It is almost an iron law of business that your existing business will erode each year.
Just as disorder increases with time (the Second Law of Thermodynamics), that happy marriage between existing products/services and existing customers is going to fade away. Disorder at work.
We encourage business owners to think about their retention rates for existing business. Let’s say this is 90% in each year. That means you need to find 10% of last year’s sales from new business to stay in the same place.
Now if you also want to grow, and we’re growth advocates, you’ll need to find these sales from new business, too. So, if you want 10% growth, then you’ll need to find 10% of new business to stay in place, and another 10% to meet your growth target – ie; 20%
So what’s new business?
- Taking your existing offerings to new customers;.
- Developing new offerings for your existing customers;
- And, developing new offerings for new customers.
(By offerings, we mean products and/or services).
In general terms, risk and cost increases from (1) to (4) and the strategies required for each is different; ie:
- Before taking on new business strategies you need to ensure that your existing business retention rate (at sensible margins) is kept as high as possible. This means having a high customer relationship focus to maintain repeat purchases. This is your first step and not usually hard on cash;
- This is a low to medium risk strategy. You understand the offering well, you simply need to ensure that the customers you’re targeting have the same buying behaviours as your existing customers. But beware! It is easy to complacently assume this is so and then, painfully, find out it isn’t. You need to research your new customer groups to understand their preferred buying reasons. You also need to ensure that the market they represent is big enough to repay the effort. This is harder on cash – converting new customers costs;
- This is a medium risk strategy. Based on a really good understanding of what else your customers want to buy (and see you as a viable supplier for), you can develop new offerings at an acceptable risk. But you can’t make assumptions. Validation of customer buying reasons and market size are absolutely critical. But you can leverage the advantage you have in existing customer relationships. Even so, this strategy is harder on cash than (B). Building new products and matching these (even) to existing customers is expensive;
- This is the homeland of tech companies and start-ups. It is high risk because you have to get the combination of new customers and new offerings right. You are dealing with two degrees of freedom and it is heavy on cash (and time). Remember those wry observations by product developers about projects taking twice as long and costing twice as much?
So which strategy should you choose?
This is a bit like the Irish joke about where to start a journey from. The newer your business is, the fewer options you have. And if you’re brand new, you’re inevitably in the high risk quadrant.
In broad terms, you want to squeeze as much as possible from your existing investments in offerings and customers. So it’s logical, when developing marketing strategies, to work methodically from (1) to (4).
We encourage CEOs to use this type of matrix to think through where new business has to come from, and then to match this with suitable strategies to manage risk and cost while getting results.