Lesson learnt #2: Know your customer. The 3 step process we used to determine our target market

Niching for a Startup is critical. It levels the playing ground between small and large businesses.

The challenge is however, when you start a new venture or develop a new product, you say yes to anything and everything.

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You take every meeting, every phone call, every bit of work that comes your way. Even if you know in your heart and on paper that you might just break even or even lose money on a client or project, you’ll say yes to the work as you never know – it may lead to something bigger. It’s all about Customer Lifetime Value, right?

If you have been or are going through this journey – I guarantee you can relate. If you haven’t experienced this, you’ve either:

  • Been an employee most of or all your career;
  • Forked out $$ to buy into an established organisation;
  • Simply a well connected, hustling genius – any of you out there?

When we initially established SBO we said yes to everything that came our way. Fixed price accountant quality bookkeeping is a pretty sound value proposition right? We grew pretty quickly by closing on low hanging fruit and referrals from accounting firms.

As we grew quite quickly, systems started to be tested. Our ‘scalable’ solution to bookkeeping started to crack.

Due to misjudgement in pricing and client expectations, margins were getting squeezed. Service begun to decline, clients were getting frustrated with us – and as a result we were haemorrhaging cash.

We made the mistake of not identifying the type of customers we wanted.

The process we used to define our target market

Frustrated at the situation, we spent some time researching the best practice techniques on how to define our target market. We followed this simple process:

  1. Assess current client base
  2. Analyse your product/service
  3. Check out your competition
  4. Look for a trend in all the above

We spent a day mapping out our issues and started to brainstorm our target market following the process.

 Step 1: Assess your current client base

We started by ranking each of our clients on a score out of 10 based on a set number of criteria. These criteria included factors such as responsiveness to queries, enjoyment to work with, payment of our fees, whether they valued our service etc.

 10 being the clients we love working with, 1s being the ‘less pleasurable’.

Applying the SaaS approach of profiling our sales (known as cohort analysis) we started with segmenting our ranked client base by 4 distinct data sets:

  • Industry
  • Business size by revenue
  • Business size by # employees
  • SBO Package size

Fortunately, we invested a fair amount of time and capital into building the right systems from the beginning, so we could easily draw down on this data without too much trouble.

This is a screen shot of our results. (I’ve arranged them into a nicer format for this purposes of presentation)

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By assessing the underlying data, we made the following observations:

  • The majority of our clients operated in Digital, Hospitality and Professional services (Allied Health industries)
  • Our best ‘highest ranked’ clients operated in Digital and Allied Health
  • There was limited correlation between our client’s turnover and rank
  • There was limited correlation between our package sizes and rank.

By assessing the data, it was immediately apparent that our challenges were industry related. Digital and Allied Health industries were the clear winners.

We sat back and brainstormed why these industries were particularly conducive to our business model and service offering.

Digital Agencies
  • Typically early adopters of technology and susceptive to change
  • Traditionally creatively focused and require partnering with a strong finance team
  • Strong, stable cashflow
  • Operate in the service industry
  • Value accurate financial data, and willing to pay for it
  • Good cultural fit for our service
Technology Startups
  • Typically early adopters of technology and susceptive to change
  • Require timely and accurate financial data for board/investor reporting
  • Value accurate financial data, and willing to pay for it
  • Good cultural fit for our service
 Allied Health
  • Strong, stable cashflow
  • Operate in the service industry
  • Value accurate financial data, and willing to pay for it
  • Good cultural fit for our service
Step 2: Analyse your product/service

After assessing why these particular industries were conducive to our model, we looked internally to understand what makes us specialised to target these businesses.

1/ Services business – Being accountants trained in a corporate environment, the concepts of staff utilisation, capacity budgeting, WIP, job turnaround days and lock-up were engrained into our psyche from undergraduate day one. We’re best placed to value add to our clients that are also in the business of buying and selling time.

2/ Digital natives – we have a natural interest in the latest and greatest in tech, and aren’t afraid to test whatever emerging software is on the market. This makes us relatable to our client base and target market – i.e. we speak the same language.

3/ Our business model – Our business model is technology and service, wrapped up in monthly subscription. The way our customers buy from us is no different to any other SaaS product in the market. The difference being of course we are a bit more hands-on. Most digital businesses incorporate a buffet of SaaS to run their business – and we’re another offering to add to that.

Step 3: Check out your competition

We checked out a few of the competitors in the market. There were a bunch out there, however we’re comfortable that we’re sufficiently differentiated from our competitors with our focus on quality (data integrity), turnaround times and independence from any accounting firms.

Conclusion

By following this 3-point process, we were able to quickly identify our target market. As a result we have seen significant turnaround to our profitability, been able to more clearly articulate our value proposition and develop more efficient and targeted marketing campaigns to acquire new customers.

What’s your sweet spot?