February 04, 2015

Whale hunting or scale hunting?

Just before the holiday break last December, a new(ish) member of our team sent me a worried message about a MailChimp customer who was threatening to leave us. Our employee was concerned because this particular customer was apparently our largest paying customer (they pay tens of thousands of dollars every month, and send millions of emails a day). I asked if they were leaving because something was wrong with our app. She said no. I asked if they had a bad customer service experience. She said no. I asked if our pricing was unfair or out of touch or needed to be changed. She said no. So that's when I told her that her #1 priority was to forget about this customer for now, and just focus on enjoying her time with family over the holidays. Besides, I was really busy at the toy store, trying to find the right crossbow for my niece, and I did not need any more stress. I realize this is not normal for a company to take such a stance, so after the holidays I had to go back and explain my logic to her. I thought I’d share my explanation here, for my subscribers and employees.

Long ago, we ran a web design consultancy. The game was to chase down the biggest, richest customers you could find, and try to extract as much money as you could from them. It’s called “Whale Hunting.” If you’re in sales, you probably own the book. When we started in April 2000, we were building websites for dot-coms who were rich with VC money. Then the dot-com bubble popped, and suddenly nobody had money. We quickly changed our direction and focused on the travel industry, because websites like Travelocity, Expedia, Orbitz and Priceline were the only dot-coms that seemed to be thriving. Thanks to one strategic client, we were doing work for airlines like Delta, Northwest, American Airlines, KLM, and so on. Then September 11, 2001 happened, and all our projects got cancelled. We pivoted and served the real estate industry after that. Then the real estate bubble popped. Hunting for whales seemed to keep us hungry all the time.

During the ups and downs of our web design business, MailChimp was running as a side project. It was making $15-$50 per customer, which didn’t seem like much to us, since we were making $15,000-$50,000 per website project. We were drawn to the whales. That’s why we ignored and neglected MailChimp for years. Around 2005, like all small businesses do at their 5 year point, we were totally exhausted and considered shutting down our business. We looked closer at MailChimp to see if there was any hope there. For the first time, we actually studied its revenue by breaking it down per month ("Ooooh, so that's what Microsoft Excel is for"). We saw that MailChimp was growing! In spite of us! Turns out $15 per month isn’t much money, but if you have three thousand customers, that was like one big website project per month! We decided to give it one more chance. If we could triple our customers in one year, we’d keep going. Well, we tripled our customers in a year, so in 2007 we decided to focus exclusively on MailChimp. 

Scale. Not Whales.
What we learned–and what I'm hoping to convince you of–is that *scale hunting* is way more fun and rewarding than whale hunting. It requires a bit of a different approach, though. We make apps for business customers (B2B), using low-priced parts (from the "cloud" as the kids call it now), then we market the apps like a high-quality, design-centric, lovable B2C brand. We get tons of users who pay us small amounts of money, instead of a few customers who pay tons of money. That’s scale hunting. Granted, we had no idea that this is what we were doing at the time we were building MailChimp. We just thought we were doing things weird and wrong, because everyone else in the world kept asking why we weren’t out there whale hunting like we were supposed to ("when are you guys going to drop that monkey business and grow up?"). With all that conventional wisdom being thrown at us, we were kind of embarrassed how we were running MailChimp.

The Long Tail
There’s a good chance that you’ve had the same "whale hunting" crap beaten into your head. Well, here’s what I love most about scale hunting. For the heck of it (I think she did it for the heck of it), our CFO shared a spreadsheet with me a few months ago that listed our top 150 customers. I’ve never asked for anything like this, so this was totally new to me. At the very top, we had our #1 customer who pays tens of thousands of dollars every month, and who later threatened to leave us. I remember that It was interesting to see who our top paying customer was, and I was glad that our product was robust enough to handle their extreme volume, but I smiled most about the fact that they only accounted for 0.1% of our monthly revenue. I thought to myself, “If the bottom fell out of their industry (which I’ve seen before), or if terrorists disrupted their industry (which I’ve seen) or if financial institutions totally screwed up their industry (which I’ve seen), or if this customer flat-out decided to leave (which came true in December), or if an even bigger competitor launches a competing service to theirs (which recently just happened), I’d still have 99.9% of my revenue. That’s good–one less thing." Then I summed up all our top 150 customers in the spreadsheet (I'm pretty good at Excel now). That’s when I really smiled. If all 150 of them left, or disappeared in some other business equivalent of a Bermuda Triangle, we’d only lose 7% of our monthly revenue. Basically, the “long tail” of our customer base (people who pay tens of dollars, not tens of thousands) makes up 93% of our revenue. 

Scale adds up
That’s what scale hunting looks like. In 2007, we stopped focusing on big clients and big money. We also dropped the scorecards and financial goals that all the business "experts" say you should track. We just focused on building an app our customers would love to use. The money and success and giant customers came as a byproduct. The result is that our private, “bootstrapped” company adds 10,000 new users per day, serves 7 million users around the world, employs over 300 employees, and best of all, has a profit margin of 50%. Sure, you can build a business that’s all about conversion funnels and bagging big “whales.” In the short term, it works. In the short term, you might *have* to do it (like we did). There’s nothing wrong with it. But try to imagine yourself and your employees 15 years from now, and what happens when you’re told that a big customer is leaving. You can tell your employee to “skip your holiday plans and hop on the next flight out and don’t come home till you get that #1 customer back!” Or you can say, “They’re a great customer, and that’s a lot of money to lose, but in the grand scheme of things, it does nothing to our bottom line. Go have fun with the kids!” Either choice is fine, but know that there is a choice. 

Suggested watching:
  • How to negotiate the long, slow SaaS ramp of death - This is a great talk by Gail Goodman of Constant Contact. I know the death ramp well, because we launched MailChimp in 2001, and we almost gave up many times. It wasn't until 2009 that we launched freemium and the hockey stick hit us on the head. More important than the hockey stick is the flywheel that she discusses. 
  • More important than the flywheel, imho, is to live long enough and stay flexible enough to change the flywheel's direction to take advantage of new trends (like freemium). Speaking of timing, Bill Gross (the one from IdeaLab, not Janus) discusses failure. If anybody knows failure, it's this guy. He's launched dozens of dot-coms, and is an expert at minimum viable products. Eight minutes into that video, he talks about the most critical variable for success: timing. It's about the journey, not the destination right? Pack enough for a really long journey, and pick some good travel partners who can help you pick the best meandering paths.
Sincerely,

Ben

P.S. We did go back to suggest that the big, #1 customer switch to Mandrill, which would allow for greater personalization and drop their costs many times over. But it's up to them. We also have a tiny team of people who look for large customers in our system, and works with them to ensure their success, so long as helping them gives us the knowledge to make our product more robust for the masses. This is more like whale watching than whale hunting.  :-)