When most middle market business owners think of growth, they think of sales or profit growth. But in reality, the most valuable type of growth is enterprise value growth. Value was once determined by a multiple of EBITDA, adjusted by customer concentration risk and future capital required. But thinking on that has recently changed. Enterprise value today is determined by softer assets like customer relationships. In fact, 65% of enterprise value is determined by looking at your loyal customer base and the lifetime value of those customers, which includes profit margins, retention rates, and referrals.
So, in order to grow your enterprise value, you need to set top-line revenue aside and focus on growing your base of loyal customers.
Though it might be tempting to grow your customer base by going out and chasing new prospects, there is enormous untapped value in existing customers. But to unlock that value, you need to establish a system for measuring the strength of your customer relationships, identify different categories of customers and dig into what drives the behaviors of each group of clients. You can then use that information to trigger desirable behaviors in all your customers, and any new customers you may acquire in the future.
Start by looking at a sample of your customers, which you can later use to create models and make projections about the rest of your customer base. Look at the relationships you have with each of these customers and identify the strength of these relationships, dropping customers into three buckets: loyal, neutral, and vulnerable.
Note that the strength of your relationship with a client is about more than repeat purchases. You should be looking at their average spend, total spend, margin, the retention rate, lifetime value, referrals, and the share you’re getting of their total spend. The higher these numbers are, the more loyal the customer is.
Then, you’ll want to examine these numbers over time to see how customer loyalty and vulnerability are changing and try to determine if any patterns exist.
Once you’ve broken your customer sample into three categories, dig into the data and conduct research via surveys and interviews to determine what drives customer behaviors. You’ll specifically want to look at how customers evaluate your company and your product or service. You’ll also want to look at what distinguishes your most loyal customers from your most vulnerable customers. Are they buying different products? Did the vulnerables have more customer services issues? Are you communicating with one group more than the other?
You can then use all that data to determine how to turn your vulnerable customers into loyal customers and how to get more spend and margin (by creating the value they point you to) from your most loyal customers. You can also start to get a picture of what a loyal customer looks like, so when you do chase new customers, you can focus on ones that look like your most loyal customers.
After segmenting your customers and gaining an understanding of what drives loyalty, you need to establish a strategy for delivering more value to customers to actively move vulnerable customers to the loyal category and get more out of your loyal customers.
For instance, if you found that vulnerables are calling customer service more than loyals and neutrals, you can then identify vulnerable customers based on how often they call in. Then, dig into why they’re calling. If there’s a common thread, try to proactively solve for the problem they’re experiencing. If customers are frequently calling in because they can’t figure out how to make changes in their client portal, do what you can to make the experience more intuitive and user friendly.
An important note here is to focus on making operational improvements rather than running campaigns to win back dissatisfied customers. This will create more long-term value for customers rather than acting as a quick-fix, band-aid solution.
While listening to your loyals, pay attention to their aspirations. Are there opportunities to create more value for them? Don’t ask direct questions like, “if we did this would you buy more?” Ask questions about how they use your product and service—and what they combine your product and service with to achieve their desired goals. Probe their goals—are there aspirations that they are not articulating but inferring?
Finally, it’s time to put your strategy into action, making the operational, product, and service improvements you need to win over customers and keep them around longer. By taking this last step and making real improvements to your business, you’ll not only grow, but you’ll also open the door to scale.
If you need help conducting research, analyzing data or creating and enacting a strategy for operational improvements, the experts at FortéOne are here to help. Contact us to learn how we can help you convert your most vulnerable customers into brand advocates and then maximize the value of each client.
Contributor: Aldy Keene, Research Leader
At FortéOne, we’ve been on the forefront of change as thought and implementation leaders for more than 20 years. Our mission is to help Family and Privately Held Business owners as well as Private Equity and Family Office investors become performance leaders in their respective industries. We are more than consultants—we are problem solvers who work side-by-side with you to deliver a business transformation that improves performance and accelerates change in your middle market company.