SEASON 2 - EPISODE 136 - DECEMBER 18, 2024

The Biggest Customer Conundrum

Bigger isn’t always better. In this episode of The REWORK Podcast, 37signals’ co-founders Jason Fried and David Heinemeier Hansson share the drawbacks of chasing high-profile, enterprise deals. The two founders explain why they prefer their business model that’s built around serving smaller clients.

Watch the full video episode on YouTube

Key Takeaways

00:35 - The biggest clients can quickly become the biggest burden and the biggest risk
07:10 - The hidden costs of “whale-sized” clients
12:35 - Things to consider when defining your ideal client
17:02 - Knowing what types of clients you’ll enjoy working with
19:53 - How venture capital funding can make a difference when choosing your ideal clients

Links & Resources

Transcript

Kimberly (00:00): Welcome to Rework, a podcast by 37signals about the better way to work and run your business. I’m Kimberly Rhodes. I’m joined as always by the co-founders of 37signals, Jason Fried and David Heinemeier Hansson. Well, 37signals is in the business of small business. We don’t have a big sales team. Our customers are small businesses, entrepreneurs, nonprofits. We’re not going after that one big enterprise client. Jason recently wrote, “While many think having a largest customer is an asset, it’s actually a company’s biggest weakness.” Jason, tell us why you think that. Let’s dive into that.

Jason (00:35): This is sort of the classic dilemma I think for entrepreneurs, especially when they’re starting a new software business. They want to land a whale and they want to land a whale because it looks good on their website. They bring a lot of money. Maybe if their business model is based on seats, they can sell a big account. And you can understand why people would feel like they want to do this. There’s legitimacy, there’s all that stuff, but the problem is is that if you land only one or two of those, let’s say, and you have to backfill with a bunch of other customers at a smaller size, then you have this big disparity between big and small customers and you have a few customers who essentially run your whole business. You are now beholden to a whale or two whales or a small school of whales, but you have that class, you have a different class of customers, and you’re almost a consulting firm at this point where you’re just going to do what they’re going to say because they pay you the most money.

(01:23): They have an outsized bill. And so you’re working for them. You’re no longer working for yourself, you’re not building your product, you’re building their product. Look, if you want to only land big companies, that’s one way to do it, but it kind of gets you into a bad spot pretty early on. The other problem is, is that if you only have a handful of big clients and one of them leaves, you’re really in trouble. And so you find that you’re going to do whatever you need to do to keep them around and that again makes you feel like a consulting firm. So what you don’t want to have happen is you don’t want to be in a situation where you can’t afford to lose a customer. And when you only have a few big customers, you simply cannot afford to lose that customer. You’ll be screwed.

(02:00): We put ourselves in a position here at 37signals basically to say, we don’t want this to happen, but if we said, hey, whoever rent some random person, you get to pick 10% of our customers and kick them out, or you get to pick 10 then they have to leave whatever it would be. We would be okay with that because we don’t have any huge outliers, that in that 10% they might pick the wrong one. We try to make all of our customers basically pay us about the same amount and that way we have a very static business, more like, literally like static where all the dots are about the same size. That’s kind of ultimately I think what you want as an entrepreneur,

David (02:33): And this all comes down to incentives. When you have these big whales, you have an incentive even if they’re not putting their entire contract with you on the line to make sure that it never feels like that. We got one taste of that in the history of 37signals. It was when we were running Campfire, our chat tool like Slack 10 years before Slack, and we realized at one point there’s some disparity here in the usage patterns. There’s one account that’s just using Campfire way more than every other customer that we have. What is going on? We were pricing Campfire at I think a hundred bucks a month was the maximum you could pay us or something like that, and we realized half the system resources are being used by one customer. Do you know what? Turned out that customer was Twitter. So Twitter and I think it was 2014 maybe or something like that.

(03:27): They were on Campfire even though Slack and the others were out there and they had 5,000 people on the system, so we were selling them a 5,000 person chat system for a hundred bucks a month, and that wasn’t working out. We simply couldn’t even recoup the expenses for the servers at that amount. So we went to Twitter and I thought, do you know what? We’re going to scare ‘em off. I’m going to give them a price that to me seems ludicrous and is hilarious in hindsight how modest the request was. I’m going to tell them it’s $5,000 a month and then they’re going to pack their bag in about two seconds and leave and do you know what happened? They were like, okay. I was like, what do you mean okay? 5,000, you were just paying a hundred and now I’m telling you it’s 5,000.

(04:13): And you just say, okay, and what happened was the most curious thing. As soon as they said, okay, I felt like I had to be their personal concierge. I had to be their personal customer service. Here’s a customer that’s paying us way more than any customer has ever paid us for Campfire or any other system actually, and now I need to be on the beck and call. There’s an issue. You have some feedback, I got to be here. Now, that’s not necessarily the worst thing in the world in the early days of your business, you want to be responsive to customers, you want to learn from those customers, but at that stage in our business, it made no sense at all. And I just went, oh, this is what it feels like to run an enterprise company. This is what it feels like not to be able to say no, and we’ve since gotten a bit of a taste of it or an invitation to a taste of it that we’ve declined ever since.

(05:04): When a large corporation, it’s always a large corporation, comes to us and say, hey, we’re considering Basecamp halfway implying we should be honored. Okay. I mean I’m honored whenever any customer wants to consider our product, but not necessarily extra honored because you happen to have a thousand employees. But what then comes afterwards is, hey, here’s 42 pages of security questions. Could you detail, build them out? No, I could not. That’s going to take, if I’m going to do a proper job and actually go through all of it, that’s going to take hours and hours and hours. That’s not the business model that we have. So we say no to those things, but then I look at the kind of companies who don’t. And Jason and I actually as we were developing Campfire two if you will, the ONCE version of Campfire did a little bit of a competitive comparison benchmarking to Slack, and we signed up for that and ended on their settings page and Jason and I both went like that checkbox, that’s an enterprise customer, that checkbox, that’s an enterprise customer.

(06:05): Even at that scale, one of the biggest enterprise sales organizations, Salesforce, who now owns Slack, they are still liable to this idea that if someone shows up with a very valuable contract, they have to put their request into the software, and the overall software absolutely suffers from it. When you take the totality of all those close deals and all those check boxes that can be directly chain to one of those contracts signed, you see the total sum of it. You see a hundred check boxes, you see 150 different features that all seem like, why is this here? Who is this for? Well, it’s for Joe in purchasing at enterprise bullshit corporation number one, and there’s an endless parade of those. So I think we have just gotten enough of a taste of that just one encounter with Twitter as a huge customer. The encounters with all the invitations and all the strings that came attached to any other in the past for us and then seeing what happened to competitors who go down that route and go like, you know what? That’s not how we want to build software.

Jason (07:10): And I’ll add this too because I think I could hear someone in the audience going, so just hire someone and let them deal with that and hire another person. Let them deal with that. Why wouldn’t you want their money? Just take the business. You got to think a little bit downstream. What does it do to your business when you take their business? What kind of business are you then becoming? Now if you don’t really care and you’re just going to take anyone’s business, whatever it is, and you’ll just kind of be okay with all the chaos and all the things you got to put up with and all the shit you got to deal with, then fine, you can do that, but you should know what you’re getting yourself into. When you land a big customer with high demands or heavy demands or they’re high maintenance customers in a sense, it comes with consequences and you have to be okay with those consequences.

(07:48): Some people are, some people are not. You need to know who you are and if you will be. We are not. We are not okay with that. We don’t want to have to wait on big customers because they need this or they need that. We want to basically build on behalf of all of our customers instead of a few. And also we don’t want the chaos that comes with managing big accounts and putting up with them and then there’s renewal cycles and they always ask for discounts. We don’t have discounts, we don’t have renewal cycles in that way. We don’t have salespeople, we don’t have any of those things. So by saying no to these big customers, we’ve eliminated all the complexity in this business that could have been there that we wouldn’t have enjoyed. We could have dealt with it probably in some way, but we wouldn’t have wanted to show up at work every day to deal with that kind of work. So the customers you take, the customers you have have a huge influence on the kind of business that you can run and you better know that some of these things come with major consequences.

David (08:41): I think the most important thing is to decide. What are you going to be? Are you going to be for small, medium sized businesses? You can sell to them in a very different way. They don’t have the expectations that you’re at their beck and call. They don’t have the expectations that Jason or I will be their personal concierge in every matters of the interaction. They have that expectation that they fill out a form and then they get access to a piece of software. Very different from when you sell to an enterprise customer. Now, that’s not to say that the enterprise sales cycle isn’t lucrative. Obviously it is. In fact it’s the default playbook for virtually every competitor we’ve ever faced in the history of Basecamp. Every competitor we’ve ever faced started with going after the small to medium sized businesses. That’s how they validate their product market fit.

(09:30): And as soon as they have product market fit, as soon as they have customers who are buying the product in more of a self-serve way, they pivot. They go, the way to scale this up in the olden days, you were scaling it up to a hundred million dollars in revenue a year because that was the key to opening the IPO window. That’s when you could go public when you had a hundred million, and there was just a playbook. A VC could hand that playbook to any B2B software SaaS company and go like, here, run this. It’s 246 pages, maybe it’s a thousand pages at this point, and step one is you’re going to hire a salesforce. Step two, you’re going to hire a ton of people stacking that salesforce. Step three, you’re going to spend $3 buying one. Now, get to work. Start calling, start cold calling, start doing whatever you can to land these whales. And I almost always imagined the boiler room from Glenn Gary, is that what the movie was called?

(10:29): There’s these salespeople, right? And they’re pushed into this box and they just got to close the deals. And I look at that and I go like, I really love the Wolf of Wall Street. That was a great movie. Would I want to come to work there every day? No, I don’t want to work for Bill Forte or whatever his name was. I don’t want to work in that scenario. I’m not saying it’s a scam, it’s not necessarily a scam. Sometimes it’s a little scammy, but it’s not necessarily a scam. It’s just a way to sell software and you have to be eyes wide open if you go in for that playbook because the company will never be the same again. Once you make that pivot from selling to buyers by themselves, when we sell to a customer nine out of 10 times, the person who’s making the purchasing decision is also the person who’s responsible for implementing the software, for using the software, for inspiring others to use it with them.

(11:21): When you sell to an enterprise, that’s not the deal at all. They have a purchasing manager and they have accounting and legal review and security review. All these other folks who are not necessarily going to use your stuff are the ones who have the power to choose you versus a competitor. And that is a key reason of why so much enterprise software ends up being so bad, because being good it’s not the competitive advantages is when you’re selling to folks who actually have to use it. When you realize that the lawyers and the accountants and the security people, they actually have as much say in the matter as the folks who have to use it, you will inevitably start tuning your software in that direction, filling it up with a bunch of bullshit check boxes that look really good on the security review and does nothing necessarily to improve the security and quite a lot often to harm the usability of the software. So it’s just a very different thing and I think that’s why when you talk about B2B software, it’s a little bit of a misnomer. There’s not a B two B2B category. There’s an SMB category, small and medium sized businesses, and then there’s an enterprise category. Don’t confuse the two.

Kimberly (12:37): Okay. Let me ask you this, because David, you said that you need to make a decision on who your audience is. Obviously in the beginning with that Twitter client, it wasn’t a decision that happened before they signed on. So my question is when in the process, was it the Twitter client that made you reevaluate this and do you reevaluate it often?

David (12:58): The Twitter client was an accident. We’ve never gone after the enterprise customer. It just so happened, and I’m sure it happened because when Twitter signed up, they were 20 people, they were 30 people. They were our standard customer size because that’s the kind of people who can actually buy this kind of software. It’s really interesting. Enterprise is not just about selling, it’s also about buying. Once you are an enterprise class customer, it’s like you’re no longer able to buy simple, affordable tools because somehow that just doesn’t seem like it’s at your pay grade. I’m a very serious purchasing manager. What do you mean I’m making consideration over a piece of software that costs $300? That is beneath me. I need a $50,000 contract to be worthy of my time and my stature at this company. That’s a little bit of a parody, but not by much.

(13:51): That is usually what happens. Once you reach that enterprise class, you have to buy from enterprise vendors ‘cause they know the bullshit. They’re okay with the three month sales cycle. They know the stupid dance on pricing that is the enterprise price will be a hundred percent larger when it actually is, and then you will look good to your manager when you manage to negotiate 40% off. I got a 40% discount on something that was a hundred percent overpriced. That’s not exactly a great accomplishment, but that’s how it goes. That’s how we trade these things back and forth in the enterprise world. So we had made that decision very early on. Jason and I never had an inclination to do that kind of software perhaps in part because 37signals just came out of that. It just came out of the client services world, 37signals used to do web design for hire, and there you deal explicitly with clients who can kind of tell you what to do.

(14:48): And I don’t think either of us had any appetite for more of that, but what I have seen, and I think that’s a more positive vision, I actually have a company in Denmark that I invested in are facing this dilemma right now. They wanted to be a small and medium sized business. They wanted to do self-service sales, but the kind of software that they’re selling lends itself more to enterprise customers. The kind of churn that they’re dealing with at the low end is a little too high. It’s difficult to land those clients, and then suddenly the enterprise customers just started showing up on their own and now they’re faced with essentially that fork in the road. What should we focus on? And as much as I’ve just spent what, 15 minutes with Jason here talking against it, my advice was actually, do you know what?

(15:34): In your situation, I think enterprise sales is probably the right move. You should probably go out and hire a bunch of salespeople. So this advice that we’re giving does not exist in the vacuum. It very much exists in the context of what kind of software are you selling, what is the life cycle of this software? What is the life cycle of the customers who gets the most benefit? If you’re selling, for example, a piece of software that just gets exponentially more valuable, the more people who are on that platform, maybe that is more of an enterprise thing. It really just starts working better and better. You got a hundred people on, you’ve got a thousand people on, you’ve got 10,000 people on it, maybe you do need that enterprise stuff, and that’s okay too. It’s not like, well, I was about to just say it depends, but that’s such bullshit.

(16:18): It depends on something specific. It depends exactly on that context. It’s not that it depends, just means you can do either or and it’s just as fine. I think Jason or I would hate the kind of business that Basecamp would turn into if we went the enterprise route, even if it was possible, and obviously it’s possible. We have a lot of competitors, the ClickUps and Mondays, Asanas and whatever of the world, a bunch of them are public now, who do that, who sell software that’s at least partly competitors to Basecamp and have chased the enterprise route. So you can do it. You also just have to have the right disposition to it. You, not just a product, not just a buyer, but you as the entrepreneur. Am I that kind of person? Am I the enterprise sales kind of person?

Kimberly (17:02): What does that mean? What is an enterprise sales kind of person or personality that you guys are saying we’re not those people?

Jason (17:07): Well, there’s a degree of ego, and I remember way back when I was starting 37signals when we were web design firms. So way back when and I wanted to land Hewlett Packard. HP was like the whale to land at the time because you got to put the HP logo on your site and say it’s in your client list and the whole thing. And to be honest, it was pure ego. I was 21 or whatever the hell I was. It’s actually 25 is actually what it was, and I just wanted to feel important. I just wanted to feel like we did something big so we could do more big things because this is a big deal. And I realized eventually that I absolutely hated working with those kinds of companies, those huge companies where decisions are passed down a chain. They’re very indirect. The work you do doesn’t end up shipping the way you want it to ship.

(17:53): The work you put in doesn’t end up getting used. And you do that a few times and that’s where you learn, that’s where the wisdom comes in, which is like the ego is a big thing. You want to feel good, you want to feel important, you want to feel like you did something important and it keeps blowing you up. But the reality is I have to live with the consequences here. Do I like to keep doing work for companies that aren’t going to use it? Do I like to do work for a small group inside of a company that’s going to get shot down later on? Do I like to work with people who have no power over the deliverables? At the end of the day, I didn’t like to work with those kinds of companies and I realized that it was way more enjoyable to work with smaller companies where this really mattered to them.

(18:31): This work was so important. This is like the one thing they were doing that year to launch a new website versus HP has 12,000 initiatives going on at once. It didn’t really matter what this thing was or wasn’t. And so it took me a while to get there. But you do have to understand, you got to ask, why am I doing this? Am I doing this for puffery, so I seem important, so I can brag? Maybe and maybe there’s some reason to do that, but you got to know why you’re doing it. And there’s people today I know in this industry and competitors to ours or other people in this world of SaaS who are not thinking that much about why they’re doing what they’re doing. They’re just doing the thing they think they’re supposed to do because they look around and that’s what everyone else is doing.

(19:14): And that’s a sure far away to discontent I think pretty quickly, unless you’re a perfect match for the outcome, which is not often the case. So I just think it’s a little bit about self-reflection and understanding what it is that drives you and what’s going to make you happy sustainably over the next three to five years or let’s say whatever. I would be miserable. Like David said, we would both be miserable if we had to service, out of obligation, big customers. I think it should be a delight to take care of any customer you have and not feel like you’re obligated to take care of these seven over these 75 because the seven that you’re working with pay you the most. That’s just to me is a terrible way to show up for work for me. Maybe not for someone else, but you got to know who you are.

Kimberly (19:55): And I would imagine some of this too comes down to your desire for independence. You can make these decisions yourself, which you might not be able to make if you had that VC funding. I’m assuming that’s what you guys are going with that.

Jason (20:08): Yeah, it’s a big part of it. I mean, if you have to hit certain numbers to get certain valuations to return certain multiples to certain investors, how you feel doesn’t matter that much. Frankly. No one really gives a shit how you feel about the work you’re doing. They just want the numbers to add up because they’re out of there in five to seven years anyway or sooner. And they’re going to move on to the next investment and they’re going to pay their LPs and they’ll be done. And it’s not to say that there’s not great companies that are VC funded and where people are enjoying the work. Of course that exists.

Kimberly (20:35): Sure.

Jason (20:36): But when that’s the case, you’re basically just, you’re a math problem, you’re an asset. You’re just kind of gutting it out as long as you have to get to some other outcome that doesn’t really include, like maybe doing this for 15 years, maybe really enjoying the work most of the time. There’s just consequences. That’s all. And again, you got to be comfortable with them and understand that there are and that there are strings attached, and do you like the strings or do you not like the strings? You got to think about that before you tie yourself up with them.

David (21:02): And a lot of it comes down to looking at your work in the sense of is this a means to an end or is this the end itself? I think when Jason or I engaged with product development, it’s an end itself. It’s not just a means to an end. It’s not a stepping stone to get to some new checkpoint on this VC journey such that we can raise this, that, and the other thing to read some metrics, no. Making the great software is the destination. That’s where we are here for. That’s why we’re still here. That’s the reward. The reward is to make great software that we can sell to people who care about buying it and paying for it. And that reward is obviously partly personal. That’s our satisfaction. If we had investors, they were not going to get it. Yeah, I’m going to send you a check for 13% of my job satisfaction every quarter.

(21:55): They’d go like, what are you talking about? Where’s the money? Where’s the money? That’s what it would come down to, right? So it would be far more binary in that regard. Are you succeeding or are you not succeeding? Where we can look at things with a few more degrees of freedom and say, you know what? This has to work as a business. I want it to work as a business. We’ve talked about the aesthetics of having a well functioning business that is making profits. That’s a beautiful thing, but it’s not the only beautiful thing. If we just had a good business, but we didn’t enjoy the work and we didn’t enjoy building the software itself, we wouldn’t have lasted as long as we have.

Kimberly (22:30): Okay, well, you’ve given people a lot of good things to think about. With that, we’re going to wrap it up. Rework is a production of 37signals. You can find show notes and transcripts on our website at 37signals.com/podcast. Full video episodes are on Twitter and YouTube. And if you have a question for Jason or David about a better way to work and run your business, give us a voicemail at 7 0 8 6 2 8 7 8 5 0. You can also text that number or send us an email to rework@37signals.com.