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FEED THE STARTUP BEAST
A 7-Step Guide to Big, Hairy, Outrageous Sales Growth
By Drew Williams, Jonathan Verney
McGraw-Hill EducationCopyright © 2013 Drew Williams and Jonathan Vemey
All rights reserved.
Understanding Your Beast
What you'll find in this chapter:
Beast or bust?
The one question you must ask
Fans, Fence-sitters and Critics
A home stager sees the light
A chocolate manufacturer gets a sweet gift
A software developer finds his calling
We want you to stop marketing.
This very minute.
Until you've asked a question. In fact, it's probably the single most important question you'll ever ask if you want your business to grow outrageously fast. It may seem hard to believe at first, but by asking your customers this question, you can virtually predict your company's future growth.
This is The Question:
How likely are you to recommend my [product/service/company] to a colleague or business associate?
Sounds innocuous enough, doesn't it? Well, looks can be deceiving. Remember those three Ps we mentioned earlier—Patience, Persistence, and a Plan? Well, all the patience and persistence in the world won't matter if the third P—the Plan—isn't up to snuff. The Plan is the secret sauce that's going to make your Beast perk up, smack its lips, and become a winner. And before you can get your plan in motion, you must find out if your base—your customer base, that is—is stable enough to support it. Knowing how your customers really feel about you is essential, because they're the ones who'll tell you what the future holds and whether you're going to be a Beast (yeah!) or a bust (forget about it!). That's why you have to ask your customers the question: How likely are you to recommend my [product/service/company] to a colleague or business associate?
It's a Big, Hairy, Outrageous Question to ask. The average entrepreneur doesn't want to know the answer because it may disappoint or because it'll just confirm what he or she already knows.
So why bother?
Because you're not the average entrepreneur. Because you're beginning to realize that how you interpret the answers may enlighten and guide you like nothing ever has before. The reality is, not all of your customers are the same. Some may like you very much. Some would switch to another vendor under the right circumstances. And some aren't overly fond of you at all and may be in the process of dumping you or worse—badmouthing your product or service all over the Internet. (This happens more often than you might think.)
SHOW ME THE LOVE
If you're like most entrepreneurs, you'll likely find three types of customers in your business: Fans, Fence-sitters, and Critics.
1. Fans are your most loyal and enthusiastic customers. They love you.
2. Fence-sitters have no particular loyalty to you one way or the other.
3. Critics aren't just disloyal, they cost you money. They're dissatisfied, demanding, and costly to service. And they're very capable of spreading negative word of mouth about you.
Critics can destroy your Beast if there are too many of them. You want to make sure you have as many Fans and as few Critics in your cave as possible because:
More Fans = faster growth
More Critics = slower growth
This may seem obvious, but what's not so obvious is the contribution each customer type makes to your revenues. Studies have shown that "totally satisfied customers" (Fans) contribute 2.6 times the revenue of "somewhat satisfied customers" and 14 times more revenue than "somewhat dissatisfied customers." At the same time, "totally dissatisfied customers" (Critics) were actually found to decrease revenue at twice the rate that Fans contribute revenue, because those Critics typically have much higher service costs, produce lower revenue, and can damage market growth through negative referrals.
Fans Will Grow Your Beast
Fans generate 2.6 times the revenue of "somewhat satisfied customers."
Fans generate 14 times the revenue of "somewhat dissatisfied customers."
Critics Can Mortally Wound Your Beast
Critics decrease revenue at twice the rate that Fans contribute revenue.
Too many Critics and not enough Fans spells disaster.
The key takeaway is that you can have twice as many Fans as Critics and still be losing ground! That's why you need to know who's in your Beast Cave, and fast. And yet, most businesses don't. When Bain & Company surveyed 362 American companies in 2005, a whopping 80 percent of those who responded declared their companies were delivering a "superior experience" to their customers. But when Bain asked the customers themselves, only 8 percent agreed (see Figure 1.1). That's a huge, frighteningly hairy, 72-point gap!
To make matters worse, the average U.S. business loses up to half of its customers every five years. In contrast, the most profitable companies lose less than 10 percent of their customers every five years. This strongly suggests that the most profitable companies have a better customer mix (more Fans, fewer Critics) than average companies. If you want to grow, you can't do it without making sure that your customer mix is working for you.
So what has this got to do with your marketing? Everything! If you don't have enough Fans in your Beast Cave, there may be a problem with your business. No matter how great your need to boost short-term sales, running a marketing campaign with too few Fans in your fold will not likely be the best use of your time, people, and money. In fact, if your product or service is broken in some way, exposing more people to your "broken-ness" sure won't help. It's almost always better to address the problem first.
On the other hand, if you discover you have a Beast Cave full of Fans, congratulations! You'll want to ramp up your marketing programs. In this case, the next thing you'd want to do is profile your cave-guests so you can run smarter, more productive marketing programs. But before we get ahead of ourselves, we'd like to introduce you to a few people.
THE THREE ENTREPRENEURS
Say hello to Sophie Growmore, Paul Treadwater, and Karim Stardupta, our three entrepreneurs. Outsiders might say they're pretty successful since Sophie and Paul are over the $1 million mark in sales, and 23-year-old Karim runs a software startup. But revenue growth has stalled at Sophie's and Paul's companies, Karim is looking for customers, and none have a growth strategy that really passes the sniff test. That's where we come in. Throughout this book, you'll follow our three entrepreneurs as they guide their Beasts up the road to Big, Hairy, Outrageous Sales Growth. A quick note: Keep in mind, Sophie, Paul, and Karim are fictional composites of real-world clients (for confidentiality reasons), but their struggles and stories are absolutely real. Let's meet them and see how they found their way out of the marketing wilderness.
Sophie Growmore: 29, Home Stager, Entrepreneur
Sophie's been an entrepreneur since she was six and began helping her interior decorator mom charm clients and pick up checks. After college, Sophie put her entrepreneurial talents to work building Staged2Go, a successful home staging and design business that prepares homes for sale within her local market.
The key to Sophie's business success to date has been a strong and loyal base of real estate agents who have come to know and trust her over time. She's always grown her business organically, so she's been able to pace her investment in her business with the growth of the business itself. But Sophie's sales peaked at $1 million annually and showed no signs of increasing. And Sophie wanted to grow big. In order to grow big, it appeared Sophie needed to expand her business into new markets, first locally, and then into new cities across the country—markets she knew nothing about. To do this, Sophie would have to make sizable up-front investments in local warehousing and inventory, as well as hire staff to manage those locations—all before supporting revenue was available.
When we were introduced to Sophie, she was uncertain how to rapidly attract new agents in the new markets. We asked her if she knew how many Fans she had in her customer base. She gave us a withering look, so we explained the importance of knowing her customer mix (percentage of Fans, Critics, and Fence-sitters) and its correlation to long-term growth.
She agreed to conduct a simple one-question survey to determine her Beast Potential score. Beast Potential is an extremely powerful predictor of a company's current and future sales growth determined by your customer mix. This is the question she asked her real estate agent customers:
How likely are you to recommend Staged2Go's home staging services to a colleague or business associate?
For the one-question, web-based survey, her customers were given a scale of 0 to 10 to express their support (10 being "extremely likely"). Any customers who indicated 9 or 10 were considered Fans. Customers who indicated 7 or 8 were Fence-sitters, and customers who scored 6 or less were considered Critics.
Sophie began to understand that this powerful little survey, originally devised by Frederick Reichheld of Bain Consulting Group, could prove invaluable in obtaining critical insights into her firm's marketing health and future growth potential. Because the survey had only one question and was targeted to her customers, Sophie elicited a 40 percent response. She was happy as a clam—that is, until she reviewed the responses. Our post-survey conversation went like this:
US: Only 33 percent of your customers love you.
SOPHIE: I don't get it. Our agents rave about the work we do. Almost every job!
US: But sales are slowing. The referrals are slowing.
SOPHIE: That's why we're going after new markets.
US: Or maybe there's something else going on.
The next step was to dig a little deeper and follow up with the other 67 percent—the 37 percent who gave her a firm 7 or 8 (the Fence-sitters) and the 30 percent who gave her 6 or less (the Critics). Our next conversation went like this:
US: It seems the majority of your customers love your staging work but really don't like your billing and collections. Apparently, there have been a lot of screw-ups. As a result, you received more 7s and 8s in the survey than your staging success would suggest.
SOPHIE: Accounting is really boring.
* * *
In the rush that is her business, it was easy for Sophie to get caught up in the success of her design work and overlook operational issues. If Sophie had charged ahead with a full-blown expansion of her business, there's every reason to believe that she would have found sales growth a lot slower than she expected. Sophie would have spent a lot of very dear money exposing her weakness to many more agents. That would have been the path to a saw-toothed sales curve, not a smooth, upward-to-the-right, hockey-stick sales curve that makes entrepreneurs so happy. Armed with fresh insight, Sophie took a step back, hired a better-qualified bookkeeper, and decided to get her operations in order before contemplating expansion.
Paul Treadwater: 44, Chocolate Maker, Entrepreneur
Sophie's story is echoed by Paul Treadwater's. Paul manufactures and packages gourmet chocolates under his own Treadwater Chocolates brand, which he sells to thousands of small retailers and corporate gift basket companies across the country. Paul also has a profitable private label business going with large department stores and specialty food retailers. Like Sophie, his sales were stagnant, even though Paul himself was a whirling dervish who always seemed to be just one step ahead of a heart attack. What's more, Paul's contract sales force was aging, and new, younger salespeople weren't being attracted to the profession. His sales connection to his thousands of customers was on the wrong side of the growth curve.
Although Treadwater Chocolates generates approximately $5 million in annual sales, profits are continuously eroded by margin pressure from his retailers on one side and significant increases in ingredient costs on the other. Paul is chief product development officer, chief large-account salesperson, chief operations person, and chief cheerleader. Trapped working "in" the business, he has almost no time to stand back and work "on" the business. He seems to be stuck on a treadmill that he can't get off.
We had Paul do the one-question survey. Unlike Sophie, he was pleasantly surprised by the results. His Beast Potential was significantly higher than the average for his industry. What's more, the survey unearthed another compelling insight. His highest scores came from corporate gift basket companies.
Our post-survey conversation with Paul went like this:
US: So you have high Beast Potential, but you're struggling to be profitable. What do you think it means?
PAUL: It's the problem I've had from the beginning. Everyone loves our product, but the cost of selling to and servicing so many small retailers is really high. We do a good job, but we make no money. And yet small retailers are where most of our revenue comes from.
US: What about the gift basket companies?
PAUL: That one's interesting. Our cost of sales to gift basket companies is quite a bit lower. They don't require as many SKUs, and our product seems to be perfect for them—beautifully packaged but well-priced. As a group, they're far lower maintenance.
US: Makes sense. The perceived value of a gift basket is more important than the quality of any one component. The sale is less product-focused.
PAUL: There's something else. For whatever reason, gift basket companies are more Internet-savvy than our small retailers. They love our partner ecommerce site.
US: How big is the corporate gift basket market?
PAUL: Quite substantial—around $3 billion annually—although it is seasonal.
US: How big is your share of the gift basket business?
PAUL: I'd say minuscule.
US: Looks like you may have a market opportunity to test out.
PAUL: Looks like.
Karim Stardupta: 23, Software Developer, Entrepreneur
Karim has five customers. He started his business in his bedroom when he was looking to buy a new camera online. He used several comparative pricing websites and was disappointed by the results. He knew he could do a better job. After a little investigation, he realized there was no money in a consumer price comparison site—there were too many, and they were all free. He decided he would rather eat his keyboard one letter at a time than develop yet another high-traffic, zero-revenue website. But speaking with his neighbor (and soon-to-be first customer), a retail merchandising manager, Karim discovered that retailers were getting crushed by the price transparency brought on by pricing apps on smartphones. A shopper could manhandle a product in-store, price-check it, and buy it cheaper elsewhere—all in a couple of clicks. Retailers needed to be able to see what their competitors were pricing like products at, so they could manage their pricing policies accordingly. Karim had a novel idea of how all that web-based pricing could be pulled together and presented to a retailer in a way that would allow the retailer to make better pricing decisions. And so BigFatData was born.
After nine months, Karim had signed five large retail customers, all on the back of his success at helping his neighbor deal with his price transparency issues. The sales had come quite organically, through referrals, word-of-mouth, and a bit of free press. He now had 10 employees and an office, but he had noticed that the sales weren't just walking through the door in the same way anymore. He had also noticed that several other firms had gotten wind of the same aching retail pain and had built their own companies, offering similar solutions. Karim decided it was time to ramp up his marketing. Before doing so, however, he wanted to step back and try to get a better understanding of what caused his initial success and what that might tell him about his future growth plans.
Excerpted from FEED THE STARTUP BEAST by Drew Williams, Jonathan Verney. Copyright © 2013 Drew Williams and Jonathan Vemey. Excerpted by permission of McGraw-Hill Education.
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