As we work with clients helping them achieve their revenue target, we are often surprised by how few companies actually think of their existing customers as the real revenue generator engine fueling growth.
Sales and Marketing are far more focused on potential customers than existing ones, leaving existing customers to Customer Service or Support. Even then, to many companies, customer service is just a necessary cost of doing business.
However, experience shows that existing customers are likely to be a much stronger source of new revenue than new customers for the following reasons:
- Repeat or recurring purchase – although many companies do not view revenue from repeat purchase or recurring usage (as in SaaS models) as new revenue, it is ALWAYS new revenue since the customer can choose to buy from another vendor. Taking recurring revenue for granted will, sooner or later, lead to high customer attrition rates.
- Selling new products and services to existing customers is significantly easier than to new brand new customers. In other words, growing the account costs less time and money than trying to get a completely new customer.
- A referral from an existing customer has a higher closing ratio and shorter sales cycle than a lead from marketing efforts.
We are NOT saying that companies should not go after new customers. On the contrary, we believe that it becomes easier and less expensive to go after new customers if a company does very well with its existing ones.
What we are suggesting is that a company should place a very high premium on creating highly satisfied customers—what we call raving fans—so that it has a much better chance of increasing revenue at a lower cost—which results in higher profitability. This is what we call Quadrant 1 and Quadrant 2 revenue generation efforts.
Let's begin by postulating that losing a customer hurts a company’s financials far more than winning a new one can help it.
Many CEO’s understand this instinctively. That is why companies provide Customer Service, so as to keep customers happy and prevent losing them. However, this is seen as more of a necessary evil, a cost, or a negative rather than a positive.
We are saying that working hard to make existing customers raving fans has a far greater impact on revenue, market share, and profitability than any marketing and sales activity that the company can invest in.
In this article, we will first outline three ways in which existing customers can dramatically help a company grow its revenue at a lower cost than going after new customers through marketing and sales campaigns. Then we will discuss what the company must do in order to enable these powerful revenue generators.
Revenue Generator 1: Lifetime Value (LTV) of Customers
A powerful concept that every company should understand and utilize is the Lifetime Value (LTV) of a customer. LTV is defined as the net cash contribution that a customer pays for products and services, minus one-time acquisition costs (cost of sales and marketing in order to acquire the customer in the first place), minus the recurring costs of servicing the customer, calculated over the lifetime of that customer.
To illustrate this , let’s start by making the following assumptions regarding a “typical customer” of a fictional company ABC Technology.
|Average Cost of service ($/year)||19,200||80%|
|Avg. LT of typical customer (months)||30|
|Acquisition cost of typical customer ($)||7,000|
|Year 1||Year 2||Year 3||Total|
|Acquisition cost ($)||7,000||-||-||7,000|
|Service cost ($)||19,200||19,200||9,600||48,000|
|Net cashflow ($)||(2,200)||4,800||2,400||5,000|
Most companies do not take the trouble to analyze the average LTV of their customers. Instead, they mostly see the cost side of things, which lead them to think of Customer Service as, “Either we have to get our customers to pay for more customer support, or we have to reduce our cost of customer support”. This usually is a path that eventually leads to lost customers, market share, and profitability.
However, if a company takes the time to gather data, analyze, and build LTV charts similar to the above, it will see things that may not be apparent at first glance.
The net cash-flow is primarily determined by four factors:
- How long the customer purchased form the company
- How much it purchased each period
- How large the cost of acquisition was
- How large the cost of servicing this customer was
A substantial part of the cost of providing services to customers is of a fixed cost nature anyway, such as payroll and infrastructure costs. What this means is that trying to lower costs (perhaps by reducing services) has the opposite effect of displeasing customers and risking them leaving, thereby increasing cost of services as a percentage of revenue.
The goal is to make each customer so happy with your products and services that they do not want to leave unless they have to. As a result, each additional customer now becomes truly incremental, rather than replacing lost customers. This widens the base, frees up more cash for R&D, lowers the unit cost of services to each customer, and provides a whole host of other benefits.
Using LTV, we can illustrate how dramatic the results can be by making only two small changes:
- Increase average lifetime from 30 months to five years (or 60 months)
- Reduce the operating cost by 5% to 75% as a result of increased lifetime enabling increased number of customers
The new LTV chart looks like this:
|Avg. LT of typical customer (months)||60|
|Average Cost of service ($/year)||18,000||75%|
|Year 1||Year 2||Year 3||Year 4||Year 5||Total|
|Acquisition cost ($)||7,000||-||-||-||-||7,000|
|Service cost ($)||18,000||18,000||18,000||18,000||18,000||90,000|
|Net cash flow ($)||(1,000)||6,000||6,000||6,000||6,000||23,000|
The total net cash flow over the lifetime of the customer increased from $5000 to $23,000.
To really see the impact, for each scenario, lets’ divide the total net cash flow over the number of months
- Scenario one: $5,000/30 months = $167 of net cash flow per customer per month
- Scenario two: $23,000/60 months = $383 of net cash flow per customer per month
We increased our net monthly cash flow per customer by 230% simply by providing better customer service and thereby increasing the average lifetime of a customer.
The added bonus is that your acquisition cost will likely be lower as well, increasing your net monthly cash-flow. Happy customers are more effective at promoting your products and services than most of your marketing and sales efforts. References from raving fans have a much higher closing ratio and close much faster than leads from marketing efforts—thereby lowering your acquisition costs.
So far, so good. The question that comes next is likely to be, “Wouldn’t our operating costs go up if we try to give better quality service?”
The answer appears to be NO.
We are not suggesting that companies increase the level of Customer Service they provide (which will significantly increase costs), but to change the way they provide it.
If we had a leaky boat, we can prevent the boat from sinking by bailing faster, or adding more people to bail. However, adding more people will increase the weight of the boat and make it more likely to sink than float. Bailing faster means that becomes our full time occupation rather than sailing the boat.
Or, we can do something different—fix the leak. Before we do that, however, we need to know a few things:
- Where the leaks are
- How big they are (naturally we would start by fixing the big leaks which will sink the boat faster than the small ones)
- What is causing the leak so we can prevent new leaks from occurring
Armed with this information, we can then put in place a plan to fix the leaks and prevent them from occurring in future. Now, we can focus on the real business of why we have the boat in the first place.
In many cases, we see our clients do with customer service is akin to bailing out water without fixing the leaks. The more customers sit in the boat, the more people are hired to bail water from the boat—this is not a winning strategy.
Raving fans are created by making intelligent, data-informed investments, resulting in products that are easier to learn and use. And creating raving fans is the number one goal of our new Customer Service organization.
Revenue Generator 2: Product Launch Pad
If we create raving fans that have no intention of leaving us, then we have a ready-made market for the new products and services we introduce. Since love our company and our products it will not be hard, or costly, to get them to try these new products and services.
To make this work, we need to pay attention to two things:
- Our products and services work seamlessly with each other—having one product makes the other products that our customers already own even more valuable
- Our products and services work in the same or similar way—if our customers know how to use one product, then they know most of what they need to use our new product
If we can make the above two points happen, then there is a pretty high probability that any customer of one of our products will buy at least one other product from us.
Revenue Generator 3: Lead Generation Engine
The good news doesn’t stop there. If we have raving fans, they will rave about us. And if we ask them, they will have no qualms giving us the names of others that they believe will buy our products and services.
Anyone who has ever sold for a living knows that it is significantly easier to sell to someone who came as a reference from a customer than to someone who came from a marketing campaign. The closing ratios are way higher, and the sale cycles are way shorter.
Therefore, taking the trouble to ensure that our customers are raving fans will pay big dividends.
- Each raving fan stays with us a long time, making them highly profitable
- They will be far more likely to buy other products and services from us, increasing their lifetime value
- And they will market and sell for us, lowering our acquisition cost.
So why don’t companies do everything they can to make each of their customers raving fans? We don’t think it's for lack of wanting, or even trying.
We believe that the main reason that most of our clients cannot brag an 80% or more raving fan rate is because they don’t know how to achieve this.
The rest of this article discusses what transformations companies must undergo to achieve this goal and how they can make the necessary transformations.
Step 1: New Vision, New Mission
The New Vision: Total Customer Care
To enable the three powerful revenue-generating changes, companies have to move from “Customer Support” thinking to “Total Customer Care” thinking.
This is a major change in thinking—from supporting customers to taking total care of them. It includes not just addressing problems when they bring it to us, but eliminating the need for them to have any issues in the first place. It means creating products that are easy to learn, easy to use, and work as expected all the time.
Most importantly, this vision removes the view that Customer Care is the responsibility of the Customer Support/Service “department” and puts it squarely on the shoulders of the entire company—Product Design, Engineering/Development, Operations, Marketing, Sales—everyone is responsible for Total Customer Care.
The Mission Statement
The mission statement that derives from the vision of “Total Customer Care” is likely to be just as ambitious—“To create raving fans who are 100% reference-able”
Achieving this mission means that every one of your customers would be delighted to be a reference for you. In fact, they won’t wait till you ask, they are constantly raving about you all the time.
Is that possible? Yes. But it will take everyone in your company working together to achieve this mission—not just the Customer Service “department”.
Step 2: Know where you are Today
It is very hard to build a plan for improvement unless you know where you are, right now. Such an audit enables you to see where you are and where the gaps are vis-à-vis your end goal of “100% reference-able raving fans”.
Without taking an audit of where you are and identifying the gaps, very little will change for a simple reason. No one will know what to change or by how much to change it.
The audit here is essentially a survey that would be sent out to all of your customers asking them to rate your products and services along a number of critical issues. By getting an overall score of ‘A’ means that the customer is a raving fan of your products and services. A score of 'B' means that the customer maybe loyal, but may not be fully comfortable recommending your product and services to others. Any score below a ‘B’ can be assumed to mean that customer will likely switch to another vendor given the opportunity.
What you would like to find out during the first audit is:
- What percentage of your customers gave you an overall (average) score of A, B, C, or D
- In what specific areas are your highest and lowest scores
It is our strongest recommendation that the questions be asked in such a way that they are not biased to solicit favorable responses. Finding out the truth, the whole truth, and nothing but the truth is the goal of this step.
Step 3: Set a Challenging Goal
Armed with actionable information from your survey, you can now begin setting your plan for fulfilling your mission of 100% reference-able raving fans.
Set as your goal that at least 90% of all your customers will be raving fans within two years. With this as goal, you can now set quarterly goals for the next eight quarters so you can end up at your final goal.
Step 4: Know What to Measure
It is critical to measure the right things so that not only will you focus on addressing the right problems, but will arrive at the right fix for these problems.
To our thinking, companies tend to focus on measuring what they have heard others do to try to improve on these metrics. For example, we often hear clients tell us, “we have the best response rate in the industry”, or “87% of all issues are resolved on the first contact”. While these are good, they will not produce raving fans.
These are transactional metrics that do not measure the quality of the relationship at all.
By definition, raving fans are customers who absolutely love your product(s). That means your products are great, they work as expected all the time, and customers have no trouble using them-- they rarely have any reason to contact you because of a problem. If there are any problems, they expect these to be resolved quickly. Therefore, your response rate is only material if it is too slow, not if it is quick.
In other words, fast response rate is not good customer service. It is like expecting a waiter to arrive at your table within a certain amount of time. Unless the waiter takes too long (in which case you likely wont go back), that will not be the reason why the restaurant may become your favorite.
Measuring the wrong things leads to the wrong conclusion, misleading you to spend more money on scaling your Customer Support organization, rather than creating great products that your customers will love. The more issues a company has the more people it hires to handle these calls/tweets/emails/chats, the more quickly it patches the problem for that customer, and the less the problem is truly addressed.
Don’t be concerned with how fast you respond to an issue or how many tickets you close relative to how many tickets are opened.
Instead, be concerned with how many tickets you have relative to how many users you have. If the number of tickets to users is small, then you are moving in the right direction. Otherwise, you may be responding to issues within seconds, and you may be closing tickets within 24 hours, but you don’t have happy customers because they are still calling about too many issues.
We believe that the right metrics are those that help you identify and resolve the issues at their root cause. We recommend that you look at issues that come in (via phone call, email, chat, twitter, etc.) and analyze them according to the following:
|Issue Category||Root Cause||The Right Solution|
|Broken product/process||Product has bugs or has outdated processes or screens||
|How do I do this task?||Product is too complex and/or not well documented||Study how customers are using your product and make it easier to figure out and use|
|Can you do this for me?||Product is too complex, or it takes too long to complete tasks||Study how customers are using your products and make it easier to figure out and use|
|I did this and now this is messed up.||Product does not protect the user from making errors (it is not bullet proof)||Study how customers are using your product and put in place safe guards that protect the user from errors|
The key here is to use Customer Service/Support as the eyes and ears of the Design and Development team, not as a cheap substitute for them. The goal in the end is to create products that customers fall in love with—easy to learn, easy to use, and beautiful.
Step 5: Create a Learning Organization
Gathering the right kind of data is a great start, but learning from it and making necessary changes to improve customer satisfaction is the end goal.
A Learning Organization has at the very least the following characteristics
- It runs an audit of every system and business process it uses, At least twice a year, to see what is still relevant and what no longer is. Based on its analysis, it re-calibrates its systems and processes to meet today’s and tomorrow’s needs
- It surveys its customers, at least twice a year, to make sure it’s products and services are “must-haves” for them rather than nice to haves. Based on the surveys, it makes plans for necessary changes and executes them
- It continually communicates its finding with EVERY employee of the company—not just management. In fact, the best Learning Organizations involve their customers and their vendors in their findings.
- It demands that every employee actively participate in the drive towards making every customer a raving fan by inviting employees to:
- Review the data shared and providing their analysis of what it means
- Suggest ways of improving products and services to address any gaps they see
- Provide a plan of action for how that employee will improve his/her capabilities to better help address the gaps they see
- It rewards initiative, smarts, creativity, and hard work in a number of ways:
- Company-wide recognition
- Cash bonus
- Pay and responsibility increase
- Paid time-off from work
- Special perks such as being able to work from home certain times a week, being able to get their own hours, etc.
- It empowers every employee to step up and do whatever they believe is necessary to create a raving fan
- It is always dismantling departmental silos and encouraging cross-departmental information and knowledge sharing
- It accepts and even rewards “smart” mistakes (mistakes made in the process of learning something new), but has little patience for “dumb” mistakes (mistakes made through carelessness, incompetency, and lack of doing proper homework)
- It makes it clear that the role of management is to support those that do the work because those that do the work know more about the work than management.
- Its reward system is designed to foster company-wide teamwork.
- It allows anyone who is approved to go ahead with a project to select anyone else they want from any department to be on their project team
- It recognizes that the project team leader has a higher rank during a project’s life than the department head in terms of prioritizing the work of the team member
- It has little tolerance for those that complain or blame others, but rather recognizes as leaders those who take full responsibility for the success of a project and spend their time and energy on the solutions to the problems
These are some important ways a company can become a Learning Organization so that it continually improves its products and services to its customers, thereby becoming a "must have" for them.
In this article, we have outlined three important ways how existing customers can dramatically increase a company’s revenue, market share, and profitability. We have also discussed how a company must first transform itself so as to create raving fans that will stay with it for a very long time, buy more and more from it, and tell everyone that listens to buy from this company.
In the second part, we have discussed five important steps a company should follow in order to transform itself into a Total Customer Care company that creates raving fans.
SOMAmetrics has helped many customers to bridge the gaps mentioned above, enabling our clients to convert their customers into raving fans. Let us help you determine how you will convert every one of your customers into raving fans and thereby significantly increase your revenues, market share and profitability.
Contact us today for a quick call to see if we can help