we got a “Powered by Automated Insights” link in very small print.
The millions of fantasy football players weren’t our customers. We weren’t in the fantasy football business, we were in the automated content business. What we did want were the few fantasy football players who saw those recaps and thought, “My company could use automated content for a totally different reason.” As an example, one of those fantasy football players was the managing editor at the Associated Press. That little attribution link led to our second big customer, and then several more.
Our track and trap strategy doesn’t have to be attribution to a huge public audience, but we should have our own strategy and a plan in place before we land that first big customer.
And we should execute that plan immediately.
The NEXT Customer is King
When we have only one customer, we need to be constantly working on landing our next customer. Or, when one customer makes up the lion’s share of our revenue, we need to be constantly working on diversification.
While at the same time making that one big customer our top priority.
We need resources for this, because it’s crazy hard to do both. I’ve seen it dozens of times. A startup launches their MVP, signs a huge first customer, and then hires exactly what resources they need to serve that customer. Instead, what they need to plan for, and hire for, is immediately landing that next customer.
I’ve even built runway to do just that into the contract with the first customer. Yeah, we’ll need three more developers and a project manager, but we’ll also need a salesperson to start calling into every company like the customer we just landed and dropping this customer’s name.
Admittedly, there’s a lot of luck involved in getting someone to pay for it. But that’s just cushion. It’s more important that we establish and keep the mindset of serving one customer while planning for ten, twenty, even a hundred additional customers, not just in the staffing, but in every aspect of the company.
Because if we don’t, we’re constantly at risk of that dreaded breakup, and growth means nothing if it can all be wiped out with one phone call.