Brief Summary
This video discusses why some businesses plateau and how to overcome this by identifying and transitioning to better customers. It highlights the negative impacts of serving "sucky" customers, including structural churn, reduced profitability, and decreased team morale. The video provides a step-by-step guide to identifying ideal customer profiles, realigning business strategies, and transitioning away from less profitable clients to achieve sustainable growth.
- Identifying the root cause of business stagnation: often due to serving the wrong customers.
- Understanding the impact of "sucky" customers: high churn, low profitability, and operational strain.
- Transitioning to better customers: improving LTV, CAC ratio, reputation, and team morale.
Intro
The video addresses the common problem of businesses not reaching their desired revenue levels due to having poor customers. It aims to explain what this means, why it's important, why it might be holding the business back, and what steps can be taken to transition to better customers. The speaker uses the example of agency owners selling social media marketing services to small business owners, who often plateau despite their efforts to scale.
The Problem with Selling to Small Businesses
Many businesses that sell to small business owners face challenges because these customers are often volatile and quick to cancel services when they experience financial difficulties. This creates an unstable foundation, like building a castle on sand. The speaker suggests that businesses should consider selling to less volatile customers, such as Fortune 100 or Fortune 500 companies, as larger agencies do. Small businesses often require more assistance beyond lead generation, including help with sales, pricing, and overall business strategy, which can strain the resources of the service provider.
The Conflict and Misalignment
The difficulty in transitioning away from less profitable customers lies in the apparent conflict between needing to maintain current revenue and the necessity of switching to higher-value clients for long-term growth. This misalignment occurs because the potential value a business can provide is limited by the customer's ability to realize and pay for that value. Selling to "bad" customers often leads to lowering prices and reducing service quality, creating a vicious cycle.
Structural Churn
Structural churn is defined as the percentage of customers that leave a business each month due to factors inherent to their own business, rather than dissatisfaction with the service provided. An example is given of a CRM company in the gym space experiencing high churn because gyms frequently go out of business. This type of churn is often unavoidable and limits the potential for customer retention, highlighting the importance of selecting a customer base with greater stability.
Custom vs. Templated Solutions
The speaker describes a barbell strategy where custom solutions should be reserved for high-end customers who can afford them and are reliable in their commitments. For very small businesses, templated or DIY solutions are more appropriate because they cannot afford extensive support. The middle ground of mid-priced services to small customers is often unsustainable due to high churn and excessive support demands.
Red Flags of Bad Customers
Several indicators suggest a business is dealing with undesirable customers: short customer lifespans, excessive support requests, additional requirements beyond the core service, price resistance, dissatisfaction despite exceeding expectations, overpromising to secure sales, and knowingly selling to customers who will be difficult to satisfy. These factors contribute to a challenging and ultimately unprofitable business relationship.
The Impact on Acquisition
The speaker explains how having the wrong customers negatively impacts three key forces in acquisition: Lifetime Value (LTV), Customer Acquisition Cost (CAC), and payback period. With problematic customers, LTV decreases due to operational strain and price compression, while CAC rises due to the need for increased marketing efforts to replace churned customers. This extends the payback period, limiting cash flow and hindering business growth.
Additional Negative Impacts
Beyond the financial implications, serving the wrong customers leads to decreased team morale due to burnout from constant onboarding and offboarding, as well as dealing with demanding and dissatisfied clients. Reputation suffers as initial promises are difficult to keep, leading to negative word-of-mouth and increased customer acquisition costs. The opportunity cost of not serving better customers is also significant.
Recap and Roadmap
The speaker summarizes the problems and impacts of having the wrong customers, noting that these issues often arise around stage four of business growth, characterized by having a small team and operating as a manager. Common constraints include too many unqualified leads, necessitating better free resources and increased qualification efforts. The speaker promotes the "$100 Million Scaling Roadmap" for identifying and addressing business challenges at each stage of growth, available at acquisition.com/roadmap.
Emotional Challenges of Transitioning
Transitioning to better customers is emotionally challenging due to existing financial obligations, payroll, and the fear of losing revenue during the shift. However, staying with the wrong customers leads to continuous margin compression and eventual business failure. The speaker emphasizes the importance of choosing a better customer to reverse negative trends and improve LTV, CAC ratio, reputation, team morale, and cash flow.
Reversing Negative Trends
Switching to better customers reverses the negative impacts of serving less profitable clients. LTV increases, the LTV to CAC ratio improves, reputation is enhanced, team morale rises, and cash flow is freed up. The speaker notes that businesses can often make more money by providing higher-value services at a higher price point to customers who can afford and appreciate the value.
Emotional Pains and Ego Death
The emotional pains of transitioning include dealing with overhiring, uncertainty about the new path, and attachment to current revenue levels. The speaker stresses that sometimes going backward in revenue is necessary to build a stronger foundation for future growth. Entrepreneurs must be willing to admit mistakes and understand that the fastest way to build a large business is not the same as building a small one.
Tactical Steps to Fix the Problem
The first tactical step is to conduct a customer profitability analysis, examining demographics, current behaviors, and actions taken by successful customers. This analysis helps identify the ideal customer profile (ICP). Once the ICP is defined, the business must realign its positioning, messaging, offers, headlines, testimonials, onboarding experience, and sales strategy to target and attract the desired customer.
Redefining Customer Profile and Transitioning
After identifying the ideal customer profile (ICP), businesses should redefine their customer profile and realign their business in positioning and messaging. This includes matching the offer, headlines, and testimonials to the target customer. The sales team should only focus on selling to the ICP, implementing a qualification process to say no to less desirable customers. To transition, businesses should gradually decrease the percentage of "brokie" customers while increasing the percentage of ideal customers, eventually stopping sales to the former altogether.
Making the Transition and Tough Decisions
Transitioning may require putting a cap on sales to less profitable customers and potentially laying off employees. The speaker emphasizes the importance of taking responsibility for past mistakes and providing severance to affected employees. Maintaining a respectful and open relationship with former employees can lead to future opportunities and contract work.
Long-Term Growth and Solving the Core Problem
When the transition is executed correctly, the business will begin to grow again due to increased cash flow and customer retention. The key is to sell something that people don't want to cancel, which often requires changing the target customer. The speaker concludes by emphasizing that solving the problem of high churn leads to sustainable growth and success.
