Is your company doing well – or are you measuring the wrong things?
Last week, I spoke at a conference in Arizona, and at the evening reception before the education day, I had the occasion to converse with a business owner who was very proud of his performance on his “KPI’s” – his Key Performance Indicators. He recited survey result after survey result, all very positive. I couldn’t blame him for being proud. I asked him, “So, what’s your customer retention rate?” “Eighty-five percent,” he said proudly.
As you have probably already figured, an 85% retention rate means a 15% customer loss rate – which sounds bad. That’s because it is bad. However, it’s worse. His company runs on contracts of three to five years, which means that in any given year, only 20% to 33% of his customers are even empowered to make a decision to stay or leave. Hence, his real “customer retention rate” hovers somewhere between 25% and 55%; that represents the percentage of customers who are able to make a positive decision to stay and in fact stay. Oddly enough, retention rate was NOT one of his KPI’s. It occurs to me that too many businesses measure the wrong things. Let’s talk about doing it right.
A true “Key Performance Indicator” should be a real measurement of how your company, department, or people are performing at any given moment. By “real,” I mean that it should be something that you can hang your hat on. Unfortunately, too many businesspeople (like my contact above) hang their hat on customer surveys. That’s not real.
Customer surveys ask about an experience in the abstract; i.e. detached from other business decision making criteria. Here’s an example: I’m a loyal Southwest Airlines customer. I have a one-hour rule; if Southwest can get me within a 1 hour drive of my final destination, I’ll fly Southwest over another airlilne that can get me closer. That’s because Southwest consistently delivers on my expectations. They get me where I’m going on time, my baggage shows up (with one past exception), an the people are pleasant and responsive.
Every now and then, however, I have to go someplace they can’t take me. One such instance happened about a month go. After I flew, the airline sent me a survey asking about my experience. I responded honestly – my experience was fine. Yet, as I’m writing this, I’m in the airport waiting for a Southwest flight, having chosen Southwest over that airline (as well as a few others). So, did I lie on my survey? Nope. I don’t lie on surveys. However, their survey did not require me to make a purchase to validate my results. So, I’m sure I helped their “KPI’s,” but I’m buying from their competition.
Repeat after me: Market Research isn’t real until you ask someone to write a check. I’ve noted before that one of the most well-researched product launches of the 20th century was the Edsel; yet, the Edsel was a flop. The Edsel sounded good to buyers until they were asked to buy.
Hence, your KPI’s should be based on real transactions that ask customers to make an investment – if not in cash, then in their time and credibility. Here are a few examples:
Customer Decision Rate: Your Customer Decision Rate (or CDR) should measure the customer’s desire to buy from you (or continue to buy from you) in the framework of other potential buying decisions. As you’ve seen above, my acquaintance’s CDR landed somewhere between 25% and 55%. 85% is bad; those numbers are ugly. Incidentally, this number should be different than your proposal close rate, because it should only pertain to current customers. Your current customers are your best barometer of your ability to keep your customers happy; new customers are different.
Customer Internal Growth Rate: This should be a measurement of how much, over time, your customers’ business with you grows. Again, this should be separate from your new customer selling efforts. Are your salespeople able, on a regular basis, to expand your business within current customers – or are those customers making a decision that you have not earned the right to do more business with them? Retailers have a measurement called “Same Store Growth” that measures how much their existing stores grow their revenue, independent of new store openings. This is a parallel to that number. If you do it right (have a high retention rate and a high internal growth rate), your Internal Growth Rate can offset customer losses, meaning that new-customer sales become pure growth.
Referrals and Testimonials From Current Customers: Referrals and testimonials are another measurement of your customer pleasure. While these do not (typically) ask the customer to invest money, they do ask the customer to invest their time and credibility. In some cases, this can be a more significant investment.
Price Index Over Time: You should be measuring the average prices, or the average profit, achieved in your ongoing customers over time. Some industries (including the one referenced above) have a “rollercoaster” price effect. The account is signed at a low price, and then the company increases prices periodically over the term of the contract. Then, at renewal time, the incumbent must requote prices at a low level to retain the business. Ideally, we want the customer’s price and/or profit to consistently (if slowly) increase over time.
Ther are, of course, many other KPI’s that you can use. We haven’t even touched the subject of new customers, for instance. The ones I referenced are extremely important because they all referencetransactions and price. Transactions and price are simply ways of quantifying the value of your relationships with your customers.
If you’re measuring the right things, you’ll get the right knowledge; if not, you may have great “indicators” without having real success.
