Startups: Do Cheapskates Make The Best Early Customers?

December 6, 2006

So, do cheapskates make the best early customers for a startup.  In a word:  No.

But, since you’ve already interrupted your busy day to read this, let’s take look at this a wee bit deeper and explain why I don’t think cheapskates make the best early customers.  For purposes of our discussion, rather than using the more controversial “cheapskate” label (which makes for a good blog title, but is not the best characterization), lets use the term “unreasonably frugal”.    Even this is not perfect, but will serve our purposes.  Basically, the central idea here is “customers that are by nature highly cash-conservative and whose strategy is to look for the cheapest solution for most things.”

Here are some of the most likely counter-points people might make to my assertion that these frugal clients don’t make the best early customers for a startup:

1)     Won’t frugal customers help me ensure there is sufficient “value” in my product?    Maybe, but probably not.  A lot depends on what the primary premise of your offering is.  Are you offering an innovative product – with very few alternatives?  If so, then the frugal customer is likely not your best choice of customer.  Frugal customers are seeking to get the best deal possible (often regardless of the price-point or potential value).  As such, they will push your startup to squeeze whatever value they can.  Though we’d like to believe this “squeezing” helps us focus our offering, take costs out of the equation and offer a better “value”, it doesn’t seem to work out that way in the early stages.  My argument is that what an early-stage software startup needs is not someone to push them to deliver a cheaper solution, but one that is better differentiated and can be offered at a premium.  Instead of trying to take cost out, you should be working to add value in at this stage.  More on this in the next point.

2)      Won’t frugal customers help me “stretch” my product in the right direction?  Once again, maybe – but probably not.  There are two primary mechanisms by which clients can stretch you and get more from your offering.  One is to stretch you in what I would call the “services dimension”.  In this dimension, clients lean on you for a combination of training, support, hand-holding and customization so that they can get more out of your offering.  The other is to stretch you in the “product dimension”.  In this dimension, customers are pushing you to add more capability to the product so that they are less dependent on you and they can do more things themselves.  I would argue that frugal customers generally tend to want more services (because this reduces their work in the short-term and increases the value they get for the same price) whereas the other kind of customers are often pushing you to remove your services from the equation because they’d rather have control.  These latter kinds of “forward thinking” customers are the ones you want.  They’ll make you work hard to get you to stretch your product so that they can do more with it.  The upside to you is that growing your product in this way (within reason) gives you more leverage.  The time you spend adding a new capability will benefit future clients as well – and in theory, gives you the hope of a price premium or more differentiation in the future.  In the long run, this is a better thing. 

3)     Aren’t any customers I can cajole into buying, good customers?  No, they’re not.  As a software entrepreneur, you’re making a series of decisions along multiple dimensions.  Many of the “interesting” decisions involve tradeoffs. On the product front, you have to decide whether or not to add a feature or capability.  On the customer side, you are deciding whether or not to take on a specific customer (or not). Yes, you heard that right.  Even in the early stages, you should be turning away some customers regardless of how desperate you are for cash and regardless of the validation it may give you.  In the early stages, you should be looking for customers that are generally aligned with where you are taking the company and product.  Interestingly, most entrepreneurs instinctively know whether a customer will be a “bad” customer or not.  The challenge is acting on that instinct and walking away (politely) when necessary.  The right customers are those that are innovative, looking to gain some advantage (even if temporary) and willing to take a risk for that potential gain.  They are the classic “early adopters”.  (Read “Crossing The Chasm” on the suggested reading list if you have not done so already.  Moore does as good a job explaining this as I’ve seen so far).  

In a future article, I’ll look at this topic in much more depth and answering the broader of question:  What makes for a good (or great) customer for an early stage software startup?  If you have thoughts or ideas on this, please leave a comment.  Will try to incorporate as much as I can in the future article.

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