Scaling a Business Starts with Customer Retention. Part 2 - Measurement.
In my last blog on this subject, we looked at why retaining customers is as important if not more important than new logos or customer acquisition. Part two is all about the measurement because you can’t manage what you can't measure.
Analysing market statistics for various sectors is crucial for any business looking to optimise its strategy and improve customer retention. Metrics like average transaction value, percentage of repeat business, customer retention rate, profitability, and average payment cycle provide valuable insights to help make informed decisions about where to focus your efforts.
Average Transaction Value (ATV):
What it tells you: This metric measures the typical revenue generated per customer transaction. It helps you understand the buying behaviour of your customers.
Actionable insight: If the ATV is low, consider upselling, offering bundles, or enhancing product value to increase it. A higher ATV may suggest premium products but be cautious of excluding potential customers with high prices.
Percentage of Repeat Business:
What it tells you: This shows the level of customer loyalty and satisfaction. A higher percentage of repeat business means that customers are coming back, which is key for retention.
Actionable insight: A low percentage indicates low customer engagement or value perception, suggesting a need to improve customer relationships and satisfaction. Conversely, a high rate of repeat business indicates successful retention strategies.
Customer Retention rate (CRR):
What it tells you: How many customers have renewed contracts over a particular period versus those that have decided not to renew, whilst ignoring new customers that you may have required. This way you get a more accurate picture and insight of attrition rates. Retained Customers tend to make repeat purchases, contributing to steady sales whilst reducing the pressure to continuously acquire new customers, creating a strong foundation for sustainable growth and a more stable revenue stream.
Actionable Insight: CRR shows your business's current health and sustainability, so it is an important metric. In most industries, the top performers achieve a 94% CRR, so 100% is unrealistic, despite being an admirable target.
Customer Churn:
What it tells you: Your churn rate is the rate at which subscribers or customers stop transacting with your business. They are customers who have cancelled their subscriptions or will not transact with your company again. The churn rate is an important metric that indicates the percentage of customers a business has lost over a specific period. It is calculated by taking the number of lost customers, dividing it by the total number of customers, and then multiplying by 100 to get the percentage.
Actionable Insight: A low churn rate is a positive sign, reflecting a stable customer base, which is essential for fostering continuous growth and ensuring the long-term sustainability of a business. Understanding and monitoring churn rates can help businesses implement strategies to improve customer retention
Profitability:
What it tells you: How well your business converts revenue into profit. This is one of the most important metrics to assess overall financial health.
Actionable insight: If profitability is low, reassess your pricing, product margins, or costs. Identifying your most profitable customers can help target your messaging and offerings effectively.
Average Payment Cycle:
What it tells you: This indicates how quickly you receive payments from customers. A longer payment cycle could impact cash flow and affect your ability to reinvest in growth.
Actionable insight: If payment cycles are longer than desired, consider revising payment terms or offering discounts for early payment. This can also help identify industries or regions with varying payment cycles to guide your targeting decisions.
The key to scaling a business begins with protecting and managing the existing customer base to minimise attrition. This fundamental principle of growth is often misunderstood by companies that focus solely on acquiring new customers. When your customers are happy, they are less likely to switch to a competitor, leading to faster and more sustainable growth for your business.
Mark
