eCommerce Analytics

Tim Ferriss makes some excellent points in his post The Margin Manifesto: 11 Tenets for Reaching (or Doubling) Profitability in 3 Months which it got me thinking about how margins are changing in the software business and why enterprise software companies must start “firing” their high maintenance customers.

The software industry for some time has been forgiving of poor fiscal discipline. With 90% margins, it is possible to blow lots of cash on unprofitable sales and marketing campaigns and still make a mint. Furthermore, Wall Street has always rewarded new license revenue growth over cost control. In this kind of environment any new revenue is good revenue, regardless of its ultimate price.

Sadly, the days of inflated margins are nearing an end. The price of software is crashing, and SaaS along and the consumerization of IT is turning software into a commodity. Enterprise software companies doing $500k deals on six month sales cycles will have to reduce their cost structures quickly to survive this disruption to their model.

With these changes afoot, plenty of blog space has been devoted to exploring how software companies can cut sales and marketing costs through search engine optimization, pay-per-click advertising, and viral marketing. Comparatively little has been written about Tim’s #10 point, however: firing high maintenance customers.

Despite the huge improvement in margins that result from firing poor customers, there are three reasons that the idea rarely gains traction in an organization:
1) Cultural resistance due to short-sighted metrics

Most companies are reluctant to fire customers. After all, no sales or marketing organization can be convinced that it’s a good idea to forgo revenue in pursuit of improved profitability down the line. This is especially true when they are measured on how much they drive top line growth, as they almost always are.
2) Data integration challenges

Even if sales and marketing can be convinced of the value in firing poor customers, there are still huge technical barriers to integrating the data required to for analysis. Challenges abound in getting CRM data to merge neatly with support and billing databases. Unless IT has a lot of spare capacity (an occurence as common as a Bigfoot sighting), significant budget will have to be allocated for data integration.
3) Inability to make sense of the results

Finally, once all the data is integrated, a healthy dose of marketing analytics know-how is required to make sense of it all. Without highly trained business analysts on staff, it is very difficult understand which customers are profitable and which aren’t. Furthermore, unless you want to keep spending money acquiring bad customers, statisticians and data miners will need to be called in to help build attribute profiles of unprofitable segments.

While firing unprofitable customers is a powerful way to improve margins and profitability, these three barriers ensure that it rarely gets done.  Unfortunately for most enterprise software companies, it will be too late by the time they realize how criticial it is to shed themselves of poor customers.   Those with the foresight and fortitude to make it happen sooner than later, however, can expect great rewards.