As economic uncertainty grows, is it time to stress test your customer base?

When we think about engineering or aviation, stress testing is a fundamental principle of safety. We would be shocked if it wasn’t done.

In a business context, we are seeking financial safety, so you want to stress test your customer base.

Flawed belief

Business owners often say: ‘We must be doing okay as we are busy.’ But that’s like saying: ‘The bridge is safe because it’s still standing.’

Rarely do business owners consider stress testing their most significant asset: their customer base. And very few know how to do it accurately. Most leave it to their accountant, dubbed cashflow forecasting, which is like driving with your rear-view mirror.

As we move into a very interesting economic landscape, which for many business owners is unchartered waters, stress testing your customer base is basic revenue insurance.

The big question is: what percentage of your revenue needs to be repeat business to stay afloat?

Few companies measure this break-even point, and often this is the ‘fat tail’ of disaster they didn’t see coming. The upside of strong customer loyalty is it enables predictability with revenue, which creates certainty.

Without it, the only certainty you have is uncertainty.

Know your numbers

Often the challenge rests with leadership, as many cling to beliefs that aren’t correct or are founded on opinion instead of sound data. In fact, many business owners rely upon past financial data to forecast the future.

This isn’t just inaccurate, it’s irresponsible.

Your sales and account management teams must be able to give an accurate indicator of repeat business, and you must check it for accuracy. If it’s incorrect, then they don’t understand the customer base, and that’s very risky.

If it’s accurate, then it reflects very healthy customer relationships, and most importantly, there is massive untapped leverage in this fact. The simple reality is you must know the facts.

Knowing the customer retention percentage you need to break even gives you a clear indicator of the reality of your loyalty.

Customer retention data must also comprise of:

• Average dollar sale values;
• Frequency of transactions;
• Total customer revenue;
• Lead generation strategy;
• The last time they were contacted;
• A rating score on their predictions for revenue (consider if they are doing well);
• An estimate of how much they should be spending and the variation to current YTD figures; and
• Product and services mix (consider if they are buying all they should be).

It’s a lot easier to sell to an existing customer, so make sure you have secured future revenue with them.

Marketing stress 

You must also stress test your lead generation and conversion strategies.

What if, all of a sudden, it was only 50% as effective as it is today. Would you cope? Would you sink or survive?

Run a simulation with your executive team in which your marketing suddenly tanks and new prospects are 50% of what you were expecting.

What is the impact? Can you maintain break-even? What percentage is your cashflow out of range?

Do you have enough money at the end of your month, or too much month at the end of your money?

With your current cash reserves (if you have any), have many days survival do you have?

Be known for value 

In a tough economy, one of the first ways customers assess their suppliers is how they judge ‘value for money’.

If your customer experience standards are basic levels of satisfaction, you are going to find yourself stuck in the price trap, no question about it. However, if your customer experience standards are optimal and structured at appreciation standards, then you are going to maintain margins as customers will value the extra mile you go for them.

The simple rule is: obsess over customers, not over competitors.

For most companies, the end of the year is a cashflow drain.

Now is the time to act and get the clarity you need to ensure you are in a strong position at the start of the new year. Don’t assume it’s all okay.

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