A Visual Approach to Evaluating Customer Value
The Business Logic of Investing in Customer Success
The logic of investing in customer success is straightforward ─ at least at first blush.
More customers means more revenue.
Customers × Dollars/Customer/Year = Dollars/Year = Revenue
So,
↑ Customers = ↑ Revenue
(holding other variables constant).
The level of customers over time is a function of the rate at which prospects are converted into customers relative to the rate at which customers are lost.
In other words,
↑ Converting and/or ↓ Losing → ↑ Customers
If the cost of acquiring or converting a customer goes up, one should pay particular attention to reducing the rate at which customers are lost.
Wow, this is easy! If the cost of doing something goes up, we look for alternatives. In this case, that means reducing customer churn.
Customer success expenditures reduce churn and, thus, increases revenue.
↓ Losing → ↑ Customers → ↑ Revenue
So, spend more money on customer success and you’ll grow your top line. It couldn’t be simpler. Right?
Revenue Isn’t Value
Well…as the saying goes, “It’s not what you make, it’s what you take home.” The revenue growth that comes from improved customer retention isn’t free.
Effective and consistent customer success efforts require time and money. While revenue over time increases value, expenses reduce value. How might one go about assessing the trade-offs among customer acquisition costs, customer success costs, and business value?
Let’s Start with a (Different Kind of) Visual Model
In another article, we introduced something called a causal loop diagram in order to clarify how investments in customer success have the potential to drive three virtuous cycles:
- Happy customers are loyal
- Happy customers buy more
- Happy customers accelerate word-of-mouth referrals
In the video above, we’ve taken a step toward evaluating the “happy customers are loyal” effect with a bit more rigor. It’s just a step, though. We’ll add quantitative flesh to these conceptual bones in later posts. Hopefully, though, this will be enough to get you started thinking about your business decisions a little differently.