Do Business Well

Market leaders choose their customers very carefully because they know that they will be judged by them: Nothing says more about a business than its customers. Unfortunately, conventional wisdom can’t help in this task. The first rule in sales is, go after the low-hanging fruit—that is, the easy-sell customers—rather than clamber for what is hard to reach. But this is good advice only if there is a plethora of fruit on the low branches, and in the era of customer scarcity, the pickings are getting slimmer. The real plums are in the high branches.

Market leaders deliberately pursue some of the most difficult and demanding clients they can find because they know that satisfying these customers will stretch their abilities and help them become better at what they do. I call these stretch customers.

But not all tough customers are desirable matches. Some of them are simply the wrong ones to have because their demands don’t play to a company’s strengths. That doesn’t necessarily mean they are undesirable for other suppliers. Picky, critical eaters who want personal service could be ideal stretch customers for a swanky full- service restaurant but a very bad match for McDonald’s.

Who are the desirable stretch customers? As it turns out, for companies that sell to other companies, many of them are other market- leading companies. It is easy to see why. By definition, market leaders are the pacesetters in their fields, and they didn’t get there by moving slowly. Their success depends, at least in part, on their ability to motivate their suppliers to perform consistently at elevated levels. It is also important to have them as customers because they are growing faster than their peers.

Consider the makers of consumer packaged goods, whose immediate customers are retailers that sell the products. Procter & Gamble and Gillette discovered long ago that they had to do whatever it took to get their diapers and razors onto the shelves of the notoriously demanding Wal-Mart Stores. They could not ignore the enormous buying power of this giant, which grew in the six years through May 2000 from $76 billion in sales to $167 billion. That $91 billion increase represented the single largest growth opportunity for both P&G and Gillette.

Since its inception in 1993, Siebel Systems, too, has made a point of pursuing stretch customers, such as IBM, Microsoft, Yahoo!, and Schwab, enterprises on the forefront of their industries. Catering to them has propelled Siebel into the lead and insures that it won’t design solutions for yesterday’s problems.

Not only do stretch customers help you grow; they keep you on your toes and tone up your muscles. Toyota, for example, heaps enormously tough demands on its suppliers, who often have to struggle to keep up, to improve quality, costs, delivery time, and efficiencies. Yet after they successfully meet such high standards, they find themselves in far better shape to deal with their other customers.

While there is nothing intrinsically wrong with low-hanging fruit—without such attractive, easy customers, even market leaders would have trouble making money—companies that settle for them alone inadvertently risk defining themselves as reactive followers, unwilling or unable to tackle challenges posed by more demanding customers. On the other hand, catering to companies like GE conveys a different story. Being a key GE supplier means working harder, and that effort speaks volumes about a company’s determination to keep up with the market leaders.

The implicit message in all of these examples is this: If you want to be a market leader, do business with others who already are. If you want to grow, go after customers who are growing. And this advice isn’t limited to companies that sell to other businesses. It is equally relevant for about half of the 5,009 companies in my database that sell directly to consumers.

McDonald’s, for example, is constantly investigating new ways to appeal to the roughly 20 percent of fast food patrons who eat at this kind of restaurant four or five times a week. These super- frequent customers account for 80 percent of all fast food revenues. Clearly, they are not complaining. Equally clearly, it behooves McDonald’s to cater to their needs and work to understand how they are changing over time.

Tests of new product lines, such as Mexican dishes or pizza, found little enthusiasm among the super frequent crowd. But Mc- Donald’s recent adoption of a speedy custom cooking technology has been a hit. Not only does the technology improve the burger’s taste; it speeds preparation time while cutting down on wasted food. McDonald’s knows that what its super frequent customers value most is the “fast” in fast food.

Does all this mean that the new market leaders go after only those customers who will stretch them? Not at all. A useful way of thinking about this is to imagine the customer base as divided into three separate groups. In the first are stretch customers, who spur a company to improve its business practices. Managed properly, they are a vital source of progress. They may not be the most profitable customers. Wal-Mart, for example, is known to drive a very tough bargain, and Toyota is certainly not every supplier’s idea of a lucrative account. Having too many stretch customers can therefore put excessive pressure on the bottom line and overextend the organization. As a rule of thumb, stretch customers typically don’t make up more than 10 percent of the market leader’s customers. (Often the percentage of sales is far higher: Wal-Mart, for example, accounted for some 18 percent of P&G’s diaper sales a few years ago.)

The second group in the customer base is made up of demanding customers who do not meet the criteria of the stretch category. These customers should not make up more than 10 percent of the customer base either, but for different reasons: They are the wrong match.

Customers may be wrong for a variety of reasons. They may be altogether too demanding, or they may ask things from an operational standpoint that don’t mesh with what a company is trying to do. Or they may turn off—and turn away—other, better customers.

One way to deal with them is to try to change their demands and turn them into more desirable patrons. Whether or not that works, there is a real risk in over-servicing them, which ultimately hurts other, more valuable customers. That is why it is good to know who these customers are and to hold the line on the amount of energy and resources that is spent on them. Saying no to undesirable customers is a practice that many market leaders have become very good at. (Of course, it would have been better to have screened them out altogether before they became customers. In practice, however, that isn’t easy. Even managers who use sophisticated approaches to assess their prospects will be unable to avoid a few that simply don’t belong. Ask any banker whose carefully selected customers default on a loan.)

That leaves the 80 percent who are the bread-and-butter customers in most thriving businesses. This core group typically is the most profitable and thus is worth holding on to. Even though this group may not be as vocal or demanding as the others, market leaders know how important it is to give its bread-and-butter customers the benefit of the progress generated by stretch customers. Thus, they achieve a proper balance between stretch customers and this core group.

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