Investors like to use the word “traction.” To me it’s always conjured dramatic imagery of a pickup truck struggling up a muddy hillside, then finding enough footing to propel itself up to glory. When companies pitch to me and talk about “early traction,” though, I always probe to check for the “First and Worst” phenomena.
My first customer at my first company was a grandfatherly CIO at a big hospital. I was enthusiastic to please him, but I was also very conscious that I intended to take over the world with our software. I told him, “We’ll change anything you want about the product, as long as it’ll be good for all our future [gazillion] customers.”
The Grandfatherly CIO of course wanted one-off customizations that would be good only for him. I said, “here’s the thing, we’re a young company, and if our product does wonders for you, you’re going to want us to be around to improve it – but if I’m doing custom work for you, it’s going to make me less profitable selling to others, and you need me to be profitable to stick around.” He seemed to think that made sense, and begrudgingly agreed.
In the end this arrangement was a win for both of us – our product was a home run for his organization, we got a ragingly evangelical reference customer, and they helped make our product better for others. Most importantly, this precedent gave us courage in dealing with future customers wanting customized projects. This wasn’t as important with the first or second hospital, but was hugely beneficial by hospital #300.
Since then, as an entrepreneur and investor, I’ve seen lots of companies go through this early customer stage. Usually, companies end up loving them too much – their “first” customer becomes the “worst” customer for their future. By changing products or processes into one-offs, their grand vision of high growth products morphs into a grind of custom services engagements.
There’s nothing wrong with custom work, but “product” v. “service” companies are inherently different in their scalability, profitability, growth prospects, and enterprise value. The key is in knowing who you are and sticking with it – in early days, it’s particularly hard to determine where the line is that separates the two paths.
During my early days, I asked two simple questions to stay on track.
- Can I replicate what I’m about to do with my next 100 customers? That first one-off seems harmless, but they add up to slow development, increase maintenance burden, and reduce sales efficiency.
- Am I willing to walk away from this customer’s business? This is the ultimate test – not all customers are good for your strategy. I ended up turning down or firing customers that weren’t good for us.
Ultimately, whether product or services, the key is to be clear on what you want to be and staying disciplined in doing the right things to get there.
An edited version of this article was published at Inc.com and can be found here.