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
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.
The sales team is having a hissy fit. They proclaim we’re 11% ahead of goal and we’re in the slow season! Why are you making life more difficult for the sales team? This change project is unrealistic! None of our competitors do better than us! It’s not broken, why fix it?
There’s a disturbance in The Force.
Ten seconds into our call I hear that Chuck, our client who owns a thriving $28 million business, is shaken up. We’ve been working together for almost three years. It’s not the first time we’ve met resistance to what the organization calls The Customer Rules Initiative.
In almost three years we’ve rolled out eleven important changes and dozens of small improvements. The Customer Rules Initiative has helped our client grow beyond their expectations.
Chuck is second guessing his twelfth change. The pushback on this change project is almost as hard as the first project where we decided to put all the information a customer needed on the website. The sales team was in open rebellion. They couldn’t imagine why anyone would call if we answered all their questions online. They were wrong then, they’re wrong now. Being wrong is human, acknowledging it and pushing beyond it is hard.
How Do You Stay On Track?
My job is to remind Chuck why the Customer Rules Initiative matters. First I listen. I listen for about half an hour. This has the desired calming effect.
I remind him of his favorite quote: “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” – Sam Walton
Chuck is listening, that’s good. The problem is real. We have to fix it.
Chuck is committed to what we teach as The Four Pillars of Amazon’s Success:
Culture of Innovation
If you’re a growing company it’s hard to argue with any of them. Intuitively every business owner knows they need all four pillars, they are unifying principles.
Chuck’s the guy that pointed out that The Force that propels this flywheel is Customer Centricity. The gap between customer expectations and customer reality is what needs to inform change.
The Force = Customer Centricity = Caring about the customer’s perspective
What Caused The Disturbance In The Force?
After almost three years of continuous improvements, why don’t they just trust us? If it were only that simple.
We came up with the twelfth change the first month we engaged. We’ve been putting off taking action on it since then.
A few months ago while visiting with Chuck and his senior executives at an offsite retreat we needed to print out several documents. The hotel couldn’t accommodate us. Bryan, my business partner, ordered a printer using Amazon’s Prime Now. Less than an hour later we were printing.
Bryan decided to point at the elephant in the room. We can get a printer here in an under an hour, why exactly can’t the sales team always respond to an inquiry within two business days? What do your customers expect?
Sales Team Response Time
In our first draft of our Buyer Legend, the narrative originally read that the customer was delighted because sales team responded in four minutes. That draft was abandoned. Two business days was substituted. They didn’t know their actual response time but anecdotally we estimated it averaged 2-4 days. We didn’t win this battle but we did insist on compliance with updating Salesforce. We now know that they respond to 87% of leads within two days. Of course, there are automated emails that are intended to follow up.
Yet, customers are human. Humans want what they want now. Not later, not even in five minutes. We want it now!
A New Goal – 5 Minute Response Time
After a long discussion, we agreed to tackle the twelfth change. We agreed that customer expectations could be unrealistic but we could meet that challenge. It helped that this time we had internal data to back us up. Leads that were reached by phone the same day closed a little over 3x the leads that took more than a day to respond to. Leads are expensive! We also reminded them of The Lead Response Management Study by Professor Oldroyd, a Faculty Fellow at MIT.
The new buyer legend says: “John (the prospective customer) is delighted because the inquiry was responded to immediately. John says “if they respond that quickly to an inquiry I bet they do that for customers too.”
Let’s examine why this change makes sense based on the unifying principles of Amazon’s Four Pillars Of Success:
Customer Centricity – immediate response is what the customer wants and expects
Continuous Optimization – be better today than yesterday is always the way towards our new goal
Culture of Innovation – find solutions and embrace change to improve customer experience
Corporate Agility – work to become more nimble and react to changing customer expectations
The Sales Team Rebels
This change is what the sales team was up in arms about. They missed the part where the sales coordinator, a new position, made the call answered a few questions, asked a few questions to qualify the prospective customer and scheduled a follow up with a sales person.
What we had was a failure to communicate. Chuck assumed the sales team reread the Buyer Legend carefully. The did not. Crisis averted.
Publishing a new Buyer Legend means employees scan quickly for changes. There are always minor changes highlighted but major ones are deliberately not. That is supposed to encourage careful reading.
Disturbance In The Force A Post Mortem
There are four forces that pull against the unifying principles of Amazon’s Four Pillars of Success:
Maintaining Status Quo
We could call them disunifying principles.
Let’s examine how they almost derailed the twelfth change:
Organizational Focus – the sales team metrics were focused on their own team’s “performance”, not the customer
Maintaining Status Quo – the sales team didn’t perceive their process as broken
Competitor Focus – the sales team saw themselves relative to competitors but not relative to the gap in customer expectations
Misplaced Accountability – the sales team was exceeding sales goals, an internal benchmark, but that data didn’t reflect the customer’s reality
Happily Ever After?
The sales team was asked to reread the Buyer Legend and some minor edits were made and agreed upon. The twelfth change is underway and initial results are positive. We’re nowhere near the 5-minute goal but our motto is #BeBetterToday. Nearly every lead is having a conversation within the same day as their inquiry. The hero of a Buyer Legend is always the customer. Chuck is unshaken in his faith that when he takes the customer’s perspective things work out well in the long term.
We kick-off the workshop with a two-day onsite visit. We help you create the Four Pillar foundation for your organization. The entire process takes between 4-8 weeks and the typical investment is $30,000 – $100,000.
We can speak at your event. Our fees are $20,000 in North America, and that includes travel. International fees are $20,000 plus business class travel, from Austin, and lodging. Contact us to discuss your event