November 21, 2005

Are You Renting Your Customers?

Have you heard about renting customers? Years ago I learned the concept. I was responsible for sales and marketing at a software company. This organization enjoyed high margin sales and provided its customers free bundled services. Services that reduced the complexity of software management.

As is often the case with technology adoption, complexity inexorably evaporates. The software company had difficulty justifying its margins to increasingly more knowledgeable buyers. The business environment changed forever. In response the company transformed its approach by dropping prices and charging for services it normally provided for free.

The results were dramatic. Sales increased for the first 3 months. Then the unthinkable happened...revenues dropped. We were alarmed to say the least. After reviewing the data it became clear why -- When competing for business on price we were only renting customers until a lower price came along. Plus we were paying the rent from our profits!!!

Within the next 12 months the company was acquired by a low cost competitor. Does this sound familiar? Are you renting customers? What can you do to get your business to a more solid business model?

Here are 5 easy things you can do to enable loyal customer relationships:

1. Identify your "thought leader" clients and talk to them every month. These are you top revenue/margin accounts and ones with the highest growth year over year;
2. Survey every one of your customers every six months. Use the survey not just to identify problem areas, but also ask clients for new product/serivce ideas. Review results and implement action plans with your management team;
3. Scrub all your accounts monthly. Crunch the numbers - track month to month variances in revenues and margins. Go through your sales funnel in detail. Review lost accounts and understand why they left;
4. Identify your top 10 competitors. Categorize them (strong or weak offering). Track and review their capabilities, customers, financial results, offerings. Do this every month;
5. Conduct Market/Technology Reviews. Track product/technology lifecycles, review/identify market trends. Look out for the "tsunami" that will disrupt your business. Do this every six months at a minimum.

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