The Down Side of Upmarket

By Doug Kaye

From Web Hosting Monthly, November 2003 Edition

December 11, 2003 -- (WEB HOST INDUSTRY REVIEW) -- We all dream of landing the big account that will lift our businesses to the next tier, bringing in a long-term contract and a high-powered reference account that can attract even more large customers.

While I don't want to discourage you from growing your business, I hope you'll also consider the risks you're taking, for I've seen more than one Web hosting entrepreneur get into trouble either during or after acquiring that big new customer. I've made some of these mistakes myself, and with the advantage of perfect hindsight I can see they're preventable.

The Dilemma

First of all, ask yourself how this new customer fits into your long-term plans. Are you trying to move your entire business upscale, and does this new account represent a move in that direction? In either case make sure you read Clayton Christensen's classic business book, "The Innovator's Dilemma" and his brand new sequel, "The Innovator's Solution". They'll show you how difficult it is for an incumbent company to evolve from the status quo, and how you can use this knowledge to your advantage. (One possibility is to start a new venture or division to pursue larger accounts or those to whom you'll supply a substantially higher level of service.)

The Eggs in the Basket

Of course, you've got to make sure your company will survive even if something goes wrong with any one account. It's not just a question of whether your customers renew their contracts; in some cases, for reasons you can't predict, even the largest of customers simply may not pay their bills. You can go after them to collect, but what will you do for cash in the meantime? Your profits serve as a cushion against such problems.

My rule of thumb is that the revenues from any single customer should never exceed your company's pre-tax net profit. In other words, if your profits are 12%, then a single customer that provides more than 12% of your revenues puts you at risk. The logic is simple: If you lose that customer, you go from making money to losing money. You're not making a profit, you say? Then the key question is whether a new customer gets you to profitability more quickly, as only companies that turn a profit have control over their futures.

The Fluke

Aside from the financial risk, you've got to ask yourself what the significance is of this new, large customer. Are you making an effort to move your company up-market to focus on more such accounts in the future, or is this a fluke? If it's a fluke, treat it as such. Most companies like to buy goods and services from vendors who are at least as large and stable as they are. This can be a challenge for the young and unstable Web hosting industry, and is one reason major hosting companies have trouble competing with outsourcing and telco giants. If your new "sugar daddy" account is a substantially larger business than your own, consider that it might, indeed, be a fluke and not something you can easily reproduce.

The Distraction

How will this major account change your business? Will you be providing managed or customized services beyond what you normally offer to your existing accounts? If so, you must consider the impact this will have on your business. If this new account only needs a whole lot more of the same services you're already providing, it's just a matter of scale. This is the easiest type of major account to handle, and the one for which your chance of long-term success is greatest. However, if you're being asked-and you've promised-to provide types or levels of services outside of your standard offering, you're introducing significant risks. First, there's the increased risk of failing to meet the needs of your new largest customer. But perhaps more important (and insidious) is the risk to your existing customer relationships. You're likely to jump through hoops to satisfy a major account, and you'll probably assign your best people to handle it. But recognize that by doing so, you'll be cannibalizing the resources from your existing mainstream customers, and increasing the risk of dissatisfying them. To some extent this can't be avoided by any growing business. But at least make this a conscious decision, taking the risks into account.