It’s been a while since I blogged about growth in a business and while reading a book the other night my memory of a blog post I’ve been meaning to write for ages about growth and why so many businesses fail to achieve it consistently sprung to my mind.
So here the deal, as you grow sometimes it gets harder to keep growing.
What? Doesn’t growing mean there’s more opportunity to grow through things like referrals? Yes it does, and we will touch on the importance of referrals in another post but first let’s get the whole growth kills growth thing out the way.
So imagine on day one you already have 1 client and you spend £1000 on marketing and for that you get 10 clients. You’ve achieve a CPA of £100 & 1000% growth in a single day – great stuff!
Imagine then being on day 100, you now have 1000 clients and you still get 10 new clients for your £1000. Your CPA is still £100, but your growth is now down to just 1% – ouch.
Now of course you’re still growing, but to an outside world that looks solely at growth figures, without context, your growth is slowing down; in fact it’s alarming. Maybe you’ve over cooked it? Well no you haven’t but that isn’t going to stop people thinking it.
In this event then, in order to maintain steady growth, you’re going to have to do some maths. For example if you were going to achieve the same 1000% growth on day 100, you’d need to spend the equivalent of £1,000,000 to reach it.
Steady growth then it seems is dependent on linking your marketing spend to the number of clients you have. As client numbers go up, so too must marketing spend or else your number will plateau and questions will be raised.
Yet how many times have you seen static annual budgets that expect marketing spend to remain constant throughout the year? How many times have you seen marketing spend take a hit as soon as profits are down?
It’s a sad fact that most business leaders don’t understand the reasons for growth and how as businesses grow they need to increase the resources they dedicate to growth in order to keep it at a constant level.
Now that I’ve explained the basics, let me throw in some extra info that will take your nice straight line graph linking spend to growth and make it more of an ever increasing curve. The truth is twofold:
- As you search for more sales, the marketing cost for attracting those clients will go up (so your £100 CPA will probably be about £250 by the time you get to £1000 clients – which means you’re profit levels from each client will also drop as you expand).
- As the number of clients you gain goes up, so too will the number of clients you lose (this is called your churn).
While the first problem is a matter for the accountants to work out in your budget (at some point it will be pointless to add more clients because the cost becomes more than the profit you could make), the second one is something that the sales team can affect heavily.
Churn is a hidden problem for many businesses. You see if you have a churn rate of 5% per month (e.g. 5% of your clients leave each month) then with 10 clients you’ll lose just 0.5 clients per month. Get just one sale and you’re growing!
But with 1000 clients and a churn rate of 5% you will lose 50 clients per month which means you need to attract 50 clients just to stand still!
Now you might have the best sales team in the world, but if you’re gaining 40 customers and losing 50 and that means you’re shrinking.
If sales teams want to grow fast then they need to get the number of customers leaving down to zero.
Companies that don’t report on churn are fools because it hides the true growth rate of any business. Pure sales without churn is simply a vanity stat designed to make companies feel good about themselves in board meetings; yet you can be sure it’s the stat that’s the most supressed in any board report.
Churn is often something that serves as a sticking point between service and sales. Whose fault is churn after all? Worse when it comes to sorting it out the question often looms as to who will take responsibility for it; usually resulting in no one taking ownership of churn at all.
In truth then if you want to grow consistently, when figuring out what your marketing spend should be companies need to:
- Set an acceptable growth rate for the year
- Predict the churn rate for the year
- Work out the number of sales needed to counter act churn and achieve your desired growth each month (factoring in the new company size at the end of each month)
- Predict the average CPA to achieve that CPA (and target teams bonus around beating it) building it into the budget.
- Allow marketing spend to rise each month to facilitate that growth rate
There is however a cunning ploy that all businesses can use to offset churn and keep those pesky CPAs down. If churn kills growth, this this little trick is the way to turbo charge it; yet 99% of businesses get it completely wrong…
But that’s next weeks post which you can read here “Evangelists create growth“.
