Business Insights ‘Leading edge thinking for growing your

business and unlocking your people potential’

Are your customers costing or making you money?

Do you really know?

Regardless of your industry, sector, business type, or whether you’re in a B2B or B2C environment, there is a success formula for growing businesses and ensuring your customers are making you money.

However, most businesses and business professionals are either not aware of the success formula, and its fundamental principles, or are not following it!

What is the success formula?

The success formula is based on 11 critical questions which will be discussed throughout this issue. Think of reading it as a 12 minute health check/self-audit of your business!

The background

The global business arena has resulted in a cosmopolitan shopper’s paradise. In the current climate the consumer is the King or Queen; they are well educated, know precisely what they want, and have more choices than ever about how and where to buy. The old rule book is no more!

Therefore, businesses need to create a new rule book if they are to prosper in the current consumer revolution. Customers have more power than ever before; some may even say that they are now in charge.

However, it seems that few companies have truly woken up and realised the full consequences of this paradigm shift. They do not have accurate customer profiles or transaction histories for their key customers. Many businesses don't have an understanding about how much it costs to acquire a customer, and some know very little about customer retention rates, average customer revenue or profits per customer. Very few have a real understanding of the ’cost to serve’ across their various channels of delivery.

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Perhaps even more shocking is that in a number of businesses, employees’ rewards and remuneration are not aligned to delivering key customer metrics. This in turn means that they are driving the wrong behaviours and values amongst their people. Very few organisations have a senior board executive responsible for customer experience, and even fewer understand consumer behaviour.

Now, if you’re reading this and saying to yourself ’actually, we’re doing all of this already’, then fantastic! You and your business are part of a select group who are leading the way in the consumer revolution.

If you’re not doing some, or all these things, then read on to see the 11 questions that will challenge you to dig deeper into your business and your business’ strategy!

“The primary purpose of a business is to attract, maximise and retain customers. Everything which contributes to this is an investment and anything which doesn’t, is a cost!”

Which activities in your business are an investment, and which are a cost?

Without customers, businesses don’t exist! The challenge is, that most businesses over-engineer their business growth model, making it more complex and cumbersome than it needs to be. They introduce layers of management that stifle and delay decision-making. They create unnecessary systems, processes and procedures that detract their people from doing what they do best - attracting, maximising and retaining customers. And then, businesses wonder why they’re not delivering market or industry leading performance and growth!

Here’s an exercise for you…imagine that today is your first day working in your business. Apply this guiding principle and interrogate every system, process and procedure that you currently have in place. Each time asking ‘is this contributing to attracting, maximising and retaining customers’ or ‘is it a blocker to our success?’ In short, is it an investment or a cost?

With this initial guiding principle in place within your business, you can then start to drill further into the other critical questions and components that make up the business growth success formula.

There are only 4 ways to grow any business

Despite what many people say, there are in fact only 4 ways to grow any business; these are what we call the 4 big questions of business growth.

Whilst there are a number of answers to each of the questions, and multiple strategies that you can implement within your business, when you actually peel back the layers, all strategies and answers will be based on these 4 questions of business growth.

During good economic times new business was probably easier to come by, and it didn’t really matter if you lost a customer, because there was always another waiting in the wings.

However, in a competitive market where multiple providers are chasing the same customers, and those customers are more demanding than ever, a structured, systematic, and sustainable business growth strategy is more important than ever.

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So, what are the 4 big questions of business growth?

1. How do you increase the number of customers? 2. How do you increase the average order value? 3. How do you increase the average order frequency? 4. How do you increase the retention of customers?

Now, a number of people may say “but what about reducing costs, surely that will increase my profits?” Whilst yes this is right, in this particular case we are talking about the untapped potential of unlimited growth. Reducing costs is finite – you can only ever cut back so far, before arriving at a base cost to serve and deliver your customer proposition.

Acquisitions can also be another way of driving growth, however in this issue of Business Insights our focus is on sustainable organic business growth - unleashing the hidden windfall profits lying in your business. The business growth strategy that has no boundaries, other than the percentage market share you can realistically acquire in a given time frame.

Back to the 4 big questions, which of the questions do you think most businesses focus their time, effort and resources on?

It’s the first, chasing new customers?

Whilst this is certainly key for business growth, it’s actually the maturity of your business and the size of your existing customer portfolio, which will determine how much focus you need to place on this question.

Experience tells us that most businesses spend too much time on this question, and only a few businesses have a business growth strategy that integrates all 4 questions.

In the past you’ve probably seen the BT or British Gas adverts with the eye-catching headline;

‘A million customers come back to BT/British Gas’

Now, the challenge I have with this headline is, why did they lose these customers in the first place?

Business growth is about attracting quality customers through the front door of your business, and then having a compelling value proposition that fulfills their needs and wants. It’s about delivering your compelling value proposition through an exceptional customer experience (a separate topic that we’ll be covering in a future issue of Business Insights), and maximising the value and worth of each customer.

And finally, because of the great value and experience you deliver, those customers will then stay with you for the long-term, and drive your retention strategy.

So, do you have individual business growth strategies in place in your business focusing on…

1. Increasing the number of customers? 2. Increasing the average order value? 3. Increasing the average order frequency? 4. Increasing the retention of customers?

Those businesses that are really successful (i.e. leading their industry, field or sector), are the ones that work all four dynamics at the same time! However, not only do they live, work and apply the 4 dynamics at the same time, they also have an intimate understanding and appreciation of...

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Life time value (LTV)

What is the LTV of a customer in your business?

Understanding this is fundamental in creating your sustainable business growth model.

Let’s use a couple of real scenarios, in order to bring this to life.

Imagine you’ve always shopped at Sainsbury’s, but one of your friends is raving about Tesco and how good it is, so you decide to test out Tesco for yourself.

You go along to the local Tesco with your shopping list of 40 items, and 30 minutes later you’re at the checkout packing your items…all 80 of them!

We’ve all been there haven’t we?! A trolley full of items which resembles nothing like the list you went in with, and your wallet or purse is £100 lighter!

Despite this, the experience was excellent - you agree with your friend’s rave review and you are now a convert - Tesco is definitely for you!

Think about how long you’ve been going to your current supermarket – I bet if you’ve been a customer for a while and you actually sat down and calculated your worth to them over that period, it would be huge!

If Tesco worked on an average LTV model of 5 years, assuming they have all their maximisation and retention strategies working for them, the above family could potentially equate to £25,000 over the period.

Tesco is now the 4th largest retailer globally - a fantastic success story! I’m sure if we were together face to face, we could reel off a list of businesses (both large and small) that have really mastered this business growth formula, and are rigorous and relentless in their flawless execution.

Why? Because it works!

This is where LTV comes in...

How many times a week do you go the supermarket? Say for example you’re a family with 2 children, you probably go once a week.

And how much do you spend on each weekly shop? Let’s say the average order value is £100.

These are the first two questions of the business growth model answered.

Next, what is the average order frequency?

Taking out two weeks for your annual holiday, the average order frequency is then 50 times per year.

Tesco are delighted! They have a new customer who has an average order value of £100 and visits the store 50 times a year, that’s £5000 of new revenue for them.

Now that’s life time value…and this is only based on the first year!

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Another example of a great business growth strategy is Rolls-Royce.

Since the company was privatised in 1987 its share price had generally lagged that of BAE Systems, a fellow leading UK manufacturer. However, over the last couple of years the situation has been dramatically reversed. Rolls-Royce’s share price is currently 767.50p* (giving a stock market value of £14.37bn) and BAE Systems’ is 311.10p* (giving a stock market value of £10.16bn).

Whilst investor nervousness about defense cuts afflicting BAE may have something to do with the turnaround, a more likely explanation is that shareholders are finally becoming comfortable with the Rolls-Royce mantra that it is now a service company, with stable, long-term revenues from the after-sales support of its engines.

Perhaps this last paragraph is most important in the context of what we’ve been talking about in this issue. Rolls-Royce recognised some time ago that their core business growth model of selling engines was potentially flawed when creating a sustainable business growth model, with predictable revenue streams. Hence the creation of an entire ‘back end’ proposition based on the ongoing servicing and maintenance of their engines, which is living proof that their vision and foresight is now coming to fruition in their share price and market sentiment.

Relating this to your businessჼ

What is a customer worth to your business? Not just during year 1, but over their life time…what’s their LTV?

Don’t just calculate the turnover figure, think about what they are worth in terms of profitability? After all, as you and I both know, that’s the real measure of business growth and success!

‘Turnover is vanity, profit is sanity and cash is reality!’

It’s amazing when you actually calculate the real life time value of a customer or client, how it changes your focus within the business. With this clear focus, you can then calculate what you are prepared to spend on sales and marketing to attract new customers at the front end.

*As of 1st February 2012

1. £1 in every £7 spent on the high street goes through Tesco’s tills

2. Tesco is currently the 4th largest retailer in the World

3. £67.6 billion - total group annual sales 4. More than £3.8 billion operating profit 5. 5380 stores worldwide 6. 492,714 Staff worldwide 7. Tesco stores are now present in 14 countries 8. Over 32 million people have a Clubcard

worldwide 9. 569 stores opened in 2010

Perhaps it’s time to increase our sensory acuity and become even more curious and inquisitive about what other successful businesses are doing, what we can learn from them and how we can apply the principles to our own businesses.

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And then once you’ve attracted them, dependent on both current and future value, you can decide on your channel and contact strategy in order to educate them on your product/service offering. After all;

Frequency of contact = Frequency of order and breadth of product penetration

However, there’s still one final piece of the jigsaw missing.

You can have a detailed understanding of the 4 big questions of business growth, understand the LTV of your customers (and therefore what you’re prepared to pay for them) but you still need to...ჼ�

Understand your cost to serve

What’s the cost to serve these new customers?

Nowadays, many businesses are multi-channeled (for example selling their product/service online, face to face or through a contact centre), so the question could be even more pointed…

What’s the cost to serve your customers by channel?

The challenging economic business landscape has definitely focused the minds of business professionals to interrogate their cost base and understand the cost/profitability of customers.

This topic could be the sole focus of a whole issue of Business Insights. However for now, we’ll focus on two key drivers of analysing cost to serve - the technology advancements, and the changing demand and sophistication of the customer.

It’s no big surprise that there has been phenomenal growth in web-based businesses such as Amazon, ASOS and Play.com, as the model gives the consumer complete control over when and where they choose to shop. For the business, it can deliver a leading edge ‘cost to serve’ business model.

More traditional businesses are having to look at the way they serve their customers, particularly if there is face to face contact. A customer relationship management tool and an expensive retail estate, to support the business’ value proposition, are often key.

All businesses are different and need to be looked at based on their own merits - taking into account all the dynamics of the business growth formula that we’ve covered here. However, without an in depth understanding of cost to serve and conscious decision making in relation to LTV and the 4 big questions, many business growth models are fundamentally flawed.

Putting it all together

The principles of business growth are not complex, and certainly do not need to be over-engineered. It’s about applying the fundamental guiding principles, the essence of which we’ve captured in this issue of Business Insights.

As promised, a quick summary of those 11 critical questions...

“The primary purpose of a business is to attract, maximise and retain customers. Everything which contributes to this is an investment and anything which doesn’t, is a cost!”

1. Which activities in your business are an investment and which are a cost?

2. How do we increase the number of customers?

3. How do we increase the average order value?

4. How do we increase the average order frequency?

5. How do we increase the retention of customers?

6. What’s the life time value of a customer to your business?

7. Having now understood LTV, what’s the acceptable acquisition cost of a customer?

8. What’s the cost to serve? What does your multi-channel solution need to look like?

9. What’s your profitability by customer, taking into account all the above factors; their acquisition

cost, cost to serve, product mix and life time value?

10. Do you have separate strategies centred on acquisition, maximisation and retention?

11. Are they specifically itemised within one overall business growth strategy

If you would like a more in depth discussion about this topic, or would like to talk through how we might be able to help you grow your business or unlock your people potential, please email businessinsights@pti-worldwide.com or call us on +44(0)870 850 8931.

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Business Insights is a quarterly publication designed to provide you with leading edge thinking, trends and insights into the world of business and people development. It will address one key topic per issue, focusing on the practical application for you and your business.

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