I recently agreed with a the cruel truth on business expansion.
We conducted an analysis of our company miss rate (customer unsubscribes) and the numbers came out pretty good.
The data showed an average drop of 2.5% to 3% (we lose 3% of our customers every month).
If you’re not familiar with industry attrition rates, below 5% is a good goal, of course the lower the better.
If we can stay at 3% forever, I’ll be happy.
Low attrition means our customers see value and thus want to continue paying for our service.
Another way of putting it is that we don’t have a ‘leaky bucket’.
Leaky bucket syndrome comes when you work really hard on your marketing and sales, getting customers to come in, only to have them cancel and charge back at a rate that makes growth impossible.
However, even when it’s low, confusion can be a deceiving number.
For example…
I continued to explore some potential future numbers to see how the 3% loss rate plays out as it grows.
3% loss with 50 customers = 1.5 customers lost per month
100 customers = 3 missing per month
200 customers = 6 per month
500 customers = 15 per month
This means we need at least 15 new customers to avoid falling behind with 500 customers.
And that assumes we maintain 3% attrition as we grow.
I am currently working to get us to 8 new clients per month in a row.
We’ve hit that number before, but we haven’t stopped there.
15 would be a big improvement.
But as we grow, 15 simply maintains the status quo.
If we want to continue to grow, we cannot rely on today’s growth rate alone.
When we get 4 new customers and the loss is 2 customers, we add +2 net each month.
But as it grows, 3 a month, then 4, then 5 and so on. we will lose.
Getting 4 new customers won’t be enough to get results.
Our growth rate must continue to outpace our losses.
How to Stay Ahead
There are two options to clear the confusion –
1. Find new marketing channels as a never-ending process.
We can improve existing campaigns, but they will hit a ceiling and eventually they will deteriorate.
We always need a new marketing campaign, and then another, and another leap.
That’s why you need a marketing department that never stops working to find the next improvement and the next breakout campaign.
2. Rely on referrals to keep us in positive territory.
Word of mouth is at the heart of most companies of scale.
This is because the spoken word has an internal positive reinforcement loop.
Every customer you get gets more referrals, which one gets more referrals, etc.
This ideally implies a strong referral rate that is higher than your bounce rate.
Tendency to references
Coming to terms with this made me realize that I needed to get my priorities straight.
Increasing word of mouth referrals should be a priority.
I believe this is the only way to get our company to where I want it to go (8 figures and more).
Advertising campaigns work, but without enough referrals, we will struggle to reach each new milestone.
If you’re wondering why this is, it’s because referrals are better at all levels.
- People who are referred convert at a higher rate.
- It costs nothing to generate a referral (not to be confused with affiliate referrals where you pay a commission)
- Referrals are generally better customers with less churn because they come from your best customers
Advertising costs money, has ups and downs, degrades over time, and can attract customers who are more likely to become confused.
What causes direction?
I’ve been wondering why we don’t get enough referrals at my company.
As you reduce churn, you increase customer satisfaction, but that may not be enough to drive referrals.
A simplified scale for customer satisfaction:
Unhappy customers = high churn
Happy customers = low loss
Happy customers = word of mouth
Satisfied customers can’t cancel, but they don’t tell others about your company.
Word of mouth only happens when a customer is so happy that they are excited to “brag to their friends/family/colleagues” about what your product or service has done for them.
They should also be in situations where it makes sense to talk about your work.
If most of your customers are in one industry and they interact with others in the same industry, word-of-mouth opportunities surface more regularly.
If simply using your product exposes it to other people, it can make word of mouth very natural.
The problem we’re dealing with in our case (email overflow) is universal, but not talked about much.
Sometimes we do word of mouth when a customer talks to a colleague in the same company.
We also talked word of mouth within the training groups when the topic hindered productivity and growth.
So this year I want to double down on these two items.
- Shrink an industry more than ever before
- Look into networking with entrepreneurial coaching groups
I hope my thought process helped you think of recommendations for your business as well.
Keep growing!
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