I have found giving customers too much choice can be a detriment to building a sellable company. I learned this the hard way when my first attempt at building a scalable service business flopped.
I had read a glowing article about Jupiter Research (now part of Forrester Research), an analyst firm that provided its studies to customers through a subscription offering. Jupiter would do one piece of research and present it to all of its customers. Finally, I thought, a model that brought some scale and leverage to the consulting business.
I spent the next weekend plotting my entry into a business model with leverage. I decided we would publish six major research reports each year at a price of $50,000 per year. For a single company to commission one report would cost more than the subscription, but now the company would be getting a total of six reports – a good deal, I reasoned.
At $50,000 per subscription, all we needed was 100 subscribers to have a $5-million business. The prospect energized me.
I’m a Pareto kind of planner, so once I thought my strategy was 80 per cent of the way there, I cobbled together a makeshift brochure and hit the road to start selling the subscription.
I divided my prospects into A, B and C leads. The As were our long-term clients, Bs were sporadic customers, and Cs were people we’d never met. Interestingly, the plan sold best with B customers. They knew us better than the Cs but were not so entrenched with us that they viewed a cookie-cutter offering as a step back in our relationship.
The problem was, I burned through our B customers quickly. I managed to get 17 subscribers, which amounted to $850,000 on an annual basis. A nice chunk of revenue to be sure, but not enough to make it worth walking away from our other clients. If I was going to make the subscription model fly, I would need to convince my A customers to join the 17 Bs who had already committed.
But my As weren’t interested in the subscription. Some thought they were giving us so much consulting work that we should throw in the subscription free as a thank-you for their business. Others didn’t like the cookie-cutter nature of the subscription model. Each time I met with my A customers, I would listen carefully to their feedback and capitulate.
And that was my mistake. Giving our A clients the choice ensured they would never make the move to the subscription offering. Our A customers had become As because we were providing value to their business, and they didn’t want to mess with a formula that worked for them.
With 17 customers, and $850,000 in revenue, the subscription offering represented about 25 per cent of our revenue at the time. Important, yes, but not enough to cover payroll, rent and all of our other expenses. With my A clients saying no, I decided to run the subscription program while at the same time continuing our consulting business. Things went downhill from there. Client deadlines and demands eventually overshadowed the subscription business, and the quality of the reports suffered. Employees preferred to work on custom consulting projects instead of writing formulaic reports. I felt as though I was trying to take off with an overloaded plane—I could get the front wheels off the ground but didn’t have enough torque to get the heavy plane airborne.
With B clients starting to question the value of the subscription and As no closer to making the leap, I decided to shut down the program.
Over the following five years, I often thought about what went wrong and continued to dream about transforming the business into something scalable. I concluded that my biggest mistake was giving my A clients the choice to continue to do business with us using the old model. I decided to relaunch a version of the program but force our customers to make a choice: either subscribe or end our business relationship.
Giving customers an ultimatum actually worked in most cases, and we quickly made up for lost consulting revenue with new A subscribers. As we got more focused on the offer, the As and Bs started talking it up, and we received more inbound leads from Cs.
The business started to take off. My only regret was not having had the courage to turn off the old business the first time I tried to scale up.
Special to The Globe and Mail
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell . Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers.