Identifying Profitable Customers

Ultimate success is dictated by being customer-focused. First and foremost is doing business with companies that are themselves profitable. That is not easy today, but we really focus on successful companies, healthy companies, and companies that have a solid and broad base of their own. We look for companies that are themselves customer-focused because we don’t want to be in a situation where we are scratching a current itch and the thinking is, “We have a customer satisfaction problem this year, and my CEO told me to go do something about it. We have to go out and buy something and try to deploy it. We hope the problem goes away and that we change CEOs next year.” We don’t want that type of customer because if we deploy our same resources at a company that is really customer-focused, then the lifetime value of that business to our business will be much higher.

Obviously financial stability is important as well. In this day and age, we have a very strong credit-checking process that makes sure that the customer is financially healthy. Most importantly, we measure the business in terms of what products we have sold each customer and what support agreements we have in place for each customer; we may lose a bit of money up-front on a product sale and maybe give them a little bigger discount, which goes counter to the way that companies run today. We do that because we are very confident that we can prove the value of our solution very quickly and that allows us to obtain a longer- term agreement with the customer. If you look at the monetary value of a one-year versus a three-, five-, seven-, or ten-year customer agreement, there is an increase in monetary value for having longer-term agreements. More and more today we focus on structuring long-term support agreements. This is unlike most technology companies that go in and sell a product and first-year support, and then they review the support agreement and hope that the client buys more support offerings. We are looking at structuring much longer-term deals with our customers that allow us to leverage our relationship over a longer period of time.

Think about what having a five- to ten-year agreement with a customer does. First of all, your competitors aren’t going to call on that customer because you have a binding agreement for a very long period of time. The customer is not going to continue paying one vendor while they buy something new from somebody else. It really enhances the competitive advantage.

More importantly, it gives you the breathing room you need to really become a strategic partner to your customer. With a longer-term agreement, you not only bond the customer more closely to you for a longer period of time, but most importantly the relationship has a greater runway on which to take off for mutual long-term benefits and it gives you the space to constantly show them the value of the relationship as you build on the company’s vision for their customer strategy. Therefore, they are more naturally inclined, when a new technology decision or new deployment or business issue comes up, to turn to you as a strategic partner because they have a long-term agreement and a long-term relationship with you. So they turn to you and you in turn have to make sure that you really help them with their overall business strategy. That is key.

If we find ourselves in an unprofitable situation, we tell the customer that we need to have a conversation about their support agreement; we need to structure it so that both parties are successful. For example, we have one very large customer right now that came to us through an acquisition. They had a longer-term agreement that was very advantageous to them and very disadvantageous to us. From a profitability perspective, we knew that we were losing money on this customer. We have now gone through a contract negotiation with them in which we have basically said, “Here is how much it is costing us to support you, and here is how much you are paying us. As business people, let’s agree that there is a discrepancy between those two numbers, and a fairly large one. Now let’s look at how many locations we are deployed at in your enterprise. Let us look at the cost savings that our products are bringing to you and the net margin contribution that we are bringing to your business. Let’s look at that number. It is a much bigger number than what you are paying us or what it is costing us to support you. Let’s come up with an agreement that allows us to be profitable, that allows you to be successful, and that also allows us to have the benefit of the margin contribution that we are bringing to your business.” Because we understand our customers’ businesses that deeply, when we have a discussion at that level, we can typically very quickly get alignment with the customer on something that no one may like, but that all will agree is a fair and equitable distribution of a value proposition. That is something that most businesses don’t do. They may just continue complaining, or they may raise prices and the customer will ask, “Why are you charging me this much more? You used to charge me X last year, and now it is 2X this year.” They may have an acrimonious perspective. We have a business discussion that says, “Here is the ROI that we are bringing to your business. Let’s work out a situation in which we don’t have a discrepancy between that and how much it is costing us to support you.”