The Customer Conundrum

The customer is king, but how do you know when you have a customer? It is when they sign up? When they start a trial? or when they start using the product? what about freemium users? Are user the same as customers?

2 years ago   •   4 min read

By Leo Moore

The customer is king, but how do you know when you have a customer? It is when they sign up? When they start a trial? or when they start using the product? Does that mean that users are the same as customers?

Maybe it's just when they start paying you money. In many situations that works great, but what about freemium products? We could argue that they are customers too, it's just that they have a zero bill.

However, that can lead to other problems, if they just sign up to have a look and never use the the product again then we can hardly consider them as users, never mind as a customer. How about if they are still using it after a certain period (say 90 days)? or are they really customers at all?

It's not a simple as it seems but there is an answer:

A user is a customer when they create value for the business

Customer = Value

The question then becomes on how does a user create value? That depends on the business model. In a straightforward SaaS business like Salesforce, Spotify or Netflix the user becomes a customer when they start paying for the service.

However, it is easy to get distracted.  There is a distinction between having value and creating value. A Facebook user has value (as product) but a Facebook advertiser creates value (as revenue).

Freemium Users

So what are freemium users? Clearly the more freemium user you have does not make your business better off. Every user has a cost in servers, bandwidth and time, no matter how small, it all adds up. There is a saying that if you work for free, you will always be busy. So a freemium user only becomes a customer when they convert to a paying customer. Before that point, they are really a marketing expense.

Trial Users

Trial users are very similar to freemium users, the only difference is that trials by their nature are time limited. So, the marketing expense can be limited. Normally the user is given access to premium features to encourage them to pay for the service. In some cases, when the trial ends the user is put on a freemium version. The marketing strategy is to keep some connection with the prospect in the home that they will become a customer at a later point.

Social Users

So what about users of social media sites like Facebook, Twitter, Instagram etc. Well the criteria still applies. The more content a user consumes on Facebook does not in itself generate revenue. I is only when they either click on an advertisement or view an advertisement that Facebook gains. So, in this case as the saying goes if you're not paying for it; you're are the product. In this case the customers are the ones buying the advertisements.

Content Users

In some cases the user is the one who generates the content. Some businesses depend on their users to create tweets and post pictures of cute cats that people want to see. In reality, this is not directly generating value for the business, this is really generating value for the other users. Apart from the social media companies, there are plenty of examples of this including StackOverflow, Quora etc. So, how do these users become customers? Well the don't. Mixed in with the user generated content are advertisements for products, services and jobs paid for by the real customers. These customers also create content but they pay to get it displayed.

Marketplace Users

Certain businesses like eBay, AirBnB, Uber and Lyft are really a marketplace. In this case, it still pays to follow the money. For example in Uber and Lyft, the content creators are the drivers and the people catching a cab are the customers since they pay for everything. In some cases, both the seller and purchasers can be customers, some sites charge the person to list their item and then charge the purchaser when they buy the product.

Know Your Customers

Being able to correctly define your customer is essential for your customer metrics. The easiest way to think about it is that your customer directly affects your bottom line. In the context of SaaS, the criteria is that a user is only a customer if they can churn.

$$Customer\ Churn\%={\#Lost\ Customers\over \#New\ Customers}$$

Losing a user who does not pay you for your service does have a bearing on your customer churn because it does not change your bottom line.

Knowing how to identify your customers is essential to being able to establish other metrics like the Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC).

Sometimes, it is hard to see the customers in the crowd but if you follow the money you will never be wrong.

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