Five Leading Indicators of Organic Growth

By Sam Klaidman November 21, 2012

To maximize organic growth, businesses must acquire new customers and get existing customers to stay with them and buy more products and services. Sounds simple, doesn’t it?

If it were, though, we wouldn’t hear so much about businesses declaring bankruptcy or planning layoffs. When determining a company’s potential for organic growth and long-term sustainability, I try to look at these five metrics:

  1. Percent of customers highly likely to refer 

  2. Percent of customers highly likely to repurchase the same products or services

  3. Percent of customers highly likely to purchase other products or services

  4. Ratio of new sales to repeat sales

  5. Percent of sales from referred prospects

Note that I said “try to look at these five metrics.” Very few businesses I have seen actually track all of them. Does yours?
 
Let’s take a closer look at why your business should track each one.

Percentage of Customers Highly Likely to Refer

Whether a business is in the B2C or B2B world, it most likely collects voice-of-the-customer feedback, surveying customers about their relationships. In the relationship survey, one of the “standard” questions asked to calculate the net promoter score (NPS) goes something like this: “On a scale of 0 to 10, where 0 is highly unlikely and 10 is highly likely, how likely are you to recommend company A to your colleagues and associates?” The answers to this question are analyzed as follows:

  • 9 & 10 are Promoters

  • 7 & 8  are Passives

  • 0 – 6  are Detractors
NPS = % Promoters - % Detractors

Without getting into a discussion about the validity of the NPS calculation, I see great value in analyzing the size and, more importantly, the trend of the percent of “10” responses, the top-box percent. (Note: Some organizations call top box the 9s and 10s, but I think that is too watered down.)

The NPS score is not something that can be managed; it is earned by doing many different things right and consequently earning a customer’s loyalty. It is an indication of how often the company’s performance exceeds the customer’s expectations. It shows that customer-facing employees are empowered to do what is in the customer’s best interest, and that their primary job is to take care of the customer.

I was recently working with a software company that was looking for insight into why its year-over-year revenue growth declined for two consecutive years. The company’s NPS data was flat for three years and included some promoters, which yielded a positive NPS. But diving deeper into the data, there was a clear pattern in the customers who downgraded their scores from 10 to 9.

When we looked at the purchase history of the 9s, we saw a reduction of annual support contract revenue. They were still using the product, but it wasn’t given as much importance as in prior years—so they were willing to suffer any consequences resulting from cancelling their support contracts. How long do you think they will continue to use it? When it’s time for a replacement, do you think they will automatically repurchase from my client or shop around?

Percentage of Customers Highly Likely to Repurchase the Same Products or Services

In the relationship survey, you have the opportunity to probe how the customer feels about each touchpoint (e.g., website, sales, installation, training, support and user group), as well as the overall strength of the relationship as it affects different potential outcomes related to your business. The NPS “likely to recommend” question is one such example. Another very useful question deals with the customers’ likelihood of repurchasing more of what they currently purchase. Again, in my opinion, the only response that matters is top box. It’s not like horseshoes, where close counts. Either they will repurchase the same stuff or they won’t. Conversely, there is value in the degree of not purchasing as you can decide whether you can turn the situation around or are better off using resources to work with new prospects.

Unlike NPS, there are many “legitimate” reasons that a customer will not repurchase. For example:

  • You sell capital equipment, and the business only needs one (a 3-D printer for the development department or a blood analyzer for a physician’s office).

  • Your customer changed its basic product design approach like Apple did, when it shifted from PowerPC to Intel.

  • Regulations change or come into force that cut you out of the picture.

I was recently working with the service vice president of an instrumentation company, and was trying to identify why his consumable business was declining. After interviewing a significant number of first-tier customers, I discovered that one of their major distributors introduced a low-cost, fully compatible, single-use instrument, and the customer base was buying it based on price. My client still kept the customers, but was losing the high-margin, low-effort sales due to price. Red flags were raised, and the company is now working to introduce a new item with a value proposition that beats that distributor.

Percentage of Customers Highly Likely to Purchase Other Products or Services

This is another top-box analysis of a relationship survey question. While the previous metric focused on existing products and services, this one looks at other products and services where the customer is not captive or even semi-captive. This time the customer has a clean slate and can evaluate the competitive marketplace. This metric addresses the question of how much will the existing relationship shape the purchase decision.

Let’s say that you and your family drive a Toyota Camry as the “family car,” and you decide to give your 18-year-old kid a new car to take to college. You don’t want to break the bank, yet you want the reliability and other benefits of a new car. Do you first research the Yaris or Corolla, or do you start searching websites for reviewer recommendations? A truly loyal Toyota fan would take the kid down to the Toyota dealership.

The same holds true in B2B. This year, your chief information officer may be buying Dell laptops, and the next flavor of the year may be Lenovo or Hewlett-Packard. This kind of behavior generally indicates that there is no long-term loyalty; purchases are made solely on price. If your marketing strategy is selling reliability, quality or other features of your brand and your customers buy on price, then you have a fundamental misalignment that will limit your organic growth. You need to know this early and raise the flag before the market ignores your brand.

Ratio of New Sales to Repeat Sales

The previous set of metrics looked at the stated intent of your customers. But intent does not always translate into outcomes, so it is critical to monitor the actions taken by your customers.

New sales are usually the joint responsibility of marketing and sales. Marketing attracts the prospects, and sales converts them to customers. However, any business will struggle to grow without a high level of repeat business. And thus, you have this “new-sales-to-repeat-sales” metric.

It is critical to get all parts of the business to agree on what exactly will be measured, and which part of the company will be the data collector/reporter. Here are some examples of how difficult this decision making can be:

  • Your company sells software and services and charges by the seat. Last year, you sold a contract for 50 seats, installation, training and three years of support after the warranty expires. Nice job! In year two, your customer decides that growth requires adding another 25 seats. Is the incremental order new or repeat business?

  • In a similar scenario, the initial order did not include the post-warranty support contract. The contract was later purchased to start at the end of the warranty period. Is that a new or repeat order?

  • The following year, you earn an order from a sister division. Again, is this new or repeat business?

The definition of new or repeat orders must be done up front, or you’ll spend more time arguing than doing anything else.

Once you do start tracking, you will want to go back in history a year or two (depending on the difficulty of getting the data), and start plotting the ratio and trend lines monthly. By looking retrospectively, you will be able to start monitoring your business performance to detect issues that need addressing quickly.

Remember, while tracking new vs. repeat business provides great insight into future growth, the data will result in poor decision making—unless there is also a similar process put in place to track the long-term value of each order for value-to-value comparisons.

Percentage of Sales from Referred Prospects

Earlier, we defined a loyal customer as someone who would recommend us. In addition to feeling good about our loyal customers, we had an expectation that we would garner real referrals from these people. But frequently, we see that real people behave very differently than how they say they will behave.

A short while ago, I was assisting a client who wanted better insight into what his survey data seemed to be telling him. We resurveyed the same customers who had recently participated in their annual relationship survey and, among others, asked these two questions:

  1. How likely are you to refer Client A to friends and associates?

  2. In the past year, have you ever referred Client A to a friend or associate?

We found that many of the high-likelihood referrers had not done so in the past 12 months—not so surprising since B2B opportunities do not necessarily arise that often. More surprisingly, we found that almost half of the detractors had actually referred people to the client. How can we explain this apparent anomaly? I am reminded of a wonderful book I read more than 10 years ago called “Five Frogs On A Log” by Mark Feldman and Michael Spratt (HarperBusiness, 1998). The book opens with child’s riddle

Five frogs are sitting on a log.
Four decide to jump off. How many are left?
Answer: five
Why? Because deciding and doing are not the same thing.
 

Tracking the percentage and the size of your new sales that come from referrals provides you with important insights. A January 2012 Corporate Executive Board study of B2B purchasing behavior showed that about 60 percent of potential purchasers consulted friends, social media and Google to find out about products and companies. They evaluated all that information before reaching out to their top selection. When they called the company, they were not looking for product information but were evaluating the likelihood of the company forming a strong, sustainable partnership.

Of course, anytime you get a referral, you should immediately contact your referring customer and thank them. This positive feedback will encourage him or her to do it again.

What about the people who said they would not refer? You should reach out to them and have a conversation in which you try to understand their apparent anomalous behavior. You never know what gems you may identify that will further your progress toward achieving the company’s long-term growth objectives.

Next Steps

At your next management meeting, ask about the five metrics mentioned in this article. Discuss the importance of focusing everyone’s efforts on really understanding your customers. And then do two more things:

  • Make sure these metrics are included in your corporate or department dashboard, or whatever you use to monitor the health of the business

  • Discuss them at each management meeting, and make sure the top executives share the discussion throughout the company.

Getting this right requires constant work and vigilance by the executive team. In many companies, the culture must be changed from antimatter to gravity, and from working independently to working together as a well-practiced team. The effort required is not easy, but it is absolutely worth the struggle. And the reward is sustainable commercial success.

Sam Klaidman

Sam Klaidman

Sam Klaidman is principal adviser at the Middlesex Consulting Group, where he offers advisory services to small- and medium-business clients in the areas of business planning, services, customer experience and growth. He is widely published in magazines like American Laboratory, Inside Technology Services, Loyalty 360, ExecutiveBrief and Survey.  He can be reached at sam@middlesexconsulting.com.

Looking for the latest in product management news, articles, webinars, podcasts and more?