Hello, and welcome to a new edition of Expander. I’m Abhishek, and each week I share practical ideas on doing product, measuring what matters, working with people, and growing a business. Send me your questions and in return, I’ll humbly offer BS-free actionable advice. 🤜🤛
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Today, let’s talk about customers. The worst customers are the ones a company cannot afford to lose. Usually, they are the 20% of the customers who bring 80% of the revenue. In other words, the Key Accounts.
Here’s how it starts. A B2B product sells at $10/user to a small company with 10 people and brings $100/month. When the same product sells to a big company with 100 employees, it brings $1000/month. Now think how much revenue would a 1,000- or a 10,000-employee company bring.
The problem with per-seat pricing is that it makes the biggest customers the best customers. With money comes influence and demands that are hard to say no to. The biggest customers suddenly have the leverage to say, “Give me that feature or else…” and the company gets forced into Customer-Driven Development — where the product roadmap is heavily influenced by its biggest customers. This is the worse place for a company to be in.
But one size never fits all. To meet the unique demands of the key accounts while also avoiding bombarding everyone with unnecessary features, companies soon start to create parallel versions of the same product — each to satisfy the ever-growing unique needs of every key account. Suddenly, the rest of the 80% of the customers, the non-key accounts, aren’t getting any attention. This is as ugly as it can get, and there’s no way to be immune to such pressure.
Unfortunately, this is the very place all SaaS companies find themselves eventually. It might make sense when the business is stable and the company has scaled enough to meet the individual demands of key accounts. But there’s absolutely no reason for a young startup to be in this position in the early years.
You see, a startup isn’t a big company, and therefore shouldn’t act like one. It’s what most founders don’t often understand. Therefore, they are strongly advised to delay having key accounts for as long as possible. And if a company plans to remain small and profitable all along, having key accounts should be avoided all together.
The key is in making sure that no one customer pays an outsized amount so that no one customer’s demands for features or exceptions can take precedence over others. In other words, no one customer should have any leverage.
One way to achieve this is to cancel the per-seat pricing and offer the product at a flat price irrespective of the size of the customer. Thus, it wouldn’t matter if a customer has 5, 50, 500, or 5,000 employees — all of them would pay a fixed $x/month.
But this isn’t always feasible. Even if the founders have strong reasons to implement this, it’s hard to get a buy-in from others — especially investors and board members. Per-seat pricing is tried and tested, and it’s hard to argue against something that already works. Furthermore, a flat pricing means the biggest customers are getting too much of a bargain — customers who wouldn’t bat an eye paying 10 times or even 100 times more. VC-funded startups can never implement this, but a small business, a one-person company, or a side business should definitely replicate this model. It’ll save them a lot of headache.
The other (and slightly more feasible) alternative is to add a cap on the maximum price a customer pays. This limits their influence. For example, for $10/month, the maximum a customer can pay is $1000, not more than that — even if they have more than 100 employees. This constraint also forces the business to focus only on small- and mid-sized companies with 100 employees or fewer, and optimise the product, marketing, sales accordingly.
Nonetheless, these pricing strategies are still controversial. On the face of it, none of them are defensible on paper. But it’s critically important that in its first 2–3 years a company focuses exclusively on product-market fit. Because more than often, a company thinks they have found product-market fit when in reality they haven’t. Therefore, everything else — especially key accounts — should be treated as a distraction until a startup is sure without any doubt that they have found PMF. At this stage, revenue isn’t money, it’s validation. It’s an indicator that customers are willing to pay, that’s it. Therefore, key accounts at this stage is meaningless.
Once PMF is taken care of (and a startup enters growth phase), the pricing strategy can be tweaked and played with. Now might be a good time to remove the capping from the pricing model. Existing users can continue with their original prices whereas new customers can be charged with the updated pricing.
In a few years, when the company has successfully scaled, it might be a good time to consider having key accounts, but definitely not before that.
Talk to Me
Do you agree with what I said, or do you think otherwise? Send me counters, comments, questions, and the benefits of key accounts.
Until next week,