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 another day.
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
the CustomerRank of any additional opportunities that they can generatefor 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 consulting/training, etc.
- 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 customers site).
- 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 count.
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.