Are you creating value with your best customers, or is it just an illusion? Here's how growing revenue can lull you into complacency.
Most people tend to think revenue is good, and growing revenue is even better--a completely understandable mindset. Revenue is probably the most objective measure in any business, because it tells you how much customers are paying for your products or services. Therefore, it's easy to equate revenue growth to creating customer value.
There's one instance, however, that can lull an organization into complacency. We call it the sticky customer trap. We see this a lot, especially in B-to-B services companies. The management team sees sustained or growing revenues from a customer or group of customers and concludes that it's creating customer value. But it's actually destroying value and putting the customer relationship in greater jeopardy.
How the Trap is Set
How does this happen? A customer purchases a service from your business. This could be IT outsourcing services, legal services, shipping, or even auto repair. There's an ongoing need for the service, so the customer continues to ask for support and continues to pay its bills. No problem, right? You are creating customer value.
The problem is that these services are sticky. Once the customer chooses you as their vendor, there is a high cost for them switching to another vendor. They may become unhappy with your service, but in order to switch they need to find someone else, believe someone else is not as bad as you, and go through the cost and effort of moving to the new vendor.
As the vendor, your organization tends to gravitate in the other direction. You see revenue coming in month after month and praise the team for their great work. The feeling of comfort at that customer causes your organization to shift focus toward new customers, which can further degrade existing customer value. Eventually, the early customers leave, usually without much warning, and you wonder why you lost what you thought were happy customers.
How to Avoid the Trap
In reality, you stopped creating customer value the moment you won the sale. The customer was impressed by what you could deliver, but as you delivered it, you never exceeded expectations. In fact, you probably under-delivered relative to their initial expectations, which resulted in customer disappointment at the same time your organization was feeling comfortable that they had developed a new long-term customer.
This is a natural tendency of an organization, but it's a hindrance to long-term growth.
The best teams avoid the sticky customer trap by measuring the leading indicators of customer value. They define what creates customer value, based on historical experience, and measure whether it's happening at their current customers. This measurement can be done through regular customer surveys or interviews, or the team can measure known drivers of customer value such as timeliness, quality, and the results they are creating for their customer (such as cost reduction). Keeping a close eye on these leading indicators can help you to avoid the trap and drive value-creating growth.
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. @karlstark