Monday Sep 12, 2011 by Alex Taussig - Principal, Highland Capital Partners
Lots of small companies will do anything to sign up a big customer. Startups often make concessions of two varieties:
Often, when we meet companies who have made big concessions for a customer, we often hear the justification that Company X is a “strategic customer.” The word “strategic” here is taken to mean that, by virtue of signing up this particular customer, your company will be able to gain some proprietary advantage in the marketplace: greater legitimacy, a new sales channel, lots of PR, etc.
Calling certain customers “strategic” is dangerous, however. There are no strategic customers, only anti-strategic ones; and here’s why.
Let’s say the concession goes down path #1. A good example is a customer who asks you to build a special, but idiosyncratic feature into his implementation of your product. You spend lots of management attention and engineering resources to complete a feature that only one customer will ever use. Even if you charge for maintenance and/or services to make that extra work profitable, you are still stuck with the legacy costs of supporting that feature. Those legacy costs can seriously hamper the productivity of a startup with limited resources and a tendency to lose focus. Unless this feature is useful to a few other customers, you may be better off not taking this customer’s business at all.
Now, for concession path #2. We often see startups give deep discounts to their first few customers for strategic reasons. Discounts for startups are somewhat of a arbitrary distinction, since the pricing is still in flux anyway. That said, if you sign up enough customers at a discount, your discount will often become the upper limit on your price. Why’s that? Because the market talks. Customers will often call up one and other and ask, “Hey, are you using [your company]’s product? Did they budge on the pricing? How much? Oh good, thanks.” Once again, would you be better off lowering customers’ expectations of you in the future, just to make a few bucks today?
If you are tempted to treat a customer as strategic, ask yourself the following question: “If I treated all my customers this way, (1) would I still have enough resources long-term to scale my business, and (2) would I still be able to make enough money from a given deal?”
If the answer is no, then this customer is actually anti-strategic. Consider spending your time elsewhere.
Alex Taussig is a Principal with Highland Capital Partners. You can find this blog post, as well as additional content on his blog called infinite to venture. You can also follow Alex on Twitter (@ataussig) by clicking here.