As an investor in a number of businesses seeking to grow, DPE spends a significant amount of time considering the appropriate performance indicators to monitor each company’s progress in generating sustained and profitable growth. Although each company is unique, we’ve learned there are 3C’s that destroy the value of any growth business: Churn, Costs, and Commoditization.
Customer churn or attrition represents the clients who choose to not renew the service or not purchase the product again. Monitoring the velocity of this change, the growth or contraction in the number of clients that cancel or choose not to purchase your service again, provides insight into your value proposition. Customers and clients often choose to cancel because the product is not delivering compelling and distinct value; it isn’t effectively solving the customer’s pain points. As a consumer, think about products you no longer purchase or subscriptions you do not renew. Why did you stop purchasing those items? When did you stop consuming those services? Churn may result for many reasons, and as a founder, understanding the cause of churn and systematically responding to it is critical to understanding a business’ viability and long-term growth potential. Companies invest meaningful resources in order to capture a customer and should be striving to retain those customers.
Delivering customer value in a cost-effective manner is critical to the success of a business. Not managing costs and not being pro-active about the opportunities to leverage new technologies or systems to reduce costs destroys value. We often observe founders solving performance problems with additional people instead of investing in the foundational systems and resources needed to maintain a cost competitive position in the market. Growing businesses require constant retooling of processes to improve productivity, which thereby increases margins.
The final destroyer of company value is commoditization. When customers believe they can solve their problems just as well by using a competitor’s products or services, you are entering the world of commoditization. Companies that experience commoditization are forced to compete on price and terms, with the value going to the customers. Obtaining and maintaining the voice of the customer is critical to understanding how to avoid the threat of commoditization. After all, your customers are doing the same as you—seeking lower costs, better solutions and ways to address their major pain points.
As the 3C’s destroy value, it is critical to recognize that they’re the product of a company that has lost touch with the voice of the customer, lost focus on customer experience, and lost control of costs. A founder must identify the leading factors that cause clients to churn, costs to rise and commoditization to take root, and actively overcome them. In doing so, a founder must drive change, exerting the effort to continually renew the organization and themselves to prevent the 3C’s from taking root and ultimately drive the organization to success.