Due to resource constraints, early-stage entrepreneurs are rarely able to be selective when it comes to their clients. This is, of course, understandable as the harsh realities of financial necessity are difficult (if not impossible) to subordinate; however, low and/or non-existent customer selection standards naturally lead to the onboarding of a disproportionate number of abusive, delinquent, wasteful, and/or misaligned clients who may help to pay the bills in the short-run, but are likely to reduce efficiency, profitability, growth, and (frequently) sanity in the long-run. Continued success, therefore, often hinges on a concept which I refer to as strategic customer churn – deliberately using price-increases and/or outright divestment to systematically purge problem accounts which detract from a firm’s ability to service, retain, and onboard other higher-quality clients.
Problem clients tend to be either abusive, delinquent, wasteful, and/or misaligned.
With their unreasonable demands, mean-spiritedness, and non-stop temper tantrums and threats, abusive clients can make business absolutely miserable – to the point of being unbearable – for entrepreneurs and their teams. In early-stage and/or financially precarious scenarios, the decision may be made to sacrifice the mental well-being of internal staff in order to keep money flowing if the client is sizeable enough. Such an arrangement, however, cannot persist for long before doing severe – even irreparable – damage as morale craters and resources are inefficiently allocated to placating the angry whims of the abuser instead of creating long-term value.
Early-stage firms are particularly susceptible to cash flow problems due to their weak balance sheets. By their very nature, slow-pay clients absorb much-needed liquidity – making it riskier than it should otherwise be for an early-stage firm to add employees, purchase larger amounts of inventory, and/or invest in other value-generating assets, among other things. Further, slow-pay clients necessitate the allocation of already insufficient resources to the administrative headache that is collections. At the extreme, billings become uncollectible – leading to painful, sometimes even fatal, write-offs of accounts receivable.
For early-stage firms, any resources spent on non-value generating tasks is wasteful – and many clients are particularly adept at finding ways, purposefully or otherwise, to waste their vendors’ time and other resources. Some clients, for instance, seem incapable of receiving an invoice without questioning at least some of the line items contained therein. Others ask for quote after quote, but never greenlight any projects. Still others troll nonstop for industry knowledge with no intention of paying for it. And, of course, there is the endless parade of startups with good intentions, big dreams, and no shot at success.
High-touch and flexible service levels are often embraced by early-stage firms as the best means by which to secure initial clients. Before long, however, the over-the-top expectations set by early interactions generally become unsustainable. Consider, for instance, early clients who become accustomed to engaging with the founder on day-to-day matters and bristle at the prospect of being handled by newer employees. Or, consider clients who insist on utilizing legacy software packages which are well beyond sunset and will not gracefully integrate with a new internal platform. Such misaligned clients offer little but momentum-crippling inefficiency in the medium- to long-term.
Early-stage firms are particularly likely to accumulate problem clients. As such, the client base that will take a firm to $1,000,000 in revenue oftentimes prevents it from being able to reach $2,000,000 – just as the client base that will take a firm to $2,000,000 in revenue oftentimes prevents it from reaching $5,000,000. Under resource constraints, ongoing growth hinges on not only the development and maintenance of a robust pipeline of prospective clients, but also on the strategic churn – through deliberate price increases and, when necessary, outright client divestment – of those existing clients who are doing the most damage.