Another way to grow is by enhancing the quality of your offering and improving the customer experience. Satisfied customers are more loyal (improved retention) and it also increases organic word-of-mouth (WoM) referrals.
WoM is about encouraging customers to actively and intentionally (unlike VIRAL which happens as an involuntary byproduct of usage) share or refer. All elements of STEPPS can be applied here as well. Eric distinguishes the two as distinct but considers WoM a form of VIRAL. I’ve intentionally included WoM under STICKY as opposed to VIRAL because I interpret VIRAL primarily as increasing exposure and providing prospects with an experience. However, with WoM, if you don’t offer a good solution or a high level of service, people won’t make referrals, no matter how much you encourage them to do so.
It’s important to remember that WoM and retention are interconnected; focusing on one without the other won’t drive substantial growth. Furthermore, WoM isn’t constant; it is proportional to the size of your customer base. Therefore, by improving retention, you maintain a larger customer base, which also leads to more WoM. It starts to compound and you experience exponential growth when your WoM growth rate exceeds your churn rate (a.k.a. attrition rate, the rate at which your customers leave. Downgrades are also a form of churn). Notice the use of the word “rate” here, which is expressed as a percentage (%), not as an absolute number. For example:
If you have 100 customers and 10 leave this month, churn rate = 10%
If you have 1000 customers and 30 leave, churn rate = 3%
Churn increases as you scale, which is normal. Having 30 customers leave versus 10 isn’t a bad thing as long as your overall churn rate (%) is maintained or lower, as WoM will also grow as you scale.
To learn more, read this post by Lars Lofgren.
Some businesses can’t avoid high churn, despite high customer success/experience (e.g., dating sites, job placement agencies, coaches). Their very nature of problem-solving leads to customers leaving once they’re satisfied. That’s completely normal and you shouldn’t attempt to force a subscription model on a business that isn’t fundamentally a subscription business with ongoing value. Instead, focus on other metrics like:
- #of qualified leads each month
- Close rate
- Customer success rate
- Referral rate
Besides increasing retention, you can also reduce churn and even achieve a negative churn rate through upselling & cross-selling. A negative churn rate occurs when you generate more revenue from existing customers than the revenue you lose due to cancellations and downgrades.
Here’s a visual elaboration of negative churn:
The graph above illustrates the growth rate of a company with a constant acquisition rate (lines indicate new customers acquired per cohort, i.e. # of new customers each month):
Left: With positive churn, the graph plateaus, ultimately creating a growth ceiling. More revenue is lost through cancellations and downgrades than the revenue generated from existing customers.
Right: With negative churn, you observe the characteristic hockey stick trajectory representing exponential growth. The increased revenue generated from existing customers exceeds the revenue lost through cancellations and downgrades.
Although we’re examining ‘hockey stick’ financial projections, it’s perfectly fine not to have or aspire to achieve them. Not every business needs to or is equipped to handle such rapid growth. Exponential growth of this magnitude usually necessitates venture capital and frequently disrupts the organization if it hires too rapidly and implements too many new initiatives.
To summarize, if you’re prioritizing sticky as your main engine, increase:
- Retention by
- Improving your solution
- Enhancing your customer’s experience
- Being strategic and intentional with your brand identity
- Nurturing community
- Integrating with their existing workflows, processes, and other solutions.
- Average Revenue Per User (ARPU) or Lifetime Value (LTV) of your customers through upsells and cross-sells.
- WoM (improving your solution and customer experience will also contribute to this): make it easier for customers to share and make referrals (recall STEPPS for some ideas).
ASSIGNMENT
Besides WoM and retention, what improvements would you like to make to your offering or customer experience? What common complaints or requests do your customers have? Use these to identify potential customer experience enhancements and value-added upsell or cross-sell opportunities.