I had an interesting conversation with a friend of mine in the industry recently – we were discussing sales and marketing strategy. It turns out that we have very different approaches.
His is to try to get fewer accounts, but to get bigger accounts that spend more money with him on average. He is working under the philosophy of growth by “selling more to your current customers”.
My approach on the other hand, is to try to get many smaller customers, each spending a less significant amount of money with us.
At first his strategy would seem to make more sense, but I would like to make the argument that it’s the wrong approach. Why? A few reasons:
- Any time you have a larger percentage of your revenue coming from a smaller number of clients, your risks of a significant problem increase dramatically. If any one or two of your clients decides to leave, it can have a major financial impact.
- I assume that most of the people reading this blog are selling to small businesses. If that’s the case, you need to be completely honest with yourself by acknowledging that your customers would rather not be spending their money with you. Nobody wants to pay for IT management and support services, they have to pay for it. Since that is the case, they will always try to get the lowest cost solution over time. Therefore, the bigger check they are cutting to you each month, the more likely they are to start analyzing those expenses and figuring out how they can cut them. It’s a funny paradox.
- If you ever decide to sell your business, a smart purchaser is going to consider the above and lower your valuation. Think about it: if you were looking to buy a managed services business doing $5 million in sales per year that was made up of 10 clients each doing $500k per year versus a managed services business doing the same $5 million per year but made up of 100 clients each doing $50k per year, which would you consider a more risky purchase? In the first scenario, losing just one customer can completely wipe out your profits.
The net result of all of this? I believe that smart MSP’s will develop sales and marketing processes that allow them to affordably target thousands of small businesses as potential clients, not dozens. I’m not suggesting that it’s a bad thing to sign up larger clients, but I don’t think that should be the basis of your strategy, and I think you should do your best to not allow any one client to become more than 8% or so of your total revenues. I also completely support trying to sell what makes sense to your current clients to bump up their spend with you a bit over time, but again, I don’t think this is the foundation of a growth strategy.
Finding more clients is the foundation of a growth strategy!
MRC
