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June 28, 2013

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:

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