There are a lot of misconceptions about growth. For instance, most business leaders view growth as taking last year’s revenue, setting a target, and using that to predict future revenue. While there are about a million ways to spend money in search of growth, there are only three ways to get money:
A: Acquire a New Customer. You find a new buyer and convince them to give you money. X: Expanding Your Relationship with a Current Buyer. You convince one of your existing buyers to spend more money. R: Retain a Current Customer. You can get money by not losing money; you can convince one of your current buyers not to leave and keep giving you their money.
Growth boils down to one simple equation: Current Revenue - Revenue from Lost Customers + Revenue from Expanding Relationships with Current Customers + Revenue from Acquiring New Buyers = Future Revenue. When the equation is all said and done, growth should look something like this:
So, given that there are only three ways to grow a business, what should business owners be doing? Typically, business owners are guilty of falling into either one of two traps:
● One: Most business owners attack growth as a “backward” process, so they follow AXR instead of RXA. ● Two: Business owners are content with “fine” retention rates and not “fantastic” retention rates.
Sometimes, business people can live in the past. They may not be adopting the new ways and methods of doing business, and instead opting for outdated practices. What The Brookeside Group has studied is that many companies focus on AXR and not RXA. So, why is this a problem? Well, all businesses have a natural life cycle. Successful companies will be centered around an amazing idea, one that can revolutionize an entire market. If you enter a market that lacks what you have to offer, then you will experience rapid early growth. During these early stages, it is time to focus on acquisition, and then expansion and retention.
However, most companies enter a mature market; one already saturated with competing ideas and businesses. Quite frankly, it is difficult to be a fledgling business in these times, as customer acquisition is challenging. The reason being is that most customers already have their needs met by another company. Having a good product or service is not enough nowadays— you have to be noticeably better than any other competitor in order to take away buyers from those companies.
In mature markets, RXA should be the primary goal, not AXR. Businesses need to focus on protecting and expanding current relationships instead of spending a myriad amount of money on acquiring new customers.
This leads to mistake number 2: being content with “fine” retention rates. Let’s say your company’s retention rate is 80%. You would say you are doing pretty well, right? Try to think of it like this: you are losing 20% of your clients every year. Therefore, it will only take 5 years before your average client leaves your company. But, what if you got retention rates up to 90%? Your average client would stay for 10 years! Basically, retention is not linear, it is exponential. By focusing on retention rates, you can expand the profitability of your business, ultimately leading to growth.
Co-written by Alexis Audeh