What is a customer?
I get to listen to lots of business presentations. Whether it’s one on one coaching, practice presentations or review board presentations for funding awards, they are a big part of my schedule. Over time, you start to pick up consistent themes, whether it’s content, presentation or style. You also get to know your fellow coaches pretty well and start to pick up on their hot buttons. There’s one guy who almost invariably, at the end of the presentation, “How do you make money?” (A coaching moment to you entrepreneurs out there anticipating pitching for investment or funding: don’t make us figure out how your business makes money; tell us.)
My “hot button” question? “Who is your customer?”
Sometimes I ask this question simply to test the entrepreneur and make sure they have a firm grasp on their business model. Sometimes I ask because they simply haven’t told me (coaching moment #2 – don’t make us figure out who you customer is). Most of the time I ask the question however, it’s because the entrepreneur has a more complex business model with several constituents and I want to make sure they have a handle on who their primary customer is.
Payment test
Let’s start simple. If I make a widget, open a store, and sell my widgets to people who walk in the store, those people are my customers. They pass my first test of what a customer is. A customer is “someone who pays me money for goods or services.”
Multiple payor test
Many times however, it doesn’t stay that simple. Let’s say you want to develop an online auction site. You’re trying to develop a premium site so you charge a membership fee when potential sellers sign up. Then when someone buys one of their auction items, you also take a percentage of the bid. So now you have two people paying you money. Who is your customer here? In this situation I simply modify my original test and ask “who is paying me the most money?” Most likely, as your auction site scales, the transaction fees will become much greater than the membership fees, so your customers are the people purchasing auction items.
Value test
Let’s wander over into non-profit land for a moment for an even more subtle scenario. Let’s say you get a rather substantial grant to spur economic development in your city. Let us further assume that in an effort to make your funding last as long as you can, your business model will entail charging current and potential retailers in your city to educate them on how to grow their businesses. You advertise your services, have a few early sucesses and suddenly business owners are beating a path to your door. At the end of your funding period you have actually collected more money in service charges than the original grant. Who is your customer in this scenario?
This is where I fall back on my third and final customer test, which is “who got the most value?” You’re tempted to say the business owners since the results of your services helped many of the dramatically grow their business. I would suggest however, that each business only got value directly related to the extent they were able to grow their own business, whereas your funder got value back from their funding equal to the total of all businesses. Hopefully, that value is great enough to warrant follow-on funding! In this scenario, I would say your funder is your customer.
Okay, so what?
The “so what” here is it’s important to know who your customer(s) are. Knowing your customer is a key element of any business plan and is a key aspect of your operational plan as you grow your business. The relationship between you and your customer(s) is a never-ending cycle of money and value. Sometimes the money comes first, sometimes the value comes first, but knowing who your primary and secondary customers are and what “value” means to them is critical for growing your business.
Over to you…
What do you think of these models, and what have I missed? Is it really all just about money and value or are their other parameters that define a customer?
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