Scaling Growth. A Gift To An Entrepreneur
I met you last week, at a conference. I decided to write this for you. You’re not alone. It’s not only you who will benefit. My gift to you is a top-to-bottom analysis of how growth is misunderstood. It’s not a generic gift. Most of us can tell the difference between a gift that meets an obligation and a carefully thought out gift that was meant especially for you.
Business Growth 101
Marketing and sales are responsible for customer acquisition but not customer experience. They persuade prospective customers to buy products and/or services. This is where most companies focus on growing their business. It’s a mistake.
The Cost of Acquisition (CAC) is critical. Add all the costs spent on acquiring customers. Then divide by the number of customers acquired in that period. For example, if ABC Company spent $100,000 on marketing in a year and acquired 1,000 customers their CAC is $100.
Gross Margin is the percentage of profit that remains after paying costs. If gross margin is 40% and ABC Company’s average sale is $500 their gross profit is $200,000. It costs them $100,000 to generate $200,000 in new sales.
Every responsible business owner and executive worries about CAC and Gross Margin.
Peter F. Drucker wrote, “The purpose of business is to create and keep a customer.”
Creating a new customer is fundamental. It’s sexy.
And keeping a customer is also fundamental. It’s not sexy.
Customer retention, keeping a customer, gets less attention. The actions companies take to reduce the number of customer defections aren’t celebrated.
Customer lifetime value (LTV) predicts the profits of the future relationship with a customer. Customer retention directly affects lifetime values. If ABC Company spends $100 to attract a new customer it makes a $100 in gross profit on the first transaction. If they make $100 every month for five years they make $6,000. The longer the relationship continues the better the Return On Investment (ROI).
Customer equity is the total of lifetime values of all your current and future customers. It’s the sum total of all the value you’ll ever realize from customers. Customers create all value. Customer Equity is the same as the “going concern” value of your business.
Value of a Business = Customer Equity + (Assets – Liabilities)
Transactional vs. Relational Buyers
Every person has a transactional mode and a relational mode of shopping. Transactional buyers are those whose greatest fear is paying too much for something. They love the shopping experience. They will shop many companies and sites in search of bargains.
They aren’t loyal to any brand or business, they seek only the best price.
Relational Buyers’ greatest fear is buying the wrong thing. They see shopping as part of the cost of the purchase.
They seek out expert help and pay a premium for trusted guidance. They rely on relationships, with brands and people, to help them make choices.
Every person has a transactional mode and a relational mode of shopping. So don’t be surprised when you see yourself in both descriptions. You are extremely transactional in certain product and service categories. You’re also wholly relational in others. At any given time and in any given category, about one-half of all shoppers will be in transactional mode. The other half will be in relational mode.
Shoppers in transactional mode will shop everywhere. They love to negotiate. Businesses often conclude that most shoppers are in transactional mode, because they are so much more visible and vocal. But in truth, more purchases are quietly made by customers in relational mode.
Customer Acquisition Cost is dependent on Customer Retention
Businesses have a 60 – 70% chance of selling to an existing customer. The probability of selling to a new prospective customer is only 5% to 20%. – Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance,
Consider that Amazon Prime customer visits convert to sales 74% of the time. They spend 3-5x more than non-Prime members. Approximately 60% of North American households are Amazon Prime members.
Can you see the impact that focusing on retention can have on acquisition costs?
Focus On Customer Experience For Sustainable Growth
The Rockefeller Corporation study found that 68% of customers leave because they believe that companies don’t care about them.
Bain & Company surveyed 362 firms. They found that 80% believe that they deliver a “superior experience” to customers. When they asked customers, they report that only 8% are really delivering.Bain & Co. calls that the “delivery gap”. We call that tragic!
Now take a look at this:
When it comes to growth, customer experience clearly matters!
Now, let’s be generous and give that 80% of executives the benefit of the doubt. They genuinely believe that their companies are customer-centric Nobody ever argues when we explain the Four Pillars Of Amazon’s Growth.
These are Amazon’s four unifying principles.:
1. Customer Centricity,
2. Continuous Optimization,
3. a Culture of Innovation and
4. Corporate Agility.
What Gets In The Way? Think of the following as the four disunifying principles.
- An Organizational Focus– keeps them from Customer Centricity. Internal teams are focused on their own team’s “performance”, not the customer’s reality
- Risk aversion—maintaining the Status Quo— keeps them from Continuous Optimization. People don’t perceive their process as broken
- A Competitor Focus—watching the industry leaders—keeps them from having a Culture of Innovation. Companies see themselves relative to competitors but not relative to the gaps in customer expectations
- Misplaced Accountability—the need to place blame—keeps them from Corporate Agility. Internal teams meet or exceed their internal benchmarks but that data doesn’t reflect the customer’s’ reality
Intentions Matter, But Actions Speak Louder Than Words
We judge ourselves by our intentions, but customers judge us by our actions. Judging yourself by your intentions isn’t a danger among friends. A friend knows your heart. But it’s a very real danger in business. What happens when a prospective customer makes contact with your company? Do they meet your best employee on that employee’s best day? Of course not. They meet an average employee on an average
Or worse, they meet a below-average employee on a below-average day. And then you are confused by those negative reviews.
Sad, isn’t it? Your intentions and motivations and personal commitments never quite made it to the party.
You have a growing business. But it could grow more quickly.
You need to know your customers better. Recognize that customers have their expectations set by companies not even in your category.
As a leader, there are a lot of demands on you. It’s hard to prioritize and maintain a long-term focus when the urgent disrupts the important.
Instead of focusing on only on growing sales, competitors, technology or all the changes in your marketplace we’d like to help you focus on the things that won’t change. You can build healthy sustainable growth if you focus on your customers’ priorities. Please believe me. If you deliver a great experience, maintain a reasonable margin, stay focused on your priorities then growth is inevitable.
Please read Be Like Amazon: Even A Lemonade Stand Can Do It. There are many examples you can learn from. Also feel free to reach out if you have any questions,
