Part III: The Customer Score
If you haven’t read part I or II of this series, you should start here: Part I: Market Score & Part II: Financial Score.
For some context before you read this:
- High Alpha is a venture studio that conceives, launches, and scales enterprise cloud (B2B SaaS) companies, thus this methodology largely centers around these types of business outcomes. However, some parts may be more broadly applicable.
- At High Alpha, we score each criteria category from 1–4 to intentionally eliminate any neutral scores.
- The “score” is partially subjective and is dynamic. Thus, scores can change over time based on if they are more developed or our views on a topic change.
Customers are the lifeblood of any business and are often the driving force behind product development and a number of other core business decisions. Most of the ideas we research at High Alpha go through some sort of vetting process that involves going to customers and finding pain points or validating a solution to their problems. Our philosophy is to begin with a specific customer (or group of customers) and try to solve a large problem they are facing, and then expanding to additional customers and pain points. In fact, we regularly have meetings and work closely with different leaders in a variety of industries as a mechanism to determine if there are new business opportunities.
This isn’t a revolutionary concept. Tons of brilliant and successful companies use customer experience as the central point of their operations. Steve Jobs himself famously said, “You have to start with the customer experience and work backwards to the technology.”
“You have to start with the customer experience and work backwards to the technology.”
At High Alpha, we’ve found that having a good set of customers is 1 of 2 absolutely vital things for a young business (the other being a strong leadership team). Thus, we strive to create a dynamic, design-led customer experience.
When we think about scoring an idea based on customers, we have a few criteria we look at:
- Adoption & Churn Risk
- Is This Product a “Need or Want?”
- Sales Strategy
- Initial Customers
Adoption & Churn Risk
Adoption risk refers to the likelihood that a customer would not adopt your solution. This may happen for a variety of reasons. If you go back to the market discussion, knowing the barriers to entry often correlate directly to why customers may be hesitant to adopt your solution.
For example, your product may be too expensive, not the best fit for a specific customer (or set or customers), a large amount of alternatives, too simple, too complex, unable to be integrated, etc. Understanding these adoption barriers is key to kicking off your sales experience. It is vital to understand the various reasons a customer may object to your pitch or your idea so that you can either craft the product to be more applicable or you can take special precautions in your sales cycle to overcome these barriers.
On the other hand, retaining customers is also vital. Retaining customers is extremely valuable and can easily be one of the last things companies think about. Keeping customers is often cheaper and more effective than trying to acquire customers, propelling a business forward. It’s important to understand the cyclicality of your product. Is your product something that the customer logs into every single day? And more importantly, is this product something that your customer uses for a extended period of time or does it have little-to-no use after a short period of time?
Take the example of a driving teacher — he or she may teach you how to park and get ready for your driving test, but you will not use their services after you pass your driving test. The driving teacher must continuously invest in finding new customers instead of having recurring revenue that maximizes the customer LTV.
Another side of churn is the “stickiness” of the product. Take a really simple example of this: choosing between a new iPhone or a new Android. An Apple user often has more friction when leaving than if they were to stay due to transferring information, learning a new UI, and possibly even the connections between other Apple products. This stickiness of the product is extremely valuable — we see this in many large software brands as well like Oracle (HRIS, ERP systems), financial systems, and payroll providers.
Need or Want?
This part of the assessment is relatively simple, but is something that is increasingly difficult to truly encapsulate in software. When designing a product, you want it to be “mission-critical”—something that the company could not live without.
When designing a product, you want it to be “mission-critical.”
There are two separate mechanisms that could make a product a “need to have.” I’ll address each one specifically:
1. The product itself directly drives revenue.
The most popular example of these kind of products are sales and marketing tech companies as the value they provide can directly be traced to closed/won business. The value in these businesses is pretty obvious—if something is going to make you $10,000/month vs. save you $2,000/month you’re likely more willing to pay for the one that makes you money. Thus, it is almost always more preferable to have a business that drives revenue than cuts cost.
2. The product is a core application necessary for the business to function.
If your product is doing something essential to our customers’ operations (think payroll, hosting, etc.), you are more likely to pay for it with less questions than if you only think it’s a “nice to have.”
Meeting both of these criteria is difficult, but when you can, it is a magical experience (the closest thing to this might be a CRM or a E-Commerce payment platform).
Sales Strategy
So far, I have seemingly conflated the user and customer together. However, there are often notable distinctions between them when it comes to enterprise software. Sometimes, the customer and user are the same person or group of people. For example, the purchaser of a HRIS system is probably pretty close to the user, but there are situations where the customer and user are pretty distanced.
Let’s take ClearScholar (a High Alpha portfolio company) as an example. The customer/buyer is a University or College, but the University is not the primary user. The main users are the students themselves, which presents an interesting predicament for the sales pitch. Do you try to manufacture value for the customer in some manner, or do you make a case for the value to a user (who isn’t the buyer)?
Understanding the relationship and the dynamic between the customer and user is extremely helpful for any idea as it gives a good starting point for how you approach the sale and articulating how you create value. Knowing who your target buyer is also helps to create a stratification of the different types of users and customers you can have. At High Alpha, we often create different personas for buyers and users that we use to determine the target or ideal customer/user. We then use them as a bright-line to determine if our strategy for sales is effective.
Initial Customers
This is likely the most valuable out of all the subsections. As I’ve alluded to multiple times, High Alpha stresses the importance of having an initial customer and partner on building the product from the beginning. We believe in the old adage: “If you have a product and no customers, you have a hobby; but if you have a customer and no product, you have a business.” This first customer or set of customers is vital to the initial creation and further development of a business.
“If you have a product and no customers, you have a hobby; but if you have a customer and no product, you have a business.”
Initial customers may also help to validate the concept of a business. If a customer is willing to pay for your product (even at a discounted rate as a beta customer), they are implicitly validating the value of your product and are beginning to shape the total sense of what someone would be willing to pay. Additionally, it can decide the growth rate of a company. If the initial customers don’t help to create a better product, it can severely hurt future growth. Therefore, it is critical to be picky with your initial customers in order to ensure a strong product build.
It may also be worthwhile to create a small “warm CRM” which ranks companies from hot sales to cold sales in order to determine the best customers to sell to at any given point. It’s an invaluable resource to have at the company formation stage and can really help narrow into what your top customers look like and the path to them.
Understanding your customers is critical for the success of your product. No business has ever been successful without a strong customer base, so it is extremely important to get customers who are invested in your product. Commensurately, it’s important to invest time into finding, acquiring, and maintaining your customers, which is ofter easier said than done.
Thanks for reading about how we look at customers as a part of the company-building process at High Alpha. Stay tuned for the next criteria category: The Product Score.
