How to Separate Core Customers From Provisional Ones

A professional services firm wanted it badly. Their chief executive had been asked by his largest customer why nothing anywhere tracked the twenty-some projects the two companies were running together, and he came back from that lunch wanting a system. The vendor moved heaven and earth to stand it up before the new year. The first task was simple. Every account owner picks five customers and writes a plan. Nobody did it, and nobody made them, and two years later the logo churned.

The churn was not the damage. And some churn is the honest price of a market still forming. The damage was that one blended retention number went to the board and the bank and eventually to an acquirer, and each of them priced the whole book to the weakest cohort inside it.

You cannot underwrite every customer at signature. Even the best qualification processes miss or, worse yet, reject what would have been a great long term customer. Two prospects present the same way, and one has an organization that will do the work while the other has a champion pushing a noodle uphill against a parent company that was never going to allow it. Sometimes the party who decides is not at the customer at all. An overseas owner, or a head office, or an acquirer who arrives in year two. You will not know for twelve to twenty-four months.

But that is an argument for changing your accounting, not for turning the customer away. Take him. Keep him out of the core revenue line until he earns his way in.

The goal: Report three numbers. What the core book retains, what the provisional book is worth, and how often provisional becomes core.

Background

This only works if three things move together. Label the account without changing the paper and the accounting and you have relabeled a risk, nothing more.

1. Services. A paid engagement, before any subscription, that finds out whether the customer is committed to the value. This can help drive internal business case for the product as well.
2. Contract. Shorter term, priced to behave like services, with a promotion decision at the end and no roadmap commitments of any kind.
3. Accounting. A separate general ledger revenue line from the first dollar, excluded from ARR and from gross and net retention.

Founders skip the third and it carries all the weight at exit. A revenue line built at inception is evidence of discipline. The same line created six months before a process is evidence of nothing.

Steps

1. Write three to five core admission tests for your vertical. Each one tests organizational commitment instead of enthusiasm. This part is classic deal qualification, but geared specifically toward customer commitment. It is mapping the internal power dynamics and politics of the customer. Most verticals need some version of these:
   • Does the buying team carry internal authority, or only influence?
   • Is there a forcing event? A vendor sunset or a platform migration or a launch date or a competitor doing something.
   • Is there a named executive who has committed to enforce a change in behavior, not merely endorse it?
   • Can anyone above or beside the buyer overrule this, and has anyone spoken to that person?
2. Route on the answers, not on the enthusiasm. Fail any test and the account is provisional. This routes the account. It does not reject it, and your sales lead needs to hear it that way or he will stop reporting honestly.
3. Sell the provisional account a paid services engagement before any subscription. Paid, because payment is itself the test. A free pilot teaches the customer that the value is free. In the case above the answer would have arrived in eight weeks instead of two years.
4. Write different paper. Shorter initial term, a promotion decision at the end, and pricing that behaves like services rather than subscription. Put the hard sentence in writing while you are at it: this does not work at the scale you are proposing, and here is what it has to become.
5. Open the separate revenue line with your controller before the first invoice. Out of ARR and out of gross retention and out of net retention.
6. Promote on evidence. The admission tests now pass on facts rather than intent, the account has reached critical mass inside the customer rather than a sliver of it, and a renewal has closed at or above the original number. Promotion is a dated event that moves the revenue line and goes in the board minutes.
7. Review the three numbers every quarter with your board — core net retention, provisional book size, and provisional-to-core conversion rate. Demote where the evidence has gone the other way. Conversion rate is the number that tells you whether your qualification is improving.

Troubleshooting

My sales lead is routing every hard conversation into the provisional bucket. Your qualification discipline has moved into the accounting instead of the sales process. Cap provisional as a share of new logos and review each routing decision at the board.

Nobody has been promoted in two cycles. The bucket is working correctly and your ideal customer profile is wrong. Go back to Customer Segmentation.

My customer found out he is in a bucket. You named it badly. This is an internal designation and there is no version of that conversation that helps him.