Targeting larger customers vs smaller customers: A comparison
Every ETS firm should have a defined target customer profile. This is basically the customers that they find ideal and will be willing to invest money to do business with. While the customer profile has many attributes, one of the most important ones is customer size. What size customers to target can have a huge impact on the business, affecting the go to market, operations, and delivery. If you are an ETS founder who is trying to decide whether to go after smaller or larger customers, this blog is going to help you understand the pros and cons and how choosing one vs the other will impact your business.
We compare how targeting larger customers differs from targeting smaller customers across 7 criteria.
1. Need for proof points
Larger customers need more proof points that your team can take them to success. This is because larger firms are more risk averse and the organizational controls often measure management on success rates. Smaller companies on the other are willing to work with smaller vendors, typically because they cannot attract larger vendors. Smaller firms are willing to take more risk and partner closer to ensure success.
The decision between small and larger customers depends on your situation. How many customer case studies do you have today? How mature are your customer stories? How much are you willing to invest in developing and maintaining your case studies? If you are a new ETS business with just a few stories and lack the budget to create very strong case studies, you may have to settle for smaller customers for today.
2. Bill Rate
Larger customers are likely to pay higher bill rates. They are most risk averse and require more safety nets in place, for which they compensate the right vendor by paying for higher rates. Smaller customers will typically pay lower rates. They often have lower expectations for the lower rate, and that is what makes them possible as well.
For the ETS firm, the higher bill rate (without gross margin reduction) is almost always better. It eases growth without increasing the headcount proportionally. It also leads to higher gross margins. This criteria generally favors larger customers and often why you see services firms targeting larger customers.
3. Contract Sizes
Larger customers are willing to sign larger contracts. This is not only because of higher bill rates but also because larger customers prefer signing fewer, larger contracts as the procurement processes are often lengthy and getting one signature is less work than getting two. Smaller customers, in contrast, will prefer smaller contracts as time and budgets are tight.
For the ETS firms, larger contracts are in fact better in almost all cases. It helps them book revenue quicker, and provides them more predictability in their forecasting which allows them to focus more on growth. Again, smaller firms may not be able to score larger contracts.
4. Sales Cycles
Larger customers will have longer sales cycles. They have more complicated procurement processes that take a longer time. In addition larger contracts naturally require longer and higher level approvals. Smaller customers typically have simpler processes and can make decisions faster.
For the ETS firm, this means that more investment is needed up front to build and nurture a relationship but for higher rewards later. The key is to understand the cash commitment and ensure you have enough cash to pursue large customers all the way to fruition, before you make the decisions. Otherwise, targeting smaller customers may be the only choice.
5. Operational maturity
Larger customers require a minimum level of operational maturity. They have higher standards of operations and they prefer to work with more mature vendors. Smaller customers are typically less mature themselves and have lower expectations.
For ETS firms, this implies larger customers will require more investment in keeping operations buttoned up and have the right processes and policies in place. If that maturity is not present today, larger customers may be dead ends. Alternatively, a plan is needed to put such maturity in place.
6. Customer Expectations
Larger customers have higher expectations. Smaller companies are bigger risk takers and usually easier to satisfy. They also make better innovation partners. Larger customers are pickier about their needs. They come in with a lot more expectations. You need to make sure your solution is more comprehensive and have to create a delivery engine with better internal controls for ensuring customer management and success.
Larger customers expect more customized solutions. It is easier to find repeatability in the work being done for smaller customers. The larger customers are more picky demanding more customized solutions while smaller customers are more willing to accept more generic solutions. This makes it easier to build expertise and IP on focused solutions improving gross margins. Consequently, in the early stage, when offerings are less mature, it may be better to learn while working with smaller customers. Once the offers mature, larger customers are more likely to purchase the off-the-shelf offer and then pay additional sums to get it customized which is a sweet spot for typical IT services firms.
All that said, the biggest thing to keep in mind while choosing your customer focus is that as your company grows and matures it is important to learn and change the decision. In Emerging technologies, it is a good strategy to start with servicing small customers and graduate to working with large customers as your offerings, processes, and proof points mature.
We hope this article helped in understanding the tradeoffs and the place of large and small customers in your overall strategy. At Vixul we want to use the experience of our team to help you navigate through the different choices you make as a business owner similar to understanding the trade offs in choosing the type of customer you want to focus on so you can make better informed choices. If you feel this article was useful please contact us at here to see if we can help you in scaling your business.