In this last post on the topic of how growing your business can increase value, let’s look at the last two strategies proffered by pundits.
The second way to grow your business is to increase the transaction frequency. This strategy relates to improving customer loyalty and increasing customer retention. It is nearly always more expensive to obtain a new customer than it is to get an existing customer to do more business with you. Fred Reichheld, in his book, The Loyalty Affect states that “a 5 percent improvement in customer retention rates will yield between a 25 percent to 100 percent increase in profits across a wide range of industries.” While I’m not sure of Mr. Reichheld’s math, certainly if the marketing costs to get an existing customer to do more business with you are minimal, then all that gross profit goes right to the bottom line.
The first way to grow your business is to increase the number of customer (of the type you want). Not all customers are created equal. Analyze what customers are the most profitable, whether by market segment, product segment, or some other classification, and focus on obtaining more of these types of customers. Some even suggest reviewing your customers annually, classifying them in terms of A/B/C/D and then “firing” your D clients. The amount of time and money you spend on them can be better spent on developing more profitable relationships.
So, going back to our original discussion of value (using the simplistic model below and assuming a stable operating company), growing your business prudently by using the three revenue growth strategies we’ve discussed, will increase the value of your company. How? Increasing the expected economic benefit, whether measured in profits or cash flow, without increasing the required rate of return (or the risks of those economic benefits occurring) and robbing the future’s growth.
Value = Expected Economic Benefit* divided by (Required Rate of Return less Expected Growth)
*Economic benefit can be some measure of income or cash flow
Let us know if we can help you discover the value of your company and assist you in identifying what drives its value.