Compounding Customer Growth

Most success in manufacturing requires consistent sales volumes in order to spread fixed costs over as many units as possible to allow the business to be price competitive by reducing costs per unit.

All fixed costs have a relevant range, meaning the level of fixed costs remains unchanged over that specific range of production or sales volume. Operating at the high end of this range minimizes fixed costs per unit produced or sold. Operating at the low end dramatically increases costs per unit. You can minimize your costs per unit with sufficient sales volumes without making any operational changes.

Compound interest is a powerful investing concept where interest is applied to both investment contributions and interest earned from prior periods. This creates exponential returns over time as the interest earned dwarfs the original investment contributions. An initial investment of $1,000 at 5% annual interest generates $50 of interest earned. That $50 is added to the balance, bringing the total to $1,050. The following year, an additional $1,000 is invested at 5% interest, bringing the total interest earned for that year to $102.50. This continues as interest compounds year after year. In this example, the amount of annual interest earned exceeds the $1,000 annual investment contributions by year 15. This is the foundation of all long term investing.

I use this same investment concept as it relates to creating a Sales & Marketing Advantage.

A Sales & Marketing Advantage allows your manufacturing business to benefit from compound gains as it relates to growing your customer base. Say we start with 100 customers and we grow our customer base by 5% each year. If we maintain this 5% growth rate for 10 years, our total base grows to 225 (rounded). While our annual customer base growth rate was 5%, our 10 year average growth rate is actually 12.5% (125 additional customers over 10 years ÷ 100 starting customer base ÷ 10 years).

The Right Type of Customer

While compounded customer acquisition growth can unlock dramatic increases in financial performance, many manufacturers are facing a production backlog.

Having a strong pipeline of orders is key to keeping costs per unit low. But as important as high production and sales volume is, what matters more is having the right type of order volume. If the majority of what we are producing is for customers with a low level of willingness to pay, we likely have many problems that are causing lackluster financial results.

When the bulk of order volume is for customers who have low levels of willingness to pay, profits suffer. The selling prices required for these types of customers will be on the low end. These customers also tend be difficult to work with. They have zero loyalty and will jump ship as soon as they can get a better price from a competitor. On top of that, they tend to drag their feet when it comes to payment, which is a drag on our cash flow as more cash is tied up in accounts receivable while the bills keep coming in.

So this begs the question, how can we shift our sales & marketing strategy so we can fill our production capacity with customers who are willing to pay premium prices and reap the benefits of compounded customer acquisition growth?

Creating a Sales & Marketing Advantage

A Sales & Marketing Advantage is crucial to increasing profits and cash flow in the short and long term.

It focus on 3 key areas:

• Generating Quality Leads
• Converting Leads into Customers
• Retaining Existing Customers

Improvements in each one will result in a compounding effect that will boost profits and cash flow. From a finance perspective, we're focused on making improvements in the sales & marketing process by focusing on the key performance indicators (KPIs) required to gain insights into the underlying performance of this area in the business.

Key Area #1: Generating Quality Leads

The first component to creating a Sales & Marketing Advantage is to increase the number of quality leads coming into the business.

This requires aligning with the market identified in the Value Advantage. While we want order volume, we want to ensure we're targeting customers that benefit most from the superior value we provide and have a high willingness to pay. By narrowing our focus on these specific segments, we will be able to provide more value to these customers while commanding premium prices, which helps increase financial results.

Focusing only on the segments that align best with our company's production capabilities also helps drive down total sales & marketing costs. Generating a large volume of unqualified leads ties up our sales teams. This time could be better spent by focusing on meetings with quality leads. Conversion rates will increase with this simple change alone.

Measuring the performance in this first area requires establishing KPIs. Here are just a few that can help you measure the effectiveness of your company's quality lead generation:

• Lead Response time: Average time taken to follow up on a new lead
• Leads per time period (day/week/month)
• Sales calls scheduled per time period (day/week/month)
• Lead conversion rate (qualified leads divided by total leads)

The quicker you're able to respond to new leads, the more likely a sales call will get scheduled. Each of the other KPIs helps show where there could be an issue in the lead generation process. If leads are increasing but sales calls are flat, we could be generating too many unqualified leads. These KPIs can be useful for diagnosing any issues in this first key area.

Key Area #2: Converting Leads Into Customers

Once we have increased the number of quality leads generated and sales calls are scheduled, it's time to turn our attention to converting those prospective buyers into customers.

Since we've laid the groundwork by focusing on the customer segments we're able to provide the most amount of value to, our conversion rates should naturally increase. We're attracting customers that have similar needs and problems that our business is well-suited to provide solutions for.

Now our goal is to convert a high percentage of these prospective buyers into paying customer as long as the selling price and payment terms align with our internal requirements. Offering too low of a selling price can cut into our margins, which if we are already operating with a backlog of orders, will put us further behind and create a drag on profits. Offering too long of payment terms will adversely affect our cash flows, putting additional strains on the business and could result in increased interest expense from loan requirements to stay afloat until payments are received.

Here's a few KPIs for evaluating the performance of this key area:

• Sales Cycle Length: Total number of days for all closed-won deals ÷ Total closed-won deals
• Conversion Ratio: New customers divided by qualified leads
• Quote-to-close ratio: closed deals ÷ quotes issued
• Win rate by sales rep: Percentage of leads converted to customers by sales rep

Reducing the average time required in the sales cycle without sacrificing our conversion ratio will help free up additional capacity for our sales team. This helps drive down costs as their base wages and benefits are spread over more client sales. Improvements here would include eliminating wasted points of contact, such as reducing the number of calls back and forth due to not being able to answer specific questions, delays in getting information or quotes to the prospective buyer, etc. Reductions in waste in the sales cycle can help boost conversion rates as we don't waste the prospective buyer's time and we make it clear we're easy to do business with. The sales team can set the tone for providing a great customer experience, another key component of the Value Advantage.

The other KPIs help highlight other issues in the sales cycle. For example, a low win rate by a specific sales rep may indicate they need additional training to boost their performance. A low quote-to-close ratio could indicate we are being undercut on bidding, which may require us to lower our bids to gain more business or find better ways of communicating the value we provide that competitors aren't able to match.

Key Area #3: Retaining Existing Customers

The first two areas of the Sales & Marketing Advantage focuses on optimizing the inflow of profitable customer orders.

Costs typically are the highest in these areas. All the work we've done so far can be quickly reversed if we unable to retain customers. We would have plenty of water flowing from the hose, but our bucket is filled with holes and profits suffer.

This is where improving customer retention comes into play. We want to ensure we're patching up any holes in the bucket.

Most of the work in this key area can be accomplished by creating a Value Advantage. This helps ensure you are easy to do business with via the Customer Experience component and the quality of your production runs is best in class via the Production component of the Value Advantage. Focusing on these areas goes a long way to retaining customers.

We can take this a step further in the sales & marketing functions of the business by creating a process to routinely follow up with customers. Such a process helps identify any possible issues that can be resolved in order to regain declining sales volume from a given customer or even help promote the sale of additional manufacturing services. You may find the feedback from this proactive customer outreach can help guide the creation of new product lines that can drive additional sales to not only that specific customers, but to all other existing customers, further increasing performance.

A couple of KPIs to use to monitor this area:

• Customer Retention Rate = (Number of customers at the end of the period minus number of new customers added during the period) ÷ Number of customers at the start of the period
• Controllable versus uncontrollable lost clients: Evaluating whether a lost client was driven by our own execution error or whether it was outside of our control.

The higher the customer retention rate, the higher your gains from compounded customer acquisition. But in order to improve this rate, we need to understand the underlying reasons for why we are losing customers in the first place. This is where controllable versus uncontrollable lost client distinction comes into play.

A controllable lost client is the result of something we did, either intentionally to stop doing business with a client or an execution failure. Examples of controllable lost clients is a stop service where we chose to no longer do business with a customer due to lack of payment from previous orders. Another example is we did not meet their production standards so the customer opted to leave us. We can implement improvements to prevent future lost clients by improving the quality of our production, reducing defects, etc.

Uncontrollable lost clients are lost clients that we had no ability to influence whether or not they continued to do business with us. There's nothing we can do to reduce this number. Clients go out of business, get acquired by a company that mandates a different vendor, and other factors outside of our control.

Knowing the split between controllable and uncontrollable lost clients gives us the additional context needed to determine whether our retention rates can be improved or whether the lost clients for that given period of time are simply the nature of businesses failing or being acquired.

S&M Advantage Financial Impact Example

To see the financial implications of creating a Sales & Marketing Advantage, let's go over an example, starting with how improvements in our lead generation and customer conversion rates affect the monthly revenue from new clients:

Monthly lead generation improves from 50 to 60 while we also improve our customer conversion rate from 20% to 25%. These improvements alone dramatically increase the amount of new monthly revenue brought into the business. We increase our monthly new customers by 50% (increasing from 10 to 15). At $500 average monthly revenue per customer, we increase our new customer monthly revenue from $5,000 to $7,500.

Let's turn our attention to the financial implications from improving customer retention to unlock compounded customer acquisition growth.

We increase our customer retention rate from 85.0% to 88.0%. This alone increases our monthly revenue from $50,000 to $51,500. Our current state doesn't allow for month over month growth. We lose the same amount of customers as we bring into the company. Our future state however allows for our customer base to grow. Here's how it plays out over a full year:

In this case, we lose the same proportion of our beginning month number of customers while adding 15 monthly new customers. As a result, we grow monthly revenue 16.1% over a 12 month period. We can calculate the maximum number of monthly customers by taking our 15 new monthly customers ÷ our churn rate. Churn rate is calculated as 1 minus our customer retention rate (88% in our case), which comes to 12% churn rate. 15 ÷ 12% = 125 max number of clients. At $500 average monthly revenue per customer, our monthly revenue will be capped at $62,500. We won't be able to grow above this amount unless we either:

• Increase the number of new customers we acquire per month
• Further reduce our churn rate
• Increase our average monthly revenue per customer via price or volume increase

Implementing a Sales & Marketing Advantage

A Sales & Marketing Advantage is key to compounding growth month over month, year after year. Start creating one by following these steps:

• Identify the customer segment that is most profitable and aligns with your production capabilities as identified in the Value Advantage
• Implement KPIs in each of the Sales & Marketing Advantage key areas (generating quality leads, converting leads into customers, retaining existing customers)
• Determine the appropriate targets for each of these KPIs and see which ones need improvement
• Implement strategies to improve the underperforming KPIs
• Monitor results and adjust accordingly.

Our next article is going to be on creating a Cost Advantage and how it can reduce your costs per unit and unlock flexibility to create other competitive advantages in your manufacturing business.

You can watch videos and read newsletters all day, but nothing beats looking at your own numbers. If you're ready to stop guessing and start implementing a clear financial strategy that puts more profit in your pocket, then it's time for my 1:1 Financial Clarity Assessment. We'll deep-dive into your company's financials to pinpoint the exact levers you need to pull for immediate, actionable improvements.

Click the link here to book your assessment today.

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