Know Your Client

I know, you are thinking, “goodness this is business 101, why am I wasting my time reading this stuff?”

Most of the time, by the end of the third day I already know whether a company will or will not meet the basic characteristics necessary for an investment by the private equity group. As simplistic as the concepts are, many companies have not given thought to these basic principles. Perhaps they start out with one idea and then get distracted along the way, or the product develops differently than their original vision and they have not had time to think about who they are selling to.

Many private equity groups will see this as a possibility to pick up a company on the cheap, in some way neutralize current partners, and have the possibility to create a big winner. I do not believe in this type of activity and will not participate in a takeover of this type but, there are those who will. This means that your interests and those of the investment firm may be significantly different and you need to be on the lookout for telling signs that you are not on the same page.

What does it mean to know your client? In today’s world of specialization it can be easy to mistake who your client is or even have a changing target segment as your product or service takes market share. Sometimes it can be very difficult to identify who is really buying your product since the person paying you may not be the person consuming your service. Your business decisions will be affected by who you think your client is. You may even adapt your product or service thinking that the entity that pays you is the one you need to satisfy. To have a successful business you have to eliminate all the noise and find out who your client is.

The way I do this is that I eliminate all of the surrounding interests and look closely at the product. I use the product and try to insert it into the things I normally do. This usually generates numerous questions about the “why” the product or service is structured the way it is. I then ask the partners and from their answers I can tell if they are focused on the client or if they have somehow ended up on a different path. I suggest different ideas about how the product could be different. Again the way they look at and evaluate the suggestions tells me how they are thinking about their client.

Recently I looked at a company in the anti-spam arena. They had developed some very good algorithms identifying spam and could successfully eliminate about 90% of unwanted or unsolicited emails. Their idea is that they could get email marketers to pay a fee to get the emails through the filters. There was also a fee paid to the user if the email that was let through was considered not of interest to the user.

Conceptually, this is not a bad idea, the marketer gets to advertise to a targeted market and the end-user gets paid if he has to read something he is not interested in. The company is convinced that its client is the marketer who will be paying them to send emails and their product development shows this belief. Their model is much more complex than that. Since most email accounts are on services such as Yahoo or Google they have to convince these service providers to not develop their own email filters and use the companies product and the real client is the end-user. Although the end-user does not pay anything and in fact would receive some type of compensation over time, if the company is not able to convince the client to use the email filter the marketers have no incentive to use the service. Thus, without widespread implementation and characteristics that appeal to both the service providers and the end-user, the product has no market.

So, know your client. Put yourself on the other end of the service, watch the order flow, how the product is used, who benefits and what the basic needs of each interested party are and you will be well along the way to a successful business.

Tags: Small Business Private Equity Business Plans Financial Model Financing Marketing Sales