Talk to any experienced entrepreneur or investor and they’ll tell you that there is no better evidence of the viability of your business than a paying customer – or better yet, multiple paying customers.
Given this fact, many savvy startup founders focus aggressively on getting early revenues, however they can -- which is a really, really good thing. But, its often helpful to understand that not all customers are created equal.
Here is how I like to categorize early customers:
- The Coerced: These are usually friends or family. In many cases they are so close to you that a simple request (assuming there’s some relevance and the product doesn’t cost an arm and a leg) is all it takes for them to pay you some money. Basically, it’s a combination of arm-twisting and guilt that brings these customers on board. Not that this is necessarily a bad thing, but recognize that revenues from these kinds of customers don’t have as much “value” as the other two categories. Basically, the validation provided for your business is just not as strong. Chances are, they didn’t buy the product, they bought you. The cash doesn’t hurt, but in my experience, its usually pretty modest.
- The Convinced: These are people that are either complete strangers or people you know but don’t know well enough to arm-twist into buying from you. They have to be convinced. You probably gave them some discount, made some changes to the product to get them on board, or just your passionate conviction was sufficient to get them on board. This is real revenue. Congratulations.
- The Committed: These are people that are not only sold (and paying you money), but are committed to your product and are ready to back you up. They either want or need to see you succeed. They’ll give you testimonials. They’ll give you ideas for features. They’ll be a reference. You’ve created something of such value to them that they’re rather pay you, and increase your odds of success, then not pay you. They answer your calls and respond to your email. They’re great. Happy, Happy – Joy, Joy.
To put a finer point on this. Lets say we measure two aspects of a new customer:
- The “distance” of that customer from you (i.e. how well did you know them and how much influence did you have over them)?
Use a scale of 1-10:
1=You’re joined by blood, undying friendship or are (or were) sleeping in the same bed.
10=They’re never met you or heard of you before. You have no power or influence.
- The “repeatability” of the sale. This measures how this customer reduces the work/effort required for future customers.
Once again, use a scale of 1-10:
1=You had to customize the product significantly and fly out 2000 miles to manually install/configure it and train them. Future customers don’t benefit from the features added.
10=They found you on the Internet, paid by credit card and are ecstatic with the base set of features you already have and are impressed with your brilliance.
So, quite simply, take the above two numbers and multiply them together and you get a “customer value index” from 1-100. Obviously, the closer to 100 you can get, the better. For my own purposes, I usually calculate the average across all my early customers. I multiple my total revenues by this average (as a percentage) to figure out what my “real” revenue is.
For example: If my average customer value index is 40 and my revenues are $500,000, I would estimate my “real” revenues at about $200,000. Not very scientific, but then very few things in startup-land are.
What’s the point in all this? Simple – it helps me recognize that not all customers are the same and that getting one committed customer with a high index is much better validation that “things are working and I’m on to something” than many low-index customers who I arm-twisted in a weak moment into paying me money.
Finally, though I would agree that “cash is cash”, in my experience, the higher index customers end up being more profitable too. Selling to friends and family (at least for me) rarely ends up being a profitable venture.