To Keep Your Customers, Build More Moats
I’m always surprised by how often even very sharp entrepreneurs don’t understand the importance of always making sure that even as their people chase new sales opportunities and fall in love with the newest and coolest marketing tools and tricks, they don’t lose their focus on basic blocking, tackling, and execution. Essentially this entails nothing more than taking really good care of your existing customers. This may seem old-school and even a little boring, but it’s a tried and true way to build an increasingly valuable enterprise.
I call this basic business strategy "knocking on old doors," which means working harder to deepen your connection to and your involvement with current customers. This will increase their average spend ("share of wallet") and lock them in for the long haul.
It's critical for new businesses to always remember that customer churn is the ultimate enemy of increased profitability. In the frenzy of a hot start-up, it may appear that customers are easy to come by because the adoption rate of anything shiny and new these days is remarkably high. But the abandonment rate is 10 times higher, so if you don't quickly connect with and retain these new customers they'll be gone and you'll be running on a treadmill and going nowhere fast.
It’s pretty much a given that happy and "cared-for" customers will end up spending more with your company over time. And "organic" customers (basically home-grown) regularly spend a lot more, with better margins than customers acquired through one-off marketing spends, promotions, and other incentives that may attract incremental customers but don’t create lasting connections to them.
Strong, long-term customer connections, however, don’t happen by themselves. You need to continually and aggressively work on new ways to keep your customers engaged and invested in the success of your business (as well, of course, as in the success of their own businesses). This process is pretty well understood, but it's rare to find it consistently well executed.
Far less well understood is an even more important element of customer retention: doing everything in your power to increase customers' switching costs. This is what I call "making moats," which not only keep your customers from leaving but also make it much harder for the competition to reach them and induce them to move. Effective moats come in many forms, and only you will be able to quickly determine which are the easiest and most cost-effective for you and which make the most sense for your customers.
Keep in mind that I’m not talking about things like long-term contracts with overlapping expiration dates or similar "legal" constraints that keep folks in the fold. I’m talking about arrangements, value-added tools and data, and other barriers to switching or leaving that result from the way you build out your operations and which actually improve customers' experience.
There are three industry characteristics that will help you discover and develop the moats that will matter the most in your business.
1. Complexity. The more you can do to streamline and simplify essential but complicated processes for your customers, and increase their productivity by saving them time and avoiding redundancy, the "stickier" your connection with them will become. Sometimes these may be complexities built into your own systems, but more likely they are aspects of doing business within a given industry or system where you can accumulate and share (exclusively with your customers) procedures, documents, regulations, and other resources that are necessary but not readily accessible or even known to occasional users. Pre-populated forms; access to associated information like applicable state taxes; drop-down lists and boxes with regularly used choices and selections; embedded estimators and calculators, etc., are all valuable add-ons, and the more detailed and industry/user-specific they are the more valuable they will become to your customers (not to mention harder for competitors to replicate).
2. Compliance. Many industries are more highly regulated than most people imagine, and it takes years of painful and costly experience (often through trial and error) to develop the internal resources and personnel to successfully navigate these regulatory environments. In many cases these companies come to rely very heavily on the industry wisdom and compliance knowledge of their vendor/partners, because the vendors regularly interact with the state and federal regulators on behalf of multiple clients and parties, whereas a single company's involvement will be much more infrequent and sporadic. The more that you (as a vendor/partner) can add additional functionality and embed the depth of your broader experience into your offerings (turning your "products" into more valuable "services" and consulting), the more locked-in customers become.
3. Consistency. As strange as it may seem from the outside, the third-party vendor/partners of large corporations are often the only parties who actually have the data and the ability to advise and assure these large, unintegrated organizations that their various departments, divisions, and affiliates are operating consistently across the business, and in a manner consistent with the company’s own rules, regulations and policies. To a certain extent, this is another opportunity to provide quasi-managerial functions for your clients who simply don’t have the internal capacity or organization (or sometimes the necessary information systems) sufficient to handle these tasks themselves. They really can’t tell the left hand what the right hand is doing and they operate at their peril (especially in highly-regulated industries) because of this. As you begin to gather and archive more and more information about their business’s functions and organization, you become an increasingly unique and valuable asset and are basically irreplaceable. In an era with increasing management and employee turnover and diminishing institutional memory at all levels, being the keeper of the company’s operational history, and one of the few places they can turn to assure compliance and consistency throughout their company, is a powerful lever for your business and a major deterrent to your competition.
Bottom line: If you want to hang on to your customers for the long run (which is really the name of the game for successful businesses) and go beyond the basic CRM programs that are table stakes these days, you need to build moats that raise your customers' switching costs, provide substantial disincentives to migration, and help to exclude competitors. Focusing on customers' needs to reduce complexity, increase compliance and assure consistency throughout their businesses is the key to keeping them.
HOWARD TULLMAN | Columnist
Howard Tullman is the CEO of 1871 in Chicago where, at the moment, 260 digital startups are building their businesses every day. He is also the general managing partner of G2T3V, LLC and Chicago High Tech Investors – both early-stage venture funds; a member of Mayor Emanuel’s ChicagoNEXT Innovation Council; and Governor Quinn’s Illinois Innovation Council. He is an adviser to many technology businesses and an adjunct professor at the Kellogg Graduate School of Management. @tullman