Since making the transition from service provider to start-up investor, I’ve developed several criteria that allow me to quickly identify if a business idea is worth taking on.
One requirement is that I believe a business must have three customers. Obviously I don’t mean three individuals – rather, three distinct groups of customers that play an important role in a business’ lifecycle.
When properly researched and defined, these three customers shape the business and ultimately lead to fast growth and high return upon exit.
So who are they?
Customer #1: the end-buyer
The first customer is the target consumer — who the business lives for. The first customer shapes the look and feel of the entire business. Your company exists to serve that customer.
By way of example, in my $500 startup AutoCarLog — an automated vehicle mileage logbook which you keep up-to-date using SMS — the first customer is anyone who claims tax on their business vehicle mileages.
Customer #2: the bulk-buyer
The second customer helps rapidly grow the business based on the theory that it’s far easier to sell to one who buys 1,000 than it is to sell to 1,000 who only buy one.
This customer can be a franchise body looking to add value to their clients, someone who wants to white-label your service, or a magazine wanting to sell your product to their subscribers. The second customer shapes and accelerates the growth of the business.
AutoCarLog’s second customer is the large tax accounting firms who individually service over 600,000 Australian clients, collectively reaching more than 2 million Australians.
Customer #3: the business buyer
The third customer is my favourite.
It’s the entity that will eventually buy your business as a strategic acquisition. It’s the business or individual who will ultimately make more money from your business, product and customer database than you can.
It’s what venture capital entities and fund managers look for in an exit.
The third customer defines how you build your consumer database, what information you collect and how you position yourself in the market.
For AutoCarLog, the third customer could be a car insurance firm looking to reach a large network of vehicle owners. It could be a fleet management service operator looking to reach an audience of potential buyers.
So how do I find my three customers?
If you have a business, you should already know your first customer — they buy your product or service on a day-to-day basis.
To find your second customer, look at your customer database and see how they can be grouped together. Think about what affiliations your first customers could have.
Also look from the other angle: who would benefit from selling or giving away your product? Benefit could mean a value-add. It doesn’t have to be an on-sell. Look to do joint ventures to get your product out there and don’t worry about reducing your margins — your ultimate aim should be to collect as many customers to increase the value for customer three.
Customer three is the trickiest, but remember you’re looking for someone who can make more money from your product and database than you can. They don’t have to be in the same industry, they just need the same customer one definition.
Identifying your three customers is a very powerful and simple way to understand your high level business aims.