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What is better: many small customers or a few large ones?

Posted on July 24, 2008 · 9 Comments

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.

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