How Healthy Is Your Customer Base?
Customers are a business's most important asset, especially for start-ups, where each customer relationship builds on the next. When a company is founded, it fights to get the first customer. Then it works to turn the first customer into two and then three, or the first 100 customers into 200 and then 300. Reputation and customer referrals can propel a growing business forward--or stifle its growth.
We've recently worked with a few businesses that are beyond the initial growth phase, a phase we liken to an entrepreneurial management team grabbing the business by the neck to push it forward. They are now middle-market growth businesses that still are growing at a 30 to 40 percent annual clip. As they grew initially, they prioritized customer segments and marketing campaigns to target the customers who were the best fit for their offering. But as they grew some more, they moved into new customer segments that were a less perfect fit.
At each of these businesses, the management team started to see increasing rates of customer attrition as they grew into new customer segments. They tried to save some of the customers, but since they had such effective sales teams, they easily replaced the original customers with new ones.
At one business, customer attrition eventually became greater than 40 percent per year and they were unable to make up ground with new customers. Another business we worked with saw their attrition rate increase from 10 percent to 15 percent and decided they needed to take quick action before it got worse. Here are the questions we asked as a first step to get the management team back on track:
- What are your overall growth goals? What level of customer retention is assumed?
- What is the cost of new customer acquisition? What is the cost of
retaining a customer or improving the probability of retaining them?
- How much do your new and original customer segments overlap? What attributes make them similar or different? What attributes are more likely to cause attrition?
- How well can you distinguish high-value from low-value customers? How well do you understand key value drivers?
- What is your entire sales funnel, and your routes to land a customer (e.g., free trial, SEO, online advertising, offline advertising, marketing promotions)? What
is your end-to-end customer value and ROI across each route?
- Who are your key competitors, and when do you consistently win or lose against them?
- What does it take to grow outside of your core segments? What makes a segment
attractive to you?
- How well can you measure ROI to the customer? When do you deliver a greater ROI vs. a lesser ROI to your customers?
These questions brought to light a number of issues and got the management team focused on customer retention. In almost every business, retaining customers is far less expensive than acquiring new customers. In your quest for growth, always keep that in mind.
Send us your thoughts and experiences on customer retention. You can reach us on email at firstname.lastname@example.org.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.