Driving Growth For Your IT Solutions Provider By Turning Customers Away

By Jill Bellak, President & COO, MBX Systems

MBX’ Systems president Jill Bellak tells how focusing on the company’s most profitable customers resulted in double the revenue, a 32 percent increase in revenue per employee, and triple net profits.

If you’re like most IT businesses, one of the yardsticks by which you measure success is the size of your customer base. You have charts and graphs documenting customer growth. You trot out the numbers to board members and investors to demonstrate momentum. You fight to keep every old customer and bring in every new one. It’s smart business — except when it isn’t.

Sometimes a better way to encourage growth is to prune your customer portfolio to focus on the most profitable consumers of your product or service as well as those in your core target markets. That’s what my company, MBX Systems, did in 2011 when we informed 65 percent of our customers that we were no longer able to service them because we were changing our business model to concentrate on larger order volumes and specific vertical sectors. We provided a list of alternative suppliers to help them make the transition and gave them six months to switch.

Since then, our revenues have nearly doubled, revenue per employee has jumped 32 percent, net profits have more than tripled, and so has our average customer size — both because of new business from larger customers and because the changes in our business model and associated resource allocation have helped fuel growth in our customers’ businesses as well as our own.

We have also quadrupled the revenue generated from our top five customers for the same reason, moved into a new headquarters that octupled the size of our manufacturing floor to accommodate our growth, and opened our first office in Silicon Valley to facilitate outreach to the many companies in our core market segments that operate from the West Coast.

It’s the same principle as pruning shrubs to encourage healthy growth. Here are the steps we took to plan and execute our customer-culling initiative and suggestions for adapting our strategy for other business scenarios.

1. Customer Data Drilldown. Our first step was to perform an in-depth analysis of our customer base to ascertain whether certain customer segments were requiring resources disproportionate to the revenue they generated or hampering growth in other ways. Our business involves engineering, building and supporting custom server appliances for ISVs who deliver business applications as turnkey hardware/software packages, so that determined the metrics we examined.

We looked at standard measurements ranging from revenue per employee to revenue and profit per customer. We also considered data patterns specific to our business, such as engineering time per customer, total units built, and the number of times a given platform design was manufactured before it had to be re-engineered to replace obsolete components.

We discovered that 15 percent of our customers were generating 85 percent of our revenues, yet smaller customers were requiring as much time and effort as larger ones if not more because of the custom engineering, on-demand manufacturing and regular technology updates required for each appliance platform. The same was true of those outside our areas of vertical specialization. We had anticipated those results, but taking a deep dive into our customer analytics laid out the facts in black and white.

Different businesses may need to look at different metrics, but ultimately the numbers will tell the story.

2. Strategic Prioritization. With the data from our customer analysis in hand, we had the documentation we needed to make critical decisions about our customer strategy and — if necessary — redefine our business focus.

For some customers, for example, we built hundreds of units every year. For others, we manufactured only a few appliances annually and had to do a technology refresh every two to three years. The data clearly showed that smaller customers were less profitable, but they required business development, engineering, manufacturing and post-manufacturing resources that would be better allocated to acquiring and servicing larger clients.

Reducing our service levels for smaller and non-target customers was not an option because that would undermine our strong reputation as well as one of our key competitive advantages. Adding resources to support those customers would have been similarly unwise because of the slimmer profit margins. The smart choice was to dedicate all of our resources to retaining our largest and most relevant customers, servicing them at the highest levels, and bringing new ones in the door. The only question was how to end relationships with less attractive customers gracefully.

In our case, the path was clear. For other companies, the insights from customer analytics might point toward abandoning larger customers rather than small, specific vertical or geographic markets, or customers in other categories. Alternatively, the information may encourage a company to stay the course. Either way, the data provides guideposts for mapping out a plan.

3. New Customer Parameters And Policies 

Based on the results of our data analysis and our subsequent decision to eliminate marginal customers, we decided to draw the line by expected revenue per customer as well as by vertical market. The change applied both to existing customers and to new prospects being pursued by our business development team.

For customers already on the books, we established a minimum order quantity and changed appliance prototyping fees as well as engineering support policies for those who failed to meet our minimum order requirements or preferred vertical markets. We then notified our “elimination targets” of the change, set a six-month grace period before the new policies would be enforced, and provided referrals to other hardware builders who could meet their needs. We also alerted those suppliers to our plans and the likelihood that they would be hearing from some of our customers.

For our business development team, we eliminated prospects in the pipeline that failed to match our new guidelines and set new parameters to ensure that sales efforts would be limited to our preferred customer size and categories. Even with these constraints, by the way, our team delivered a 90 percent increase in new business in the first year alone.

Lessons Learned

To be sure, these were difficult decisions. Saying goodbye to 65 percent of our customers — many of them long-time MBX loyalists — felt like cutting off an arm. Relationships we had fought hard to establish and nurture were suddenly being scrapped. Business development personnel in the middle of long sales cycles had to tell many of their best prospects that they were no longer a good fit for our business.

But, as they say, you have to crack a few eggs to make an omelet. We knew that our future growth and profitability depended on right-sizing our customers. We could no longer be everything to everybody. It wasn’t smart business, and it would compromise the high-touch service that has grown our business since we began manufacturing server appliances in 2000.

Obviously, this is a road that not every company should travel, but every company should mine their business data for insights into customer value. At a time when nearly every business decision from product development to marketing strategy is data-driven, data analysis should be applied to customer retention and acquisition planning as well. Even if what you learn from the exercise doesn’t lead to a retrenchment like ours, you may discover patterns that take you down a different growth path. And growth, after all, is what we’re all looking for.