Fewer high paying customers versus more low paying customers?
A friend reminded me of this question on a call yesterday. So, you are trying to position your startup and want to figure out if it is better to have a few high paying customers or lots of low paying customers. As with most things, it depends. There are advantages and disadvantages to both approaches. I tend to prefer lots of low paying customers but that is just my preferred style.
Fewer higher paying customers
Pros: more time to focus on individual customer needs / very customized service, should be able to get deals into the six figures, deeply understand the customer making your solution very sticky, high investment from the customer so unlikely to switch.
Cons: customer has a lot of leverage and can bend you to their will, losing a few customers will hurt a lot, your solution may become too tailored and will not easily appeal to other customers.
Lots of low paying customers
Pros: you can afford to lose lots of existing customers without effecting your business much (makes your company quite resilient to change), you can focus on features that will appeal to many customers and ignore customized requests, you get the benefit of wider market feedback since you deal with more customers, you get more referrals because you have more customers driving down your customer acquisition cost, you can carve out different feature sets for different types of customers and get better pricing.
Cons: deal sizes are small so you need lots and lots of customers, customer often isn’t very sticky and may switch out your solution for something else, need to have high volume systems in place for support / service / ordering.
You might be leaning towards lots of low paying customers after this analysis but many startups still make a big mistake with this. They go for low paying customers but just don’t realize how many customers they will need at their chosen price point – for example: software as a service business with $20/month customers – this means you will need over 4,000 customers just to get to a $1 million per year in revenue. Getting 4,000 paying customers is hard and $1 million isn’t going to pay for many expenses if your business is based in the USA (rent, salaries, systems to service that many customers). If we can increase that per customer spend to $100/month now we only need a little over 800 customers which seems much more achievable. When you think low paying – remember that a few thousand dollars per year per customer is still low paying and will make your business much easier to scale. Likewise, if you choose the fewer high paying customers route then each customer probably needs to be paying you more than $100,000 per year – if it is less than that then you are still in a low paying model but probably providing too many services. 🙂