Revenue Interview Series #1 | Building an Ideal Customer Profile (ICP)

Andrew Hastings is the Vice President of Investment Development at Arcadea. He leads our Sourcing and Origination efforts and is also a resource to our portfolio companies for all things revenue-generating related operations. Over the course of this series of posts, Andrew will share concepts, themes, and tactics from his experience that we believe will be useful to a founder-controlled software audience looking to evolve their revenue function.

About Andrew:

Andrew joined Arcadea in 2021, bringing with him experiences across B2B enterprise sales. Through his time in publicly traded, late-stage venture, and lightly-backed software businesses, as both an individual contributor and the leader of business lines within these settings, Andrew has been part of triple digit growth, organic and inorganic expansion, and the path to an IPO. He’s seen first-hand what works and what doesn’t, including the ‘rocks in the water’ that indicate trouble ahead, as well as how to avoid them.

Building an ICP

This post covers a concept that should be guiding revenue-generating teams and frankly, the entire staff of a software organization: the Ideal Customer Profile (ICP). The creation, adoption, and maintenance of an ICP is often overlooked or forgotten amidst the daily grind of growing a software company.

Below are seven of Andrew’s key concepts on the topic, along with a few ideas of how to push them into the collective consciousness of a software business. These are achievable for even the leanest of founder-controlled businesses as they do not require any spending or additions to your tech-stack to action.

1. What is it?

ICP is a singular definition or categorization of the prospective customers that your company is seeking to sell your product or solutions to. The definition needs to be understood and internalized by the entire staff: from engineering to support and marketing to Customer Success. This definition should identify the cohort of companies where your solution can be most impactful by solving a critical challenge in their business. A friendly yet painful reminder that many readers are already aware of: winning a customer does not, in and of itself, make a business part of your ICP. Vendors beware.

The criteria for an ICP definition is typically comprised of 2-4 key variables that help a business to develop a singular view of their market. The best ICP’s leverage nuanced, market-specific measures for ‘who they’re after’. Some general, ubiquitous examples of variables used to build an ICP profile include: geography, headcount, employment composition (FTE vs contractors etc.), number of sites/offices/locations, funding status, core industries served, ownership structure or even other technology/products/hardware that your product integrates well with. These can be absolute answers, ranges, maximums or minimums, all entirely unique to the business. As a simple example, a medical software business may define their ideal size by number of residents on staff, or beds, or clinic sites in a regional health system. Instead of headcount, revenue ranges or square footage, these are more accurate and meaningful measures in their space.

2. What is it not?

An ICP is not your Buyer-Personas. Often these two related concepts are used inter-changeably. Said simply, Buyer-Personas are the individuals inside of an ICP business that can influence the decision to purchase your product. These include the economic-buyer, product champions, power-users, and the almighty procurement and IT. Buyer-personas are the individuals your sales team needs to engage with at an ICP business to be able to sell your offering. Thought about sequentially, an ICP should be developed by a business before sorting out Buyer-Personas.

3. When should a Founder develop their ICP?

In a perfect world, ICP is developed immediately following the product positioning exercise, Pre-revenue. That said, sometimes mature software businesses find their way more organically into their core markets through way of deep domain expertise that allows them to build a product and win customers without working through the academics of why they are having so much success. While that is a fantastic starting point, long-term success for business requires a strong understanding of the ICP. Without a clear ICP, a) it becomes difficult to scale new talent, b) one can get get enamored by seemingly lucrative opportunities that do not pan out, and c) entire teams can become distracted from the core market opportunity. If ICP criteria does not already exist formally for your business today, now is a wonderful time to carve out some hours over the next quarter to co-create one with your product, sales, marketing and CS teams to document criteria for the entire staff.

4. How would you get started?

Defining your IPC after the company has had some success in the market can be very meaningful as your criteria is informed by real data and not only the academic thinking around who ought to gravitate towards your product. Within your CRM, a wealth of information exists concerning which regions, size/stage of business, and industries are consuming your offerings at the highest rates, and amongst them, who is doing so with the least burden on your customer success and support teams (tickets created or NPS score as your measure on this side).

Using data you already have will allow you to answer in precise detail, the key questions that will define your IPC such as which sizes and segments of customers contain the lowest attrition and CAC (Customer Acquisition Costs), highest LCV (Lifetime Contract Value), ACV (Annual Contract Value) and ARPU (Average Revenue Per Unit), with the lowest support burden. Working backwards using these data points to craft your IPC allows your outbound sales team or marketing function to approach markets with a clear sense of prioritization. This will increase your chances of success by only focusing on new customers that are best suited to your product. If some of these metrics aren’t available today, this is also a great time to do your first NPS scoring or run some LCV calculations to understand the payback on marketing spend. For the more mature founder-controlled businesses who have grown organically, and are now looking to add to their sales organizations, this is a critical exercise to nail prior to on-boarding.

5. How does one quantify their ICP?

It may seem nebulous to try and quantify a definition, but the goal is to build a profile that is nuanced enough to keep a team focused, while still leaving a TAM large enough for your team to pursue. At times, leaders may not be sure of how best to illustrate or categorize ICP for their teams beyond a written definition. One of the simplest ways to do this is to apply some version of a “3×3” or “4×4,” scoring system to apply on top of your written criteria, to boil down the various permutations an account can take, and express the quality through a single numeric value an entire business can understand. For instance, suppose a hypothetical mid-market EHS software business has developed an ICP as follows:

Example: How to score an account (think golf, low-score wins):

Tier 1 = 3 total points

Tier 2 = 4-6 total points

Tier 3 = 7-9 total points

The example illustrates the importance for this hypothetical sales team in distinguishing between how much effort to direct towards a North American Construction firm with 2500 employees, and a Swedish logging firm with 250 employees. Both fit their ICP, but the two require drastically different levels of attention when it comes to new-logo prospecting, support tiering, and customer expansion expectations. This framework will arm your sales team with some simple arithmetic to guide their efforts, rather than expecting them to internalize a qualitative description of your addressable market.

6. How can a leader keep ICP top of mind for their teams?

At many software companies, ICP sessions can be synonymous with employee on-boarding when first hired and Sales Kick-off in January. They are often lost in the shuffle outside these moments as the business is focused on executing. But what else can be done to keep the concept top of mind year-round? The best way to do this is to bake your ICP scoring into your existing processes. In a previous role, we used a version of the scoring metric described above and stored the tier of the account on the CRM record. The metric was visible and reportable when looking at prospect or customer data. With the ICP tier score on the account in the CRM, founders or sales leaders can run forecast meetings with an eye towards challenging the current understanding of ICP: Are tier 2 Account opportunities closing at a better rate this quarter? How come our Tier 1’s have a lower win rate and longer sales cycle than usual this month? This helps to parse out challenges in-market and be more pointed in forecast calls. By having these accounts segmented, it also allows for greater experimentation and testing of the profile during marketing or business development activities at the top of the funnel – for example, designing an automated content-heavy marketing campaign for Tier 3 prospects to flush out viability.

7. How can a leader use ICP to accelerate new-logo wins?

An ICP can be tested in every stage of the Marketing, Business Development and Sales funnels, well before becoming a customer. Demand Generation teams can use this tiering system to help rank/score Marketing Qualified Leads (MQLs). While it is great for marketing teams to be handing SDR/BDRs prospects opting in to speak with sales, it also needs to be the right folks. Using the scoring systems allows sales leaders to answer relevant questions such as: Why are 80% of MQL’s from tier 3 Accounts? Are they converting? How about with the BDR team, which sorts of Accounts have they had success with on the Outbound side? How many Tier 1, Tier 2 and Tier 3 accounts should each BDR receive to work at any given time? Are Tier 1’s still converting faster than Tier 2’s? What is happening in European manufacturing that we have seen such high engagement? Then with the Sales team, which deals are closing with the shortest cycles, largest upfront ACV, and lowest discounting thresholds? All of this can be tracked in real-time and used to refine the sales process to close more of the right kind of deals for your business.

Upcoming on the Revenue Interview Series:

  • Building buyer-personas
  • Five rules for writing Sales comp plans
  • How to recruit and hire for your first Sales hires
  • A guide and checklist to on-boarding