In a previous post Ideal Customer Profile – Part 1: Introduction, I introduced the concept of the Ideal Customer Profile. In this post we will look at how your existing customers are a great source of insight with which to start.
(Much of this post is from my latest book: Digital Sales Transformation in a Customer First World)
People sometimes forget that they can actually make choices about the customers they want to pursue. Creating an Ideal Customer Profile sets out the framework for everything else that you do: how you market, what messages you want to deliver, who you call on, and what you say. In fact it’s important to remember that, if you don‘t choose the customers, then they will choose you and the type of customers that choose to engage with you might not be ideal. Rather than suffering from FOMO (fear of missing out) on all those companies you are not pursuing, defining your Ideal Customer Profile isn’t limiting at all, it’s empowering! You get to control your destiny.
Analysis begins with understanding the ideal profile of a prospective customer. If every sales or marketing activity began with one question, what should that question be? It’s not “What’s our return on investment, or ROI?” It should never be “What can we sell to this market segment?” Before anything else is considered, you must determine what profile customer can benefit best from what you’ve got. What’s your ‘sweetspot’? Where does your offering mesh so smoothly with the customer’s business requirement that he would be foolish not to consider purchasing your product, in preference to anything else?
The Ideal Customer That You Have Today
Take the time to stroll through your customer’s mind, gain a picture of their company, industry and business challenges, and you will begin to uncover your Ideal Customer Profile.
Though there will be similarities across your customer base, not all of your customers are the same. It is probably fair to say that the revenue that you receive will differ from one customer to the next. Of course, certain customers will be more successful with the adoption of your product than others: in other words, they get more value – but I will come back to that later.
You need to determine which of your current customers deliver most value to your business. By value I mean both financial metrics like revenue, profit, low support overhead, cost to acquire, and payment terms, and market value metrics like reputation and advocacy. For example, if you are selling a product that helps SaaS companies manage their recurring revenue accounting policies Salesforce might be an ideal customer. Not only would Salesforce be a large opportunity in terms of revenue, there is probably no better lighthouse reference account. While you might get equal revenue from another company, Salesforce’s influence in the market as a thought leader and innovator reflects well on you if they have chosen your product.
The 80 / 20 Rule: Many companies find that 80 percent of their revenue comes from the top 20 percent of their customers, and that the cost-to-serve for each customer rarely increases in direct proportion to the revenue you receive. Your investment to acquire and support a $40,000 account in terms of cost-of-sale and cost-to-serve is possibly similar to the required effort for an account that is worth $500,000. It’s almost certainly not a linear relationship between effort and revenue.
Your ideal customer, the one that you want to use as a model for your Ideal Customer Profile, probably sits in that top 20 percent of customers that deliver 80 percent of your revenue; more return, less effort. Therefore you first need to establish which of your customers fall into that top 20 percent and then forensically identify the characteristics that describe these companies.
I was involved in a project with a SaaS software company to establish their Ideal Customer Profile. We first conducted some analysis based on the Annual Recurring Revenue (ARR) received from each customer. Because this was a SaaS business, ARR correlated to number of users in the account, which in turn usually correlated to the size of the company. As you can see in the chart below, this company’s revenue profile mapped to the 80 / 20 rule.
In fact in this case, 90 percent of the company’s revenue came from 40 percent of the company’s customers, but more interestingly 56 percent of the company’s revenue came from just 9 percent of the customers. Clearly a deeper focus on the larger customers was needed. Further analysis, comparing customers who paid on average less than $50,000 per year with customers who paid $50,000 or more per year, demonstrated a wide divergence in future value.
Not only did the larger customers start from a larger base ($103,000 on average) but over the period of their first six quarters as a customer their average spend grew 125 percent (to $232,000) – compared with a growth of only 15 percent for all of the ‘under $50,000’ customers.
This analysis guided the company to focus exclusively on companies that fitted the profile of their larger customers – the Ideal Customer Profile.
Of course, you can’t just eyeball an account, and say: “This account will grow to $200,000 ARR.” Or at least you can’t do it consistently without a common understanding across your organization. The first step is to determine, through desk research, and interviews with the customers, the attributes that describe this profile.
If you don‘t have a broad base of customers from which to choose you will need to develop a hypothesis of your Ideal Customer Profile and interview prospective customers that you think fit that description.
The attributes of your Ideal Customer Profile can be separated into the three categories I mentioned in the last post:
- Firmographics: Who should you call?
- Customer Business Problem: What problem do they have?
- Positive Impact Potential: Will they be successful?
Separately these three ICP Categories can be used to provide reference points for the Marketing Communications, Product Management, and Customer Success functions in your organization. Together they provide a powerful definition of your Ideal Customer.
I have written about these extensively in my book Digital Sales Transformation in a Customer First World and will dig into each one over the next few posts.