It’s better to serve customers than clients.
When considering whom you’re selling to, you need to be very clear on whether they’re clients or customers. It might be the first time you think about the difference between the two, but I believe it’s one of the most important distinctions in business. Here’s Seth Godin:
Customers hear you say, "here, I made this," and they buy or they don't buy.
Clients say to you, "I need this," and if you want to get paid, you make it.
The key distinction is who goes first, who gets to decide when it's done.
If you make the wrong call here, it’ll prevent you from succeeding. As a startup founder, your job is to serve customers, not clients. By definition, a startup is in search of a scalable business model (per Steve Blank), which in turn means that its product needs to be standardized to a certain extent. And that is incompatible with serving clients, who tend to expect tailor-made services.
You can, of course, make a really good living serving clients. But yours will never become a scalable business: the more clients you have, the more employees you’ll need to hire. The margins might be high, but you can’t expect growth to be exponential, which is precisely what is expected in the tech space. (Just ask law firms, consulting firms, advertising agencies what it’s like trying to grow while serving clients!)
That doesn’t mean that the concept of a client is completely absent from the startup world. Some startups enter a market where the legacy industry is all about serving clients, in the hope that those clients can be turned into customers. It requires starting with providing what clients demand, then training them to behave more as customers if they want to continue enjoying your product.
It’s a very hard challenge to tackle. Just ask Atrium, a startup whose goal was to invent a new kind of law firm. As is often the case in such circumstances, the clients didn’t play along: they kept demanding more (that is, after all, what clients do), making it difficult to standardize the product and scale up. In the end, Atrium had to call it quits: it couldn’t beat an entire client-serving industry with a product ultimately designed for customers.
Another interesting case is that of enterprise startups who have to treat the businesses buying from them both as customers and clients. A buyer is your customer if they subscribe to your product via a monthly or yearly fee; but they’re also your client if you provide support and additional services to help them redesign their workflow, set up the product and train their employees to use it.
In such a case, it’s really important to draw a line between the two ways of creating value. It’s tempting to focus on the client side of the business because at first providing client services seems like it’s boosting adoption—not to mention the revenue it generates early on.
But ultimately, it’s a trap. What venture capitalists value, should they decide to back your company, is the recurring revenue paid by customers over the account’s lifetime, not your ability to send more consultants in to provide services that increase short-term revenue.
So make sure to ask yourselves these questions as early as possible:
Are buyers on my market used to behaving as clients or customers?
If they behave like clients, can I teach them how to become more like customers?
If they behave like customers, how do I make sure I don’t succumb to the temptation of serving them like clients due to the siren song of short-term gains?
The Family can help you answer such questions. Join our next batch if you want us to have your back!