(Note: This post originally appeared as a guest post on Kissmetrics Blog)

Churn. Lost deals.

Those are dreaded words at any stage of the company. For a very early stage company, these events are even more impactful. Behavioral economics tells us about ‘loss aversion’ mindset. As founders, we hate to lose deals. We hate to turn down customers. It’s classic ‘loss aversion at play. But, just as you launch your product into the market, you need to be cognizant of such biases and be courageous enough to say ‘No’ to certain kinds of customers. By doing so, you’ll not slow down. Instead, you’ll avoid churn and bring the right customers into your customer development journey.

In your early stage, your customers have a profound impact on the trajectory of your product & your company, because:

• They can impact what gets built
• They have a direct impact on your acquisition channels, the cost of acquisition, and hence your precious little runway.
• This one’s more important – Each customer is a representation of a potential market segment or a niche.
• If you choose to say ‘No!’, it brings focus. You’ll spend time, money and your product bandwidth to keep the ‘Yes’ customers happy. You’ll avoid ‘spray and pray’.

Now that we’ve established that deliberately flushing out prospects from your funnel is good & even important, let’s see some of the criteria we’ve used for our own company when picking our first 50 customers.

Your product’s performance should not be affected by factors that aren’t under your control

Let’s say you are building a lead-generation software for tech sales reps. A staffing firm company may be a bad first customer because it’s a business with very little differentiation and would not excite a prospect that much. However well your lead-gen product discovers new prospect opportunities, being an undifferentiated offering, response rates are going to be poor. You need to have an idea of the kind of customers to whom your product in its “as-is” state is going to give superior results. Only then are they going to engage deeply with your product (which is essential for you to derive insights for your product roadmap) and hopefully become your source of ‘word of mouth appreciation.

You should be very familiar with the industry dynamics of your first few customers

Not all prospects are articulate and vocal about their wants and needs. As product owners, we need to fill in the gaps, instigate the right questions and deduce insights. All this is possible only if we relate with the problem space or the industry of the prospect. If you do onboard customers without fully understanding their motivations to use the product, you won’t know why they churned either (or at least you’d incur significant follow-up cost to just find why they churned).

No customer pilot should demand an unreasonable amount of your or your team’s time

I will again take an example to drive this point. Let’s say you are building a mobile chat tool that can be integrated into any app for the app owners to provide chat-based support. There will always be a prospect that’d say that they need a web interface as well. Now, don’t rush to launch a web client just to sign up that customer. Why? Because you decided to launch it on mobile for a reason. You have a market hypothesis that you are trying to prove. Don’t get distracted and pick another hypothesis until your current hypothesis has proven there is not a market for it. But then you might ask why to turn down a customer if it’s just a bit of additional work. Well, in the early stages of our companies we are severely short of time, money and other resources. If one customer draws up significant amounts of your engineering, product management, and quality assurance time, something else gives. Most often, it affects your original customer development journey.

Alignment beyond the current product version

Early-stage customer acquisition costs are high because the founders are involved and it’s often one-to-one selling. So it’s important that such customers don’t just hire your product today but also for several quarters to come. Your product roadmap and expectations have to be in sync for a long time. One way you could be sure of this is by doing a customer interview to understand the reasons they’d buy your product. If your current product is a subset of the needs of your customer, you’re in the right direction. One framework we’ve used to do the customer interview is the ‘Jobs to be done framework. It takes another blog post to write about it. So I’d leave it to you to read up on JTBD. If your product is a quick fix to a bigger problem for which they need more sophisticated solutions that you don’t intend to offer, your customer is going to churn out. You are better off not selling to them in the first place.

No ‘Pay It Forward’ customers. Only honest & real customers

We all have friends who can write checks just to see us succeed. Take their money but don’t make them your customers. They never had the need for your product. They aren’t going to give you insights. They are going to churn at some point. It’s better to avoid ‘nice’ prospects that are just ‘paying it forward’ or ‘returning you a favor’. If you don’t, you’d end up being that blind man who was led by another blind man. At the early stage, you need customers that give feedback. I can’t stress the importance of getting your product hooked up with a good analytics suite from day one – start with Google Tag Manager or Kissmetrics or one such tool. But don’t postpone. Observe which customers complete what actions. Bucket the core actions of your product and find out what percentage of customers complete it. Later on, you may expand such analysis to cohorts. Before you reason out a pattern, pick up the phone and talk to customers. It doesn’t need to be a structured interview but one that will give you a good grasp of why users do what they do. Here’s a good list of customer development resources. And before picking up the phone be sure to first read this post from Chuck Liu which covers which questions to ask in customer interviews. Remember that just adding users isn’t your goal in the early stage – The goal is to add the right kind of customers that complete core actions of your product (for them to stick around for long), give earnest feedback and are representative of a large segment.

Templates for a future customer base

You are not acquiring your first few customers to become profitable. You are acquiring them to demonstrate or experiment with ‘Product-Market Fit. So each prospect that you convert should be buying and using your product for reasons that are common to the next cohort of customers as well. Your first few customers, as a cohort, should collectively represent your market.

Please note that I use the word ‘buying’ as some investment that’s non-trivial that shows serious intent. It could be giving their credit card information or email or even buying a few credits – whatever that fits your business. The goal isn’t revenue or price discovery – so for the early customers, move them to the path of using the product as soon as possible, even if it means removing all but bare minimum friction that validates seriousness. It’s hard to predict this, but let me give an example. If you building a mobile video startup that’s like Periscope and users have to upload short videos and put up on Twitter (core actions), your good first users are the ones that have a lot of highly engaged followers on Twitter. The bad users are ones that just have passive followers or no followers on Twitter. If you know that the customer is not a representative sample of a large monetizable (or servable) market, you would be wise to avoid them.

Conclusion

In summary, be very judicious about picking your first few customers.

• Take your product to those customers that have a very high chance of success when they use your product.
• Choose those customers whose industries or problem spaces you know very well.
• Avoid customers for whom you’ve to put a lot of additional resources to make the pilot work.
• Pick customers who’d have a need for your future product, not just the current version.
• Choose those customers who are representatives of large enough segments that you can go after.
• And finally, don’t do your first few deals with friends who are doing it just to make you happy.

If you follow these principles, your customer base would be completing the core actions in your product at a rate that’s healthy. You’d have better insights and better demonstration of stickiness with your early-stage investors and you’d have set the right base for acquiring new customers. The return on your learning will be high. About the Author: Ashwin Ramasamy is the founder of PipeCandy – an intelligent prospecting tool auto-discovers new prospects & helps you reach out to them with the right message at the right time. PipeCandy is currently in private beta & the essay above is based on our experience with onboarding customers.