There seem to be two different types of customer defection problems. Big, sudden, critical client losses and slow trickles. Ray Zinn, the longest serving CEO in Silicon Valley, talks about how to handle each type, and what causes these defections.
Guy Smith: Hello everybody and welcome once again to the Tough Things First podcast. I’m you’re guest host Guy Smith and of course the star attraction as always, Silicon Valley’s longest serving CEO, Mr. Ray Zinn. Howdy Ray.
Ray Zinn: Howdy to you there Guy.
Guy Smith: I feel we should say howdy ’cause we both grew up on cattle ranches. I’ve recently saw a picture of you taken just last week mounted on your horse up in Montana. It looks like you have not given up your cowboy ways.
Ray Zinn: Not a chance.
Guy Smith: I’ve got my Justin boots on right now so I think so I think we’re both holding onto that.
Ray Zinn: Are they goat ropers or what?
Guy Smith: No just riding boots. I want to talk about customers leaving. One of the worst things you can have happen when you have a company of any size but especially for startups is when customers suddenly start to vanish. Occasionally you have big, sudden, mass defections of customers, occasionally it’s a slow trickle. Losing customers is always a big warning sign. Let’s talk about those two different things. The slow trickle of losing customers and some big sudden changes. What causes these kind of things and what should a CEO especially of a startup be looking in terms of when customers leave and why they leave?
Ray Zinn: I’ve always held that you don’t want to have any one customer greater than 20% of your total revenue. That’s about as much as you can handle if they leave. If you organize your organization such that you can cut back 10% or 15% without too much pain, then you can tolerate a customer in sub 20% if they leave you can handle that. That’s the first gauge that I use is that no one customer should exceed 20% of my revenue. If you’re a brand new startup, then one or two customers is all you have then they’re going to represent 50% to 100% of your business. If they leave that’s going to be a big problem. Obviously try to diversify as quick as you can your customer base because you are going to lose customers.
On average most companies lose 10% to 15% of their customers, revenue wise, a year. Either through obsolesce or competitors coming in or a number of reasons, company went out of business, whatever. You can lose 10% to 15% of your customers a year. You have to have the ability to pick those up somehow.
Guy Smith: That’s a good lesson for people who are trying to launch their companies in Silicon Valley is that you’re going to start losing customers from day one and fold that into your economic forecast. As I recall when you had Mike Krell, you lost one really big fish. I think you had Xerox and they made up a healthy portion of your revenues. Then they decided that they were going to go get out of the particular market that you were helping them serve and that caused a hit. Tell us that story in brief and how that helped you form your 20% philosophy?
Ray Zinn: At the time they were building a color printer and this is back in the mid eighties, late eighties I guess. It was a new market for them. They were known for their black and white but this color thing was just getting underway. We developed this product for them that is a custom product actually for this new color printer called Sunray. Everything was going along fine, we made a big investment, hired a lot of good people to work and develop this product. Put a lot of energy and effort into it. Sales wise it represented about 25% of our business, 1/4 of total company sales. It was in September and I remember getting a phone call from my contact at Xerox. He said that, “The CEOs had to pull the plug on the program.” He was real apologetic and felt really bad.
I sunk down in my chair, he could have knocked me over with a feather. It was a horrible experience because then I had to go tell my people, that we just lost a big customer. It wasn’t over time it was just instantaneous, meaning that their CEO is going to announce and a press release was going to announce it the following day, that Xerox is pulling out of the color printing business. As a consequence we had to do a significant layoff to cut back to be able to still run profitably. It was a painful time for me. I vowed at that point that I was never going to have a customer over 20%.
Guy Smith: It’s probably good advice. I’ve known a lot of people who had small businesses that relied on one or two major customers. I’ve got a relative in the answering service business who a good 40% of his revenue came off of one customer. When that customer left it caused a lot of consequences.
Ray Zinn: I’ve seen this over and over. This is not the first time I’ve seen this happen. I know customers right out there [inaudible 00:06:07] companies that have 30% or 40% of their revenue comes from one customer. In fact I have one friend that runs a company that 80% of his revenue comes from Apple. To me that’s just too risky.
Guy Smith: Yeah. I’ve known a couple of small semiconductor companies who were in the military aeronautics field. When the air force is your only customer and they suddenly obsolete an entire aircraft line or something like that, you’re entire company can be wiped out in the process. You now have technically zero customers. Let’s talk about the other side. Let’s talk about the slow trickle. This is the one that almost scares me more because how do you detect when you have more customers leaving than are coming in. What is the cause of that churn and what is the most typical cause that CEOs miss, that the churn is now getting out of control?
Ray Zinn: It’s called a leaky bucket phenomena. When you start seeing your revenue drop across the board, not just with one customer but with all of them, that’s a sure sign that either your pricing is … unsatisfactory to them. Your product has become obsolete so you’ve lost a fair number of seats on that particular product or idea. It could be that your competitors have come in and have carved out a piece of the business. Until they’re qualified, you get some business and it looks like you still got the customer until all of a sudden you get a phone call saying that competitor XYZ, has taken the business. It’s called the leaky bucket effect and that’s something you have to be aware. You can watch that. That’s something that if you look at a product line and then all the customers seem to be trickling off, that’s a sure sign that you have a product problem or a pricing or a competitor issue.
Guy Smith: Okay that certainly makes a lot of sense. The tech industry. You and I have spent pretty much our entire careers in the tech industry. Is this phenomena more amplified in high tech?
Ray Zinn: Because of rapid pace I would say so. The rapid pace of our industry just precipitate that issue. You can as they say, slowly go out of business when that happens. It’s like dying of cancer versus dying in an automobile accident. Both of them are bad because you’re going to be dead. In one case you just bleed to death and the other is you die slowly because of the cancer. Yes it is a phenomena of our industry that it grows fast but it also dies fast.
Guy Smith: I almost have a feeling that the sudden death syndrome is more acute in high tech because anyone who comes up with a disruptive new technology can completely vaporize an entire industry.
Ray Zinn: We all try and come up with a disruptive technology just to preserve our brand. Certainly the nature of our industry, if you’re not on the leading edge you’re going to be on the dying edge. You got to keep your brand fresh and keep your customers in your pocket.
Guy Smith: That leads to what I think is the second best management book after Tough Things First. One with the wonderful title Only the Paranoid Survive. Is that true? Do entrepreneurs especially in the tech industry need to be functional paranoid?
Ray Zinn: I threatened by Andy Grove and Andy personality wise was a paranoid. He ran Intel as a paranoid. That can breed stagnation. In other words if you are so paranoid, that you are afraid to go right or left, it’s like the deer in the headlights. You’re going to lose. I think Andy’s bottom line believe in that is that you got to be looking around all the corners. There’s got to be some skeletons hiding out there somewhere that a dog’s going to come up and bit you. That’s what he meant by that.
If you’re always afraid of your shadow, if you’re looking at every boogeymen man out there, then you’re not making the wrong decision. Make sure that if you are paranoid that you’re not paranoid of everything, you’re just already know where to look and not just react as you would.
Guy Smith: There’s value in functional paranoia but if you become scared of everything you’re going to eventually devolve into a state of immobility.
Ray Zinn: That’s paranoia isn’t it? You think everybody’s after you and you think you’re about to be taken over or die. That’s not an optimist, an optimist is not a paranoid.
Guy Smith: Yeah optimism tends to work better than paranoia or at least it has in my life. That’s probably the lesson for the entrepreneurs today is that you do have to watchful but you also have to be optimistic. More optimism than paranoia gives you pull and lift instead of drag. Thank you once again Ray. It was informative as always and for all your listeners out there, by all means two things. Drop by the Tough Things First website. You’re going to find all of Ray’s social media contact points there and you can hook up with him directly on Twitter and Facebook and LinkedIn. Of course if you haven’t already you have to read Tough Things First. It is arguably one of the best management books come down the pike in possibly in forever. It teaches you not only about leadership and management, it teaches you some real basic life skills and how all of these work together.
Ray Zinn: Some of the tidbits that we put on their twice a day, might be of help to a lot of our listeners. We post two thoughts of the day, two ideas and something for them to ponder. I’d recommend they go in and look at those tidbits and see if they’re of help to them.
Guy Smith: Excellent advice. Tune into Twitter and get those in real time and we will see you next week for another edition of the Tough Things First podcast.