Entrepreneur Corner

(Editor’s note: Serial entrepreneur Steve Blank is the author of Four Steps to the Epiphany. This column originally appeared on his blog.)

As a board member, investor and consumer, I’ve seen several companies fire their customers.  While this sounds inexplicable to an outside observer, sometimes it makes sense.  Other times it’s just plain dumb.

One of the great things about being an entrepreneur is that you are constantly running a pattern recognition algorithm against a continual collection of customer and market data.  For me, this was one of the joys of entrepreneurship – constant learning and new insights.  But at times it’s why entrepreneurs can sink their own companies.

Smart founders are never satisfied with simply executing their current business model, they are constantly observing, orienting and deciding whether their current business model can be made better. This tendency is a dual-edged sword: By iterating strategy a startup can dramatically improve the size and trajectory of the company, but at times this process can be the bane of venture investors (and why they have prematurely grey hair.)

When a startup finds a repeatable sales process and steadily increasing revenue, its investors want to harvest the rewards and build a culture of “execution.” However, if the founder is still running the company, the last thing he wants is a company complacent with day-to-day execution.

This disconnect – between a founder’s endorphin rush from learning, discovery, insight and acting – versus investors needs for stability, execution and liquidity – is the basis of lots of founder/board travails.  But what happens when a founder (or large company CEO) finds a better business model?

Part of the DNA of great entrepreneurs is a bias towards decisive and immediate action. However, when a startup gets past its early days and has acquired a substantial customer base, an insight about a better path, if executed and communicated poorly, can lead to disaster.

I’ve seen startup CEO’s realize their company could be much more profitable if they could only get rid of some portion of their existing customers. (It’s a natural part of learning about your customers and business model.) But instead of spending the time to move these unprofitable customers politely to some other company, (hopefully a competitor) founders tend to want to do it immediately. “Get it done, now. These customers are idiots and I don’t want them anymore.”

The founder has seen the future and wants to get there immediately. And while technically correct, and eventually the company ought to fire unprofitable customers, the result when done by impatient founders is most often less than optimal.

While it is “just business,” many customers form emotional bonds with products – and sometimes with the company itself. In fact, if you’re doing your job right as a startup, you’re encouraging customers to be passionate about your company and products. When you abruptly break that connection you risk generating hordes of hurt, disappointed – and now disgruntled – customers, who feel jilted and badmouth the company to other potential or existing customers.

If you’ve had taken the time to fire them politely with a bit more panache and patience, they’re likely to break less furniture as they leave. Entrepreneurs overlook that the customers you fire badly are ones who will do damage to your company for a long, long time (even if the impact of their departure is an increase in profitability.)

The problem isn’t about a founder’s instinct to make a strategic shift.  It’s the “do it now” impatience and minimal communication once you have a sizeable customer base. Startups with a customer base need to maintain an ongoing dialog with their customers – not make a set of announcements when the founder thinks it’s time for something new.

This is why entrepreneurship is an art. When you have a critical mass of customers, there’s a fine line between sticking with the status quo too long and changing too abruptly.

This behavior is not just limited to startups.  I’ve watched new CEO’s brought into large existing consumer products companies to turn around a failing strategy. Their new strategy included a complete revamp and simplification of the product line. Yet instead of making their existing customers feel like partners in the turnaround, these smart CEO’s publicly announce that the current product line is obsolete.  (”Can’t you see we’re busy reinventing the company?”)

Ok, that’s a great strategy inside the boardroom, but what are you doing to transition your customers to your new strategy?  Nothing? No trade-up program?  No discount for existing users?  No tools to transition your customers’ data to the new and improved but incompatible product(s)? Congratulations, you’ve just fired your existing customer base.

Instead of having loyal customers willing to work with you, you’ve told them, “You own a product we no longer care about. You’ve been an idiot for sticking with us.” The company now needs to acquire new customers rather than upgrade it’s existing ones. (Usually about 10x more expensive.)

(eBay’s shift from a full range auction site to selling used and off-season goods is an example. Microsoft forcing users of Windows XP to have to format their disks to upgrade to Windows 7 seems to fit this pattern as well.)

The fact that this strategy seems to play out often seems to be symptomatic of turnaround CEO’s transferring their impatience and disdain for the company’s old strategy and products onto that of their loyal customers.

Customers who have been told they were idiots for being loyal tend to leave sadly and with regret.  And they rarely come back.

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