Measuring R Success

How can we measure the true strength of our client relationships? What makes our business truly sustainable? How can we build our performance today and increase our enterprise value for the long term?

We can start by paying attention to the Four Rs. When it comes to measuring the long-term strength and sustainability of a business, our most important benchmarks should absolutely include:

Returns: How profitable are our customer relationships? What percentage of our customer base is generating a profitable return—fully burdened—to our company? Beyond measuring the returns on specific products or services, what are our returns on investment, staff time, and relationships? Do we fine-tune our sales and marketing to focus on the kinds of clients who generate strong returns, or do we use a scattershot approach and simply assume we will make a profit, somehow?

Retention: Making a profit isn’t enough. We must make a profit while keeping clients happy. That translates into retention. If we lose 10% of our clients in a year, we have to grow 10% to stay even. Why do clients stay, or leave, and what impact does that have on our other expenses? The time and dollars we spend replacing lost accounts could be employed better, somewhere. Customer turnover is one of the largest drags on corporate performance and progress, as it necessitates spending to replace what we once had and it demands management/staff time that could be invested in building the company.

Reliance: Do customers depend on us increasingly as our tenure grows, or do they reduce their reliance on us over the course of our relationship? Reliance is a reflection of trust that has been earned, competence that has been demonstrated, and client needs that are met consistently. It’s a key component of client lifecycle analysis, the ultimate proof of claims that “customers come first.”

Referral: How much new business comes through our satisfied clients? Every business owner can point to a specific case of a successful referral, but there’s a big difference between an anecdote and a pattern. Is the company seeking referrals regularly and are clients responding with introductions?  Are customers willing to attach their reputations to ours by recommending us, or do they merely say, when asked, that they will give us a reference?

The Four Rs offer a simple, but powerful, insight into the quality, strength and enterprise value of the businesses we are building. By focusing on the value created through client relationships, they highlight the strengths that exist independently of specific products, pricing and industry groups.

Notable by its absence here is a fifth R: Revenue. Revenue is the starting point, and the ending point, for many assessments of customer relationships, but it’s a very, very, very flawed measure. Revenue reflects size, but not value. As described in our Big and Bad post a while ago, one of the biggest errors companies make is in confusing the size of accounts with the quality of those accounts.

Too often, a company’s largest clients are among its least profitable, and retention is often bought through oversized reductions in margins. When it comes to measurement of client relationships and value, revenue rankings will often move in the opposite direction of returns.

No, as the old joke goes, we can’t make it up in volume. Value comes from the quality of relationships, not their size, which makes the Four Rs a superior matrix for performance assessment and improvement.