Avoid this simple mistake to stop losing your customers

“Your most unhappy customers are your greatest source of learning.” — Bill Gates

When was the last time you used cash to purchase something?

It’s increasingly rare to use cash these days given the COVID-19 restrictions. Even prior to that, a lot of small businesses, small-time sellers (ex: sellers at your local farmers’ market) who would normally accept cash were switching to solutions offered by companies like Square.

A lot of you are probably familiar with Square or at least the sleek, white square card reader attached to smartphones to accept credit cards. Either way, for those who might be unaware, Square “helps millions of sellers run their business from secure credit card processing to point of sale solutions.”

“We believe everyone should be able to participate and thrive in the economy” — Square

The genesis of Square tells two powerful stories.

Story #1 — Mistreatment of a group of customers by traditional credit card vendors

Credit card vendors serve four different categories of merchants (or customers) when you look at the dollars per year that an average merchant must process. These four categories of merchants are,

1. Small merchants that process less than $100K per year
2. Medium-sized merchants that process somewhere between $100K to $1 million per year
3. Large merchants that process between $1 million to $1 billion per year
4. Top merchants that process more than $1 billion per year

Let’s look at the same stats that the founders of Square were looking at back in 2009.

According to the Nilson Report and First Annapolis Consulting in 2007, “~90% of US merchants process less than $100K a year. Yet they make up 42% of acquirers’ (credit card vendor) net revenue”. To state it slightly differently, the profit margin of credit card vendors from small businesses were 45 times higher than billion-dollar corporations.

The small merchants were getting the raw end of the deal in their arrangement with credit card vendors. You’re talking about mom and pop shops that were losing a lot of money in processing fees. These small merchants — roughly 5.2 million of them back in 2007 — were open to some solution that would help them escape this nightmare.

Story #2 — A set of non-customers walled off from processing services altogether

Setting up a credit card processing system can be tedious especially if you’re a small business. Prior to Square, any business looking to accept credit cards had to purchase expensive equipment, deal with long and tedious contracts, understand all the hidden charges behind processing payments.

These barriers made different businesses choose cash transactions. According to Jim McKelvey, one of the founders of Square, sometimes small merchants avoided accepting credit cards for several reasons — for example, they either hated all the fine print needed to set up transactions, had bad credit which prevented them from becoming a customer for a credit card vendor, didn’t have a physical store address, or weren’t fans of technology!

In his book “The Innovation Stack”, Jim talks about how Square eliminated these pressing pain points of existing customers and non-customers by building a solution that spoke to every small business situation. Square built a solution to offer low transaction fees, cheap hardware, easy sign up, no contracts, easy-to-use software, fast settlement, among others to bring these marginalized customers and completely ignored non-customers back into the transaction economy.

The success of Square gives us two interesting takeaways.

Takeaway #1 — The ‘non-customer’ growth insight

“The government estimated that between 15 and 20 percent of adults in America had never flown on a single commercial flight. That sounds like a pretty big market opportunity, doesn’t it?” — Herb Kelleher, co-founder of Southwest Airlines

W. Chan Kim and Renée Mauborgne popularized the concept of non-customers in their ‘Blue Ocean Strategy’ book more than a decade ago. Non-customers exist in the fringes of any market. They ‘re either excluded from a market due to conscious and unconscious barriers or simply choose not to participate.

It’s crucial to find out who constitutes ‘non-customers’ in the different markets you serve. Following are few questions worth asking to help with this discovery process,

• Are there a group of ‘unprofitable’ customers according to your peer group of companies?
• If you know the different customer segments in your markets of interest; are there specific sub-segments of customers that you traditionally underserve?
• Do you know a set of potential customers that are not eager to do any business with you? If yes, what factors turn this group of potential customers into non-customers?
• Are there a group of customers that buy only your basic offerings and refrain from bigger purchases?
• Can you uncover a new group of customers by slightly modifying your current product offerings to suit their needs or making it affordable?
• Have you thought about the different use cases for your products and services? Are there pre-existing customers interested in these use cases?

Getting creative and uncovering non-customers can easily add a whole new untapped revenue source in any market.

Takeaway #2 — An opportunity to retain and maximize

You should periodically analyze your customers no matter what. Be it the value you create for them, how much your charge them, the way you serve them, their overall experience. Slacking off on any of the elements across the customer lifecycle opens enough room for new entrants to sneak in and make their presence count.

Given the example of Square, it’s clear that the smaller merchants were ready to be poached by someone offering relief to their processing fees problem (at least at the minimum). Think back to your own company. Are you unintentionally marginalizing a group of customers because you can’t serve them profitably under your current business model?

The easiest solution that consultants will offer in this scenario would be to drop them off as your customers. This will probably provide short term relief. In the long run, you likely missed out on an entrepreneurial opportunity to either rethink your entire business or maybe even launch a distinct line of business with a redesigned business model that moves unprofitable customers into profitability.

Trying to retain and better serve the outliers in your customer base might just uncover new entrepreneurial opportunities.

Be on the right side of history and your balance sheet by doing right by your customers. Your marginalized customers are only as loyal as the limitations of the next best option. There’s always someone in the wings (maybe even in the guise of an entrepreneur) who’s innovating and waiting for the right time to swoop in and build an empire by starting to serve these marginalized customers. They might even supercharge their growth by tapping into a huge opportunity by converting your current non-customers into customers along the way!