The Shockingly Simple Math Behind Business Growth

The Shockingly Simple Math Behind Business Growth

A funny thing happens once you’ve created and sold an online course or two. You find yourself facing a whole new set of problems: how do I take what’s already been working, and scale it up?

Usually the first solution we come up with is to sell more courses.

Now, to be fair, there’s good reason for that; the online marketing world is filled with blog posts, eBooks, articles and courses that all say the same things: find new customers! Grow your list! Create more courses! Sell, sell, sell!

In other words, just keep doing what you’ve been doing, and your business will grow.

Here’s the thing:

As acclaimed executive coach and business development thought leader, Marshall Goldsmith, said:

“What got you here won’t get you there.”

“Selling more” is one component of growing a business – but only one. And in fact, it’s sometimes not even the best one.

That’s why in this article, I want to go deeper and show you the shockingly simple math behind business growth – including the one factor that undergirds everything else and drives your success forward.

Mary, Mary, Quite Contrary, How Does Your Business Grow?

The best way to describe how business growth actually happens is through a simple thought exercise.

Imagine you had access to a remarkable vending machine:

You could put one dollar in, and get two dollars back out. Every time, guaranteed.

What would you do?

I don’t know about you, but I would quickly find as much cash as I could, and start plugging it into that machine.

In its simplest form, this is the goal of every business: to find a reliable way to bring in more money than you are spending … and then do it over, and over, and over again. Hopefully better and more effectively each time. It’s business growth 101:

Growth = increased revenues from each customer + decreased costs of acquiring that customer

The Ingredients of Dramatic Growth

The problem with the ‘sell more’ mentality is that it focuses on only the first half of this equation: the making more money part.

But it doesn’t tell you anything about the ‘decreasing customer acquisition costs’ part. Nor, really, does it tell you much at all about the ‘increasing revenues from each customer’ part.

See, ‘selling more’ is just one part of increasing revenues. The technical term that describes the whole process is the lifetime value of the customer, or LTV. In its simplest form, LTV is made up of:

  • the average dollar amount of each sale,
  • the average number of repeated transactions, and
  • how long the average customer keeps buying

Which means that if you want to increase revenues, you need to either charge more for your products, get each customer to buy more often, or keep each customer buying for longer.Selling more usually just focuses on the second piece – sometimes the third – but it completely ignores the first.

Selling more usually just focuses on the second piece – sometimes the third – but it completely ignores the first.

The same can be said on the ‘reducing costs’ side of the business growth equation. Your customer acquisition cost (CAC) is basically how much you spend in a year on getting customers (e.g. sales and marketing), divided by the number of customers that you actually got.

Reducing your CAC, then, means optimizing your sales and marketing systems so that you can spend less money on getting new customers, and/or increase the number of customers you get.

For your business to grow then, you need to find a reliable way to move these five levers:

  • Make more money from each sale, and/or
  • Get each customer to buy more often, and/or
  • Get each customer to keep buying from you for longer, and/or
  • Spend less money getting new customers, and/or
  • Get more customers

The more of those things you can do at once, the faster your business will grow.

Now here’s the thing that is really cool: there is one thing you can change, that will positively impact every one of those factors.

How A Remarkable Customer Experience Makes Dollars – and Sense

Terrible puns aside, research has shown us time and time again that one of the most strategic investments you can make to help your business grow is in creating a remarkable customer experience.

There are dozens (if not hundreds) of factors that influence customer experience, including whether you fulfilled your promises, the value received for time spent, an emphasis on problem solving in customer service, treating customers personally and as “real people,” and so on.

As seen in the model below, the core of a great experience is the product or service itself; then the level and quality service we receive with relation to that product, and finally, the ‘softer’ side of the experience equation.

Click to enlarge.

Click to enlarge.
Source

Yet despite knowing how to provide a remarkable customer experience, we often don’t really ‘get’ how big of a deal customer experience really is.

It’s not just a matter of saying “I’ll never buy from them again” when we have a bad experience; recent studies have shown that customer experience is actually a key factors in business growth. It affects each of the levers listed above.

Here’s how.

Better Experiences Mean You Can Charge More

The first lever you have in growing your business is the ability to increase your prices. There have been a number of studies examining the relationship between pricing and customer experience.

In 2002, for example, an international team of researchers explored the relationship between price and satisfaction when it came to buying a new car. Their results indicated that if your customers feel as though your prices are fair – regardless of whether they’re objectively high or low – they are likely to be satisfied. This makes sense; no one feels satisfied if they think they have been ripped off!

But price relates to customer experience in other, more subtle ways. For example, researchers from Stanford and CalTech wanted to see if price affected the perceived quality a bottle of wine [PDF]. They found that the answer is yes: price perception is a huge factor in determining whether a customer feels you’ve provided a quality product or service. If you want to justify higher prices, customers will expect more before they’ll be satisfied.

The good news is that once you’ve satisfied a customer once, the show more price tolerance – in other words, if you can blow someone’s socks off once, they will be more willing to pay premium prices later [PDF].

The lesson here?

If you have the customer experience to back it up, you can charge more.

Great Customer Experiences Get People to Buy More

Research has also shown that you can dramatically ramp up the second and third levers (how often people buy, and for how long they continue to buy) by improving your customer experience.

The Harvard Business Review has a great article that summarizes the impact; they looked at two global, $1B+ businesses to see how customer experience mapped to revenues. The findings were dramatic:

In just one year, customers who had the best experiences spent 140% more than those who had the poorest experience. That’s after adjusting for how often the customer would need the type of product / service sold; pure revenue gain, strictly attributed to the quality of the customer experience.

But beyond that, when they looked at ongoing purchases – specifically, subscription- and membership-based revenues – they found that you could predict how long someone would continue to buy from the company by looking at their customer experience.

With a poor experience, a customer only had a 43% chance of staying a member the next year; the average customer in this category would cancel their membership in just over a year.

Compare those figures to a member who had a great experience; they would have a 74% chance of still being a paid subscriber the next year, and on average, they would stick around for six years.

That adds up to a lot of revenue.

Remarkable Customer Experiences Help You Gain Customers

Levers four and five are all about getting more customers, without having to pay more to get do so. And the simplest way to do that?

Harness the power of word-of-mouth.

After all, a customer telling a friend or family member that they ‘have to buy’ from you doesn’t directly cost you anything.

According to a 2012 report by the Temkin Group, companies who are all-stars in the customer experience game enjoy roughly 19% higher ‘likely to recommend’ scores, compared to the industry average.

If percentages aren’t your thing, here’s another way to think about it:

When you provide a great customer experience, an additional one out of every five customers will recommend you to a peer.

Oh, and don’t forget this is a multiplicative effect, which means that it grows exponentially over time.

Plus, you can save money on marketing by focusing on retaining your existing customers; according to this article from Forbes, attracting new customers costs 5X more than keeping an existing customer.  Combine that with the retention power of levers two and three, and customer experience proves to be a powerhouse tool in reducing customer acquisition costs.