Some ideas and concepts for SaaS founders
The principle of knowing who your best customers are is hardly novel, sometimes I bore myself talking about it. Indeed I often go back to Michael Porter and the simplicity of his command to businesses to select the customers they choose to serve uniquely well. He summed it up well:-
“The purpose of business is to create and keep a customer.”
This premise of customer choice tells us so much about our chosen strategy and what we will and won’t do. The definition of the ideal customer may change over time, but having clarity on this question is a simple method to focus as your business is growing fast.
It’s paradoxical that a narrow focus on a pain, a well defined use case, and a clear customer focus can help us grow faster.
A recent discussion of the performance of one of our top performing companies - Unbabel - was telling; every single customer in their pipeline for the next two quarters was a “nailed on” ideal customer with an ideal use case. The confidence that brings the leadership and their investors, and the company as a whole is profoundly valuable. Every company has finite resources - even if they have just raised $60m in an over subscribed Series B round like Unbabel - and it is important those valuable resources are all pointed in the right direction.
Defining a precise and narrow definition of a customer as many of our companies do, such as Unbabel, Mews Systems or Mews, does not mean they won’t ultimately address a massive market and multiple customer profiles. What it does mean though is at every point of their journey they always need to be able to answer three simple questions:
The last question is critical; the biggest reason for a SaaS company to know who their best customers are (and aren’t) is that selling to the wrong customers is the largest cause of churn. Patrick Campbell, founder and CEO of Profitwell, analyses the performance of 10’s of thousands of SaaS companies:
“It’s surprising how often customers sign up for a product without fully understanding whether that product meets their needs. As soon as they find out your product isn’t a great fit, it’s highly likely they’ll leave you behind for a competitor.”
And what does the company in that situation do? They divert their valuable resources trying to desperately retain sub-optimal customers. It’s a race to the bottom.
Your customers define what you make, how you make it, where you sell it, what you charge, who you hire and even how you fund your business. If your customer base changes over time but you fail to make changes in the rest of your organization, stress and failure will follow.
It takes vision and guts to turn someone down and focus on a different segment, on people who might be more difficult to sell at first, but will lead you where you want to go over time. Seth Godin.
That’s enough of the why. Let’s jump into the how.
Knowing your ideal customer profile (ICP) the linch-pin of any successful business, but the conversation actually starts and ends with the problem you are solving (for the customers you choose to serve).
The customer choice impacts everything, from the capabilities of your product to your go to market strategy to the people you hire. It helps you narrow your focus, align your resources and dominate your markets. And it’s tempting to start with a list of organisational characteristics and personas but, for me, the starting point is always the problem you are solving, the industry pain.
“Good founders obsess with product, great founders obsess with pain.“
Chris Tottman, Notion Capital.
The elephant in the room isn’t the customers, it's the pain those ideal customers share. This common pain and the greatest founders (and companies) centre themselves around it:
The greatest companies centre themselves around an industry pain that won’t go away – it’s constant, it’s making everyone suffer – and so they pivot around the pain, because the pain will inevitably drive an adoption curve as the industry moves from an old way of doing business to a new way.
That’s the genius of the very greatest founders.
The pain may be associated with a critical event, an inherent dysfunction in a current solution, a shift in customer behaviour, the rise of a new technology or a myriad of different and combining factors. Below are just a few examples from the Notion Portfolio:
And that’s just the A’s.
It seems obvious, but the pain is the unifying characteristic, common to all your best customers.
However, this may still be a wide definition of a market, so we need to down the number of segments or customers that share the pain to those that are:
Critically this is not just about the top line, it’s also about the underlying viability of that segment and how effectively it will help you to achieve your goals within the life of your capital. So then we need to consider two more questions...
A great mindset to have when determining who to sell to is that of Co-founder of Idio, Andrew Davies, who asks himself:
Do we hand on heart believe we can solve this problem repeatedly and scale the solution?
So step 1? Be obsessed with the pain and refine your focus.
At Notion we like to talk about this challenge as “getting uncomfortably narrow”.
This is about defining the smallest group of customers, with a shared pain, who can be addressed in a repeatable and scalable manner, but is of course adjacent to a far bigger industry. So the decision is not just who you will sell to, but also who you will not.
As your business develops, you need to ensure that the deals you pursue are worth the resources you’re burning in order to close and retain those deals. This can only be done by knowing and selling to companies that fit your ideal customer profile.
A step which is sometimes glossed over, or ignored completely in many ICP articles, is the need to understand your focal value proposition, says Bryan Richter of Arcanum Consulting.
Bryan describes this as “holding your value proposition to a mirror” and recommends founders ask themselves questions like:
The aim of this exercise is to truly understand what your company brings to the table, getting to the heart of the Michael Porter question, “What do you do uniquely well for the customers you choose to serve.” This will equip founders with the ability to find companies which place as much value on the pain points your company is seeking to address. .
An ideal customer profile (ICP) can be seen as an explicit representation of a customer that would benefit immensely from your product/service and yield significant value in return for your business.
Typically, ICP’s are codified using the following firmographics:
By gathering data on the various customer groups that share the common pain you can start isolating segments that you may be able to address in a common way.
Identify the company size, industry, region, individual title, technology landscape, and pains, problems and challenges that make these companies a fit for your product. Kyle Porter, CEO at SalesLoft on building your ICP (Source)
You may need to gather data you don’t know you need on customers you don’t yet have, and then over time learn more and more about the unique characteristics of customers that buy fast and stay. What’s more, this may include behavioural data such as purchasing behaviour or perhaps a customers likelihood to buy from an early stage company, or perhaps even their participation in communities associated with the problem you are solving. Remember, this is an agile and iterative process and you need to be highly creative in both identifying and gathering this data and of course conscious of doing so in a respectful and compliant way.
Lincoln Murphy explains:
There is no universal definition of an ideal customer; not for your company, not for any company.
Your ideal customer profile is a living, breathing “definition” that you’ll come back to - and modify - often.
The more you learn about how your business impacts your customers, and which ones benefit from it the most, the more your ICP will continue to evolve - in some cases radically.
Unearthing your ideal customer profile is a foundational, company-inclusive process influencing upstream product development and downstream go to market. A successful process will yield an ICP which aligns the whole company to the highest-value customers.
Albeit the idea of eliminating the vast majority of your target market, and focusing on a small portion seems counterintuitive, the intention is to reach and engage those customers that fit your business perfectly, according to the stage you are at and the resources available.
To understand aspects of behaviour, you can interview some existing customers or prospects directly, to learn about their experiences with your product/service, as well as their buying process when seeking new products. The list of questions you could ask is infinite - the key is to ask questions which produce answers that you deem vital to building your ideal customer profile
With the enriched customer data, you can identify commonalities amongst your target customers, identify recurring patterns, and start to build your target market universe.
List out all the target segments you could realistically address, go as far and wide as you like. Be inclusive of segments you aren’t entirely certain of.
Be as granular as you like, the more granular the better.
NB: If selling an enterprise product that is the remit of only a few customers, you may choose to list out named accounts.
Next, develop a value estimate for your solution for each segment. If you don’t know the value for sure come up with a proxy by which you can calculate it; this could be on number of users, transactions, consumption.
Don’t overthink this stuff, just get the market universe in a list, develop a proxy for the value and create an estimate.
If like me, you like to bring some order to chaos, this is where it starts to get interesting as you start to refine your target market in order to narrow your focus.
I think of this like a sailing boat, charting a course to it’s destination into a prevailing wind.
They need to balance a desire for speed, with a desire to point as close to their end direction as possible; they endeavour to maximise “velocity made good”.
They can optimise for speed by sailing parallel, or 90 degrees to the wind (on a broad reach for the sailors) and never reach their destination or they can go “close-hauled” pointing straight into the wind and risk stalling. The trade off is to start pointing to within perhaps 50-60 degrees to the wind and then as the boat gains speed, tune the sails to point closer and closer to the destination, without sacrificing speed. Interestingly the sailors out there will also know that as they gain speed the apparent wind direction will shift, and they can point even closer.
“What on earth are you banging on about now,'' I hear many of you say. Well in our example we are trading off the attractiveness of a market with the completeness of our product (and our ability to sell). We can target the most attractive market, but if we are not ready to sell then we will not succeed. We can optimise for the segments for which we have the best solution, but if the market is insufficiently attractive or valuable we will fail again. So we make trade offs:
We need to identify the most attractive market segments, and those with the highest propensity to buy, that we are most ability to reach, engage and convert these customers.
You can use a number of different criteria, but in the many times we’ve done this we have nearly always focused on:
Simply score each segment 0 to 10. 0 being low, i.e. 0 = completely inaccessible, 10 = highly reachable.
This could be as simple as assessing yourself against that Michael Porter question? “Can we serve this customer group uniquely well”?
Then score each segment 0 to 5. 0 being low, i.e. 0 = no product / solution, 5 = complete product.
If you want to get more granular, define a number of key attributes (three in the example below) of Market Attractiveness (MA1, MA2, MA3) and three for Product Completeness (PC1, PC2, PC3)
Score each segment / customer in your universe against these MA and PC criteria. 0 is no fit, 5 is a great fit.
Don’t overthink it, just do it for each segment and each criteria. Then create an average score of those criteria for each segment and you have a priority in terms of market fit.
The (totally hypothetical) equation above is an example of how you can apply some simple logic to market selection, that will spit out a score for each segment so you can rank and prioritise your Target Markets.
So now you have a list of prioritised segments. This is where it really starts to hurt, as you start to reduce our customer choices and become uncomfortably narrow, intolerably constrained, awkwardly confined, with little room to move. You need to put your massive market through the mangle.
You need to forcibly reduce your options, making hard choices on the customers you will and won’t serve.
By drastically reducing your target market, your business's resources are freed up to target and serve the customers that truly matter. It enables founders to overcome the phenomenon of paradox of choice, the theory that having more options or choice makes it harder for decision making.
For instance, Andrew Davies of Idio said they devised 15+ use cases for their product, and after multiple iterations of ICP research they boiled it down to 1 and from there, focused on companies that fit that use case.
Multiple times we’ve [Idio] looked at our ICP and refined it… I’m a massive believer in this process.
The issue with most startups is that as they have very little to no customer data to build a perfect ICP, they are open to selling to anyone - this can lead to a very inefficient go-to-market strategy and a very high churn rate.
As much as a specific ICP helps you identify high-value customers, it also helps you to quickly sift out customers that you do not want.
Steli Efti discusses this topic in detail in this article. Efti maintains that non-ideal customers are companies you don’t want and must actively stop from buying your solution as they do the following:
Efti argues the need for early stage companies to chase smart money and not just the most money that prospects can offer.
Especially in the early days, turning away sales is difficult but no amount of cash can make up for selling to the wrong customers.
What’s more, ideal customers are more likely to recommend you to other potential customers, as there’s a strong chance that they know others who run very similar businesses, all of which are likely to be highly qualified leads for your business.
With your newly defined ideal customer profile, you now know what characteristics you are seeking in prospective clients - this enables you to refine your leads to customers which meet that criteria. However, it's important that you continue to focus and refine your ICP as you scale your business. Andrew Davies highlights:
If you don’t focus as you scale, you’re building an inefficient customer acquisition model, which you’ll regret in the long run. You need to be willing to make those trade offs for the sake of growing a loyal and significantly useful customer base. Steli Efti.
In this guide, we have attempted to provide a series of models to help founders and companies define an ideal customer with a shared problem and highlighted the benefits this approach.
With your newly defined ideal customer profile, you now know what characteristics you are seeking in prospective clients, and can align your entire organisation accordingly. This is not a sales and marketing only exercise.
But it’s not static. It’s important you continue to focus and reassess your ICP as you scale your business. How often should you reassess your ICP? There’s no correct answer. Depending on your business, and the rate at which it’s scaling, would determine how often. The quicker your business is developing, the more often your ICP will need to be reassessed.
Edward Ford on B2B SaaS GTM
David Obrand on ICP
Lincoln Murphy on ICP
Ed Fry blog post on ICP
Steli Efti on Non-Ideal Customer Profile
Ben Crouch on referrals from Ideal Customers
Kyle Porter on building an ICP
Unbabel Raise $60M Series C
Stephen Millarrd on Getting “Uncomfortably Narrow”
Andy Farquharson on ICP
Valentine Hutchings on GTM Strategy
Emily Bauer on benefits of understanding your ICP
Guido Bartolacci on ICP vs buyer personas
The importance of creating and keeping a customer