If you’ve ever run a business of any sort (whether
software or not), you’ve probably given some thought to the
“value” of each of your customers. Different industries look
at this differently. For example, successful car dealerships often look
beyond just the current sale and more at the “lifetime potential value of
the customer”. This is because not only is the person that walked
in the door today making a decision on what car they will buy today, they are also creating a future
opportunity for you to sell cars to them tomorrow.
A relatively simple way of measuring the value of a customer
could be expressed as a function of:
- Revenue Generated: How
much money the customer is paying you.
- Cost to Acquire: What it
cost you to get the customer to start paying you.
- Cost to Serve: What it
costs you to ensure that the customer continues to pay you.
There’s nothing magical here. Basically., the
above are the key drivers of profitability for a given customer. If any of
these are “out of whack”, its likely you have a not-so-good customer.
There are volumes written about ways to look at customer value through
these different lenses (including articles about firing your worst customers to
improve your business). I’ll save the topic of firing customers for
However, I think that in the age of the Internet, life gets
more interesting for software startups. So, let me introduce what I think
is a relatively new (and hopefully useful) concept:
CustomerRank™: An algorithm that
allows the ranking of customers (or clients, or sales leads) based on their
true value which is measured as a function of the following variables:
- revenue generated
- costs to acquire
- costs to serve
- magnitude of useful learning
- and the CustomerRank of any
additional opportunities that they can generate for you
These last two new items are what makes this interesting.
Magnitude of learning goes to the point that we often get
our best ideas from our customers. They do this by requesting
enhancements (that help other customers), complaining about poor service (so we
can fix it), threatening to switch to a competitor (often ones we didn’t
know existed), etc. Some customers teach us a lot of useful things.
Others don’t. This is a key variable in calculating
CustomerRank. The more useful knowledge we can get from a customer, the
higher their rank to us. Oddly, many software startups end up giving their
software away for free (see my prior
article for why this may be ill-advised) under the assumption that simply having lots of customers has value. Though
this is certainly true, not all customers are the same. Some may be creating
minimal (or no) value and others are creating lots of value.
Those of you that are familiar with Google’s PageRank
will likely pick up on the last item (#5 above) immediately.
Google’s PageRank basically calculates the “rank” of a
web page by a combination of the contents of your page and the number/quality
of inbound links (based on the PageRank of those pages). Its this “connected”
nature of the algorithm that is intriguing. Google will
“weigh” a link that points to your page higher based on the ranking
of that page. So, if The New York Times links to your home page, it means
a lot more than if I link to you from this site.
We have a similar concept with CustomerRank. Customers
that are well connected to other “high value” customers get a
higher rank. For example, if a non-profit organization is a customer of
yours and is paying you nothing, they may still have a relatively high rank if
they have a bunch of people they are “connected” to that would make
good paying customers.
So, customers can get a higher “CustomerRank”
and thus receive preferential treatment (however you define that) by doing any
of the following: [Note to Self: Write future article about creative ways
to show preferential treatment to the highest ranking customers]
How Customers Can Rank Higher
- Spend more money. This is
the easy one.
- Be Easy To Sell To: By
making themselves easier to reach, they get a higher rank. If it
costs you two plane trips to get the customer, it reduces their
CustomerRank. Conversely, the customers that make it simpler/cheaper
to earn their business get credit.
- Be Simpler to Service:
Customers that cost the least to support get a higher rank.
Basically, this credits those customers that really
“get” your business, what you’re bringing to the table,
etc. They’re not looking for a ton of custom features that
have nothing to do with where you’re headed, free
- Teach Us Something
Useful: Customers that can help us improve our product deserve to be credited for doing so.
This is the premise for so many “free” services that are
out there. But, not enough software companies actually quantify what is learned from each
customer and make the mistake of treating all customers equally.
- Be Connected To Others:
Customers can raise their rank simply by being better connected to the
community (and other customers). Basically, this credits those
organizations that have invested the time to be thought-leaders (even if
they can’t spend that much money on your product/service).
Now, some of you are thinking of posing the following
questions: “don’t all
customers deserve the best service and price?” and “aren’t we
supposed to be earning their
business and not expecting them to earn
a higher rank?” The answers are no and yes. I’m not
suggesting that we try and influence customer behavior (we should indeed be
happy and grateful that they are our customers), but I’m trying to
suggest that we change our
behavior to truly reflect “real customer value”.
Some quick (and possibly debatable) ideas of how this may be
applied in your software startup, should you try and implement CustomerRank:
- Credit customers that report
bugs or request enhancements – based
on what you actually end up doing. Example: A
customer is the first to request an enhancement that many other customers
want and that you actually implement.
- Credit customers that find you
directly over the web (and hence have a reasonably low acquisition cost).
- Credit customers that give you
a testimonial on their
website. Better yet, track how many web-link referrals you’re
getting from their site (that is, how many of your visitors came from your
- Track how much labor it takes
to get the customer live. Note: Hours you spend fixing your own
product which then has value to future customers doesn’t really
Obviously, implementing a semi-accurate CustomerRank
algorithm is non-trivial. The idea here is to just provide some useful
visibility to some key variables that have not gotten enough attention:
customer learning and customer connectedness.
On the other hand, if you’re a software entrepreneur
and want to build a CRM product for small software companies centered around
this concept, email me. I’ve got some additional ideas on the topic
(and have the CustomerRank.com and ClientRank.com domain names pre-registered
for our use). I’ll be attempting to bake this idea of CustomerRank into
my own software offerings for HubSpot.