Customer Centric

I used to think that a company’s survival was determined by its ability to beat the competition. I now question this idea. After studying a series of the longest-surviving companies, I was surprised to learn that many of them did not rely on wide "economic moats" (i.e., patents, network effects, high-switching costs) at all. This realization made me wonder if competition really is the primary threat to company survival. Perhaps the real enemy lies within? 

Eventually, I realized what many of these long-lasting companies had in common: they shared an ability to keep customers in rather than an ability to keep competitors out. In other words, their long-term survival hinged on customer relationships rather than "economic moats." 

Paul Graham, a start-up investor formerly at YCombinator, said that competition was only the cause of failure in a few of the hundreds of companies he invested in. Usually, failure came from self-inflicted wounds, such as overspending, founders giving up, or the company not building what the customer wanted. 

Companies survive if their customers want them to. Every dollar of profit, salary paid to employees, or invoice remitted to vendors, ultimately comes from the customer’s wallet in any sustainable business. Without self-sustaining customer relationships, a company must rely on outside funding to survive. The customer, therefore, is the critical link inside any business. If your customers don’t stick around, neither will you. 

Customers stick with companies out of self-interest and desire. Does the business provide the best solution for the problems they have? Has the company earned their trust? If these things are true, customers will ensure a business survives, regardless of war, famine, political upheaval, technology transitions, or other challenges the world presents. 

Jeff Bezos spoke about the importance of ‘customer obsession’ rather than ‘competitor obsession.’ I argue that leaders also need to be wary of another type of distraction: ‘stakeholder obsession.’ Stakeholders are anyone that relies on a company's business performance. These include shareholders, employees, and supply chain partners. We are stakeholders in the companies we invest in. 

When a company puts stakeholders first, it unintentionally makes their business less likely to deliver what customers want. As a result, these companies are less likely to survive over the long term. This trade-off between stakeholders and customers is the root cause of many company failures. 

Putting customers first has significant long-term benefits, yet only some companies practice this. Although customer obsession can be profit-maximizing over the long term, it is usually less profitable in the short to medium term. Ironically, an aversion to greed is often the most profitable path forward. 

Only a small percentage of companies put customers first because an inherent conflict exists inside every business: the tug-of-war between stakeholders and customers. In any business transaction, offering the customer more means stakeholders get less. And vice versa. Putting customers first means stakeholders must suppress their natural desire to maximize profits right away. 

As a CEO, you must choose which side comes first: stakeholders or customers. Of these options, it is far easier to put stakeholders first. Shareholders select the board of directors, and the board will replace a CEO if shareholder interests are not satisfied. Customer centricity, therefore, can create stakeholder misalignment if a leader is not careful. 

Putting customers first requires a CEO with unique abilities and perspectives. This person must be willing to swim against the tide to do what they believe is right, regardless of external pressures. These leaders must also control their own destiny through either voting control or shareholder support from long-term-minded owners. Without control, their customer-facing objectives are at risk of being cut short. It’s rare to find companies with all the right elements in place to nurture a customer-centric culture. 

Since the natural state of a company isn’t to put customers first, there needs to be a driving force that tips the scales and overrides conventional thinking. While there are multiple methods to overcome 'stakeholder obsession,' founder leadership is the most common. 

Founders tend to put customers at the heart of their mission because they often started their company out of frustration that the product they wanted to buy didn't exist. This frustration is why I started Bonsai–I couldn't find the fund I wanted to invest in, so I needed to create it. Founders break through the impasse between stakeholders and customers because they can see through the eyes of both parties and therefore view the trade-offs more clearly. Founders are sympathetic to customers because they used to be one, yet they also recognize–as business owners–that stakeholders stand to earn more over the long term by serving the customer and earning their trust. 

A common mistake I’ve noticed companies make is building products that are attractive to stakeholders rather than to their customers. Similarly, it's just as common for investors to seek out investments that deliver the most value for themselves rather than the end user. For example, I was trained to hunt for companies with high margins, high returns on invested capital, recurring revenue, low capital intensity, and any other metric that might amplify shareholder returns. While an attractive financial profile is vital to shareholders, this is a losing game when great financial metrics come at the customer's expense. I’ve made this mistake multiple times, and it usually ends in the permanent impairment of capital. 

I now wonder if a more logical starting point for a long-term investor is to ask: which companies are increasingly earning the trust of their customers? Unlike high margins, customer centricity is not something you can easily input into a stock screener. Identifying customer-centric companies is a much more difficult starting point. 

If customer trust is a leading indicator of company survival, I need to increase its emphasis within our investment evaluation process. Similarly, if I want to increase the longevity of the ideas in our portfolio, I need to embrace a deeper appreciation of the customer in each investment case. While this is not new work for us, we need to pay closer attention to it. 

I believe the five most dangerous words in business are: “what's in it for me?” This way of thinking tends to create situations where someone wins at another’s expense. These behaviors introduce fragility by introducing unstable relationships and damaging trust. These actions pull forward rewards today for a price that must be repaid tomorrow. Such actions include raising prices as a strategy, customer experiences designed for shareholder outcomes, unnecessarily adding debt, and strong-arming suppliers. 

An unbalanced company is unlikely to stand the test of time. The most enduring businesses are those whose everyday transactions strengthen their foundations rather than weaken them. As our time horizon lengthens, this consideration becomes more important. Customer obsession is just another form of long-term thinking.