Using Customer Portfolio Analysis to Weather the Storm as a Bootstrapper

It’s been a hell of a week.

I will not mince words: the news is all-consuming right now. And if your brain is like mine, when it takes a break from thinking about our public health emergency it jumps to the next big risk: the economy. And our business. And how things will go.

And it’s scary to think about.

We all knew the risks of working for ourselves. But none of us likely factored in a pandemic annihilating the global economy.

And yet, I think there are things we — you — can do now to give yourself some calm about what’s to come.

Before I jumped to work on Geocodio full-time, I spent several years working under and alongside talented investors. And one thing I learned from them was to be calm in the face of crisis because the economy always rebounds eventually. History shows us time and time again that panics, corrections and recessions eventually end. Pullbacks are definitely painful and difficult for a while. There is no question that the waters ahead are choppy. But what we as business owners need to focus on now, rather than letting the news consume us, is plotting a path towards the calmer seas and making sure we do what we need to in order to survive until then.

There are a few things you can do to help chart that path forward.

But first I want to remind you of something. In a recession, people often switch to lower-priced products. Bootstrappers tend to have very low overhead due to our profitability requirements. We do not have huge sales staffs or massive customer acquisition costs. Knock on wood, we’ll all see some customer attrition but be able to weather this because we have more flexibility to cut prices, and we aren’t reliant on funding or debt to survive.

So how can you plan for that customer attrition and how can you mitigate it?

What I recommend doing is a Customer Portfolio Analysis. This is something I do once every six months or so as a general strategy-building project, and it’s is helpful for giving calm and direction right now.

The basic idea comes from stock portfolio construction. When investors create a portfolio, they usually assemble it in order to create balance among a variety of industries, company sizes, and position weights, depending on the level of risk they or the customer can take on. They don’t want to allocate too much to one industry or one company in case something bad happens.

Customer Portfolio Analysis is something that many large companies do. They get the credit scores of their customers, and keep tabs on how well their customers pay them. It’s particularly common in Customer Packaged Goods, where they want to keep a close eye on the retailers they work with.

Since that kind of data can be difficult to assemble, here’s a simpler but powerful method that you can do for your own business. It will take you some time but I promise it will be eye-opening and valuable.

(Note: I’m writing all of this from my own perspective in B2B SaaS. This may not apply to you, and you may need to adjust for your own frame of reference accordingly.)

First we’ll gather and clean the data, then the fun stuff:

  1. Create a spreadsheet of all of your revenue for the past year.
  2. Copy it over to a new tab, and create a pivot table to summarize revenue by customer.
  3. Copy that pivot table and paste into a new tab, making sure to paste special => paste as values.
  4. Add the Analysis ToolPak to Excel (free).
  5. Using the Analysis ToolPak, go to the sheet with the consolidated data with one row per customer. Go to Data => Data Analysis, and click Rank and Percentile. Select the data.
  6. This will output a list of rank and percentile. Scroll to 80% and see what the amount is. This means that 80% of your revenue comes from customers who pay you greater than this amount.
  7. Go back to the consolidated list, sort it by revenue high-low, and copy the customers who fall above that number to a new spreadsheet.

Ok, still with me? That probably took you at least half an hour if not an hour. But it was worth it because now we get to start analyzing.

The first thing we want to look at: look at the data. First question: Does anything surprise you? Do you recognize the names of the customers at the top of the list? Are they, in your immediate recall, active customers?

Let’s go in and add a column to calculate percentage of revenue for each customer. Simply take your total revenue and divide it by the customer’s revenue.

Second question: what percentage of your revenue is your top customer? If it’s less than 5%, you are in a good position. If it is more than 10%, this is something to work on — more on that later. Customer concentration is something that financial analysts look at closely. For example, a company may have a high-flying stock if they’re a supplier to a big company like Apple. But if Apple is 40% of their revenue, that’s hugely concerning because losing that one customer (or that one customer recognizing their role and negotiating down prices) can mean a huge revenue hit.

Next, let’s look at sectors. This is going to involve a lot of manual know-your-customer work. If you can’t name the industry for a customer off the top of your head, look at their website and try to deduce it as best you can. If you find a customer that seems fuzzy — like they sell software to the fleet tracking industry — categorize them by the industry they sell into rather than what they make, since they are dependent on their own customers. Once you add the sector for each of these 80% customers, make a pivot table to summarize the data by industry.

Is an overwhelming portion of your revenue coming from one or two industries in particular? If you’re selling into an industry-specific niche, this may be hard to avoid, but it’s worth thinking about how you might diversify. If not, you may be over-exposed to industry-specific shocks, which happen periodically (think: real estate, banks, etc). Of course right now everything is in free fall, but some industries will recover faster than others. It’s impossible for us to know now, but you can at least arm yourself with data and know where your weaknesses might be.

A few questions to get your started as you look at your customer portfolio by sector:

  • As a general guideline, if you have any sector contributing more than 20%, consider prioritizing work that will help you diversify (more on that below)
  • Are there any sectors that are using your service for compliance reasons? This is always a great position to be in since they are legally required to use something that solves their problem.
  • Do any sectors that are particularly shaky right now, like travel or hospitality, contribute a lot of your revenue? These might be your next customers to cancel if they go under.

Next, look at company size. What is your customer makeup from a small, medium, and large company perspective? You may figure out company size as you look up their websites, but you can also find this sort of information through tools like Pitchbook.

Customer size can be a deceiving metric. There are many small businesses, but their willingness to pay can be more fickle and more like consumers since cash flow can be more volatile. Traditional brick-and-mortar small businesses are incredibly vulnerable right now. Often, bigger companies that pay for things, by contrast, regardless of whether they use them are awesome customers to have.

But having mostly big customers is not necessarily a good thing, either. Our next thing to look at is what is the funding source for your customers as (much as you can discern it). For example, is a significant portion of your revenue coming from companies that are highly leveraged or dependent on venture capital for operations? In the case of a credit crunch, as we seem to be entering now, this could get risky. A venture-backed and cash flow negative company may not be able to survive if they can’t raise cash when their current runway runs out. A highly indebted company may not survive if they can’t make their payments.

There is no one right or wrong answer out of this analysis. Instead I hope it got you thinking and curious about where to find more stable customers.

The most critical piece of this is not the spreadsheet data work at all. It’s illustrative and necessary because it tells you what is happening, but it does not and never will tell you why.

To figure out why you must interview customers. Take your top 90% customers and send them a personal email and ask to interview them. Ask them why they even need your product in the first place. And what you want to listen for in those interviews is whether your product fills a need that is both frequent and would be painful or expensive (money or time) for them to solve without your product. Take copious notes and capture their phrasing.

Your analysis after doing 5-10 interviews should focus on customers who a) are in a customer group you’d like to expand and b) describe frequent and painful needs that led them to your product. Amp up your marketing to those groups: landing pages, webinars, emails, whatever you do (that ideally doesn’t cost money). Similarly, if you talked to customers who are in more precarious positions, consider trimming down your marketing speaking directly to their use cases.

If you have any questions about how to do this kind of analysis on your customers, just shoot me an email. I’m happy to get on a call with you and help you work through it.

You got this, and you will survive.