Question: How can we decide between focusing on the needs of many small customers with only a few users each and the needs of a few large customers with many users each?
The product I manage is sold on a per-user basis. Most of our customers are small and only have a few users. However, there are a small number of customers who have a large number of users. The problem is that the needs of these large customers (who provide us with a good percentage of our overall revenue) are different than the smaller customers (who make up the vast majority of our users). If we focus on the customers that bring us the most revenue, we risk alienating the smaller customers (of which there are many). If we focus on the majority of our customers, we risk alienating the big customers (of which there are few). Who should we focus on?
Answer from Scott Sehlhorst of Tyner Blain: Thanks for the great question! Since the question is asked in somewhat general terms, I’ll answer generally. If something doesn’t match your exact situation, please follow up in the comments.
It sounds like you have two distinct market segments within your customer base. Small companies with a few users, and large companies with many users. Your comments about conflicting needs in the two groups tends to support my assumption. Remember that market segmentation is not just “what industry are you in?” but can be along any axis that allows you to aggregate customer needs / value / behavior.
Assuming this is true, I think you have to choose either to focus on one segment or the other, or consciously go after both. That strategic decision will (should) drive all of the rest of your decisions. You don’t provide enough data to pick one over the other, but the fundamental question is: “Which market segment is more important to my business?”
“More important” can mean any of a number of things. You might be focusing on market size (easy to do the math), or you may determine that one market segment has more potential to help your company grow. One market may be markedly more profitable than the other. Large companies can usually get more value from a solution that affects their business, thus generating more value (per company). If your product has high support or services costs, it may be more profitable to focus on a few large, expensive (to you), and profitable deals. If your product is very scalable, like a SaaS offering, with minimal incremental cost per customer, it may be more profitable to focus on a lot of small deals.
You may be exploring a blue ocean market, where the main strategic benefit to your company is in discovering the real value to your customers. More and smaller customers can give you more data points and can accelerate that learning.
The two markets may have a symbiotic relationship, where providing the solution to “the big guys” gives you credibility that reduces cost-of-sale to little guys. Or the reverse can be true. Being the visible “solution provider to everyone” may increase your ability to sell to the big guys.
Determine which market segment has the most value for your company and objectives, over the long term — and focus on that segment.
If you determine that both are important, consider splitting the product into two products (or versions) and/or splitting the team. Think of it this way: If the current team focuses on one market segment, is there enough value in the second segment to justify the cost of hiring additional people and providing a distinct product for the other segment? That gets you away from “we can’t do everything” as a knee-jerk reaction, and allows you to intentionally service both segments (or abandon the ‘lesser’ segment).
I hope that helps provide some guidance as to how to approach answering the question. This is a great strategic question, and I’d love to know more details if you’re allowed to share them. I’m sure the rest of Jeff’s readers would too.
6 other answers so far ↓
Raj // Jul 25, 2008 at 1:42 pm
This is a great question, and I’d think applies to a lot of companies. Excellent points by Scott in his answer.
We face this scenario in our own company as well (SaaS) - but not to the degree you seem to be facing. The needs of our large customers (fewer in number) and smaller customers (larger in number) are mostly aligned.
In your case — Scott’s idea of different product versions makes a lot of sense to me. When we get to the point in our company where the needs of smaller customers are vastly different from larger customers - that is the most likely approach we would take.
A good example that comes to my mind is: Salesforce.com. They have a good number of large customers, but also a much higher number of small customers. They’ve addressed this by having the following “editions” targeted at different sizes of customers:
* Personal edition
* Group edition
* Professional edition
* Enterprise edition
* Unlimited edition
Seems like a pretty good approach - and they’ve been quite successful with it!
I’m curious to read about other possible approaches in the comments.
- Raj
Accompa - Affordable Requirements Management Software for Product Managers
Scott Sehlhorst // Jul 28, 2008 at 5:53 pm
Great points Raj. One thing I’ll throw out, though - Salesforce is really doing a “good better best” product offering, where each product is the superset of the previous product.
They don’t have “different” products for different people, they have just found a way to charge less and offer less to people who believe they need less.
I work with a client who uses the unlimited edition, and I have a personal edition account. This model is a little like Microsoft’s approach with Vista (where home and business versions have different capabilities, and only Ultimate has everything from both “products”), except that there are no special features that personal has that group does not, etc.
I guess my point is that their example is a “special case” of different products. I think a couple better examples (while not SaaS) are Final Cut Express / Final Cut Pro, and Photoshop / Photoshop Elements.
In both cases, they are different products that leverage commonalities.
KG2V // Jul 29, 2008 at 5:09 am
One thing you have to be careful of the small number of large customers is “the Sears Craftsman” effect. At one time, Craftsman was an independent company, that sold tools to lots of companies. Sears became their big customer, to the point they concentrated only on Sears - eventually they got into a situation where Sears was able to look at them and say “You will sell out, at XX price, or we’ll take our business elsewhere”
If you let one customer become too large a part of your business, the effectively own you
Shaun Connolly // Jul 29, 2008 at 10:49 am
I agree with Scott that you need to answer the question “Which market segment will drive the most value for the business?”
You also need to analyze the sales models (and costs) required for each approach. A heavy enterprise sales model is drastically different than a low-cost, high volume sales model. Enterprise sales tend to require lots of resources and onsite face time…whereas low-cost, high volume needs to strive towards self-serve, low touch in order to keep costs of sale manageable.
If the models are very different, and ou do choose to go after both markets, then I agree with Scott that you better make sure you have an org/go-to-market structure devoted to each. Serving two masters is difficult and recipe for failure.
If you decide to focus on a few large customers, I am curious if [some of] the features attractive to the masses can somehow be extracted and leveraged for establishing your thought leadership.
For example, HubSpot offers a solution targeting small/midsize businesses but they also provide WebsiteGrader and PressReleaseGrader for free to establish thought leadership and show some of their value.
Since I’m an open source guy, I’d love to recommend an open source model that enables you to broadly address the masses for free/low cost while building targeted value on top…but I’d need to have much more info about your offering, the market, deployment models (onsite, on-demand), etc. before I even went there.
Scott Sehlhorst // Jul 29, 2008 at 12:27 pm
Great points Shaun! SugarCRM is a great example of the OSS+ model you describe. You can get the solution for free. You can purchase services (including hosting, if you want). You can purchase “plus versions” that add value relative to the OSS offering.
Derek // Apr 3, 2009 at 9:43 am
This question caught my eye because we too have faced this dilemma. While our large and small customers’ needs don’t necessarily conflict, there is still the decision between using limited resources to focus on specific feature requests of large companies versus developing features with broader appeal. I think your choice depends most upon your business model and financial situation.
We are a SaaS model company with low price points and good financial backing, so we have made a very conscious effort to stay on our roadmap to develop a product with broad appeal. To the degree our larger customers have had extra influence it’s been to prioritize things we already planned to do. Now, if you have a direct sales model selling high-ticket non-recurring items then elephant hunting would seem to make the best sense.
Other factors to consider are your cash runway and exit plans. If your company is a volume play, but you don’t have the cash runway to survive long-enough to reach profitability then you may have to serve the larger customers if they can pay your bills. Also, maybe some of your customers are possible future acquirers or have some other significant strategic value.
The primary point I would stress is that this is a high-level strategic decision that should be made in a manner that is consistent with how the rest of your business is run. Once you make your decision, stick with it and stay focused. Ultimately, I believe the worst option is to waffle back and forth and come-up short for your large customers while also failing to serve the masses.
-Derek
Artifact Software - Requirements Management Software
What do you think?