Why Doing Small Things Will Significantly Increase Valuation

Why Good Customer Service Matters for You and Your Financials.

How often do you interact with a company and have an excellent experience? When you have excellent experiences, you feel good inside. You feel like the company you’ve interacted with cares about you as a client and they value your hard earned money. You feel like the business has read your mind and thought through every step, so you don’t have to. You feel taken care of. You are also going to feel comfortable putting your reputation on the line and you’ll recommend the business to your friends, family, and colleagues. Why? Because you want them to experience what you experienced. Whether you are judging them on price, exceeding expectations, quick response, or quality, it was an excellent experience. Likely, you going to return to the business again and again for a long time.

Now, think back to a time when you’ve had a bad experience with a company. Missed appointments, no call backs, lack of attention to detail, rude employees, and on and on... Perhaps you may give the business another chance, but you’ll likely not. You most certainly won’t put your reputation on the line and recommend the business. It’s not just a money thing, it’s a psychology thing. You wanted to be taken care of and you were not. It almost feels personal and you were neglected. If you are nice, you’ll give them a second chance. You move on.

Whether you had a good experience or bad experience, there was a cost of acquiring you as a customer. Whether you click on a link, used a search engine to find a business, see a sign next to the side of road, or watch a TV ad, a business paid in some way for you to find them. And once you’ve found them, it’s the business’s job to make you a customer or “convert you.” Marketing professional use the term CAC or Customer Acquisition Cost. Simply put, it's the total cost spent on sales and marketing divided by the total number of new customers. CAC is an important metric and one you should measure. Even if you’ve spent zero on sales and marketing costs, you’ve still acquired the customer and therefore you should measure CAC. There are countless blogs, articles, and videos you can search about way to measure CAC, benchmarks, and optimization. The point here, is that there is a cost to acquire customers. Congratulations, you now have a customer!

Now that you have the customer, you have to produce for them what they’ve paid for. Customers will either have a great experience, a bad experience, or a meh experience, something in the middle. This is your business’s time to shine. Why? Of course you want to make customer happy, but from a business perspective, you want them to return. You want them to return again, and again, and again. In marketing lingo, the amount a customer spends in all these return visits with you is called LTV or Long Term Value. If they only purchase from you once, the LTV is what they’ve spend with you that first and only time. If they purchase from you ten times, the LTV is the sum of those ten purchases.

LTV:CAC

Now, drum roll please, the most important ratio in all of business is... LTV / CAC. The amount a customer spends over their lifetime with you divided by the cost you’ve spent to acquire them. Don’t take our word for it, you can read what Andreessen Horowitz’s (arguably the most important Venture Capital firm) post about LTV / CAC. They state, higher LTV:CAC leads to higher margins, which leads to higher valuations. The results of improving the ratio is not linear, it’s exponential. As Andreessen Horowitz states, improving your LTV:CAC from 2x to 3x can nearly triple your valuation. Why do valuations increase exponentially? Because customers are very difficult to retain and if your company has a magic formula to retain your customers, you are that much further ahead of your peers. Their post is wonderful and it’s worth the read, even if it’s a bit technical and academic. It’s how all smart analyst and investors value businesses.

While we would want all of you to measure your LTV:CAC ration because it provides you incredible leverage upon exit and you drive material value, we get it, you don’t have endless analysts on your team to help you measure. What we do want you to work on is thinking about your customer service and how you retain customers. How do you stack-up compared to your competitors? How would you feel if you purchased your services? Would you return again and again?

Our point here is that the little things add up for lower-middle market businesses in retaining customers. Do you deliver an excellent product, are you reliable? Is your team dressed professionally? Do you return phone calls and emails? Do you use technology to make it easier for customers to interact with you? Do you complete the work on-time? Is the final price the same as the estimate? Does your team smile? All of these actions add up and compound. And guess what, many of your competitors aren’t doing these things. Doing small things, like these examples, will generate endless repeat business (increased LTV) and referrals (lower CAC).

How to Improve Customer Service

Whenever we start a client engagement, one of the first thing we do is map the customer / client journey. I am the widget, take me through the process. We do this for many reasons, but one of the most important is so that we can understand how customers interacts with the company.

When we go through the mapping exercise, we try to be as detailed as possible. Why? Because it’s the small details that make or break a customer’s interaction with you. Depending on the client and industry, we pull data on the interactions, compare estimates vs actuals, on-time performance, how fast is the initial response time, how frequently was the problem solved in the firm interaction, etc... What was the method of interaction and was the communication clear. It all makes a difference and it’s how the customer perceives you.

After the mapping, we work with our clients to do a gap analysis. We not only look at the biggest pain points, but we also look at what’s working well. We develop methods of leveraging and broadcasting what goes well. We then put together a plan to fix the gaps.

It’s really important to not stop here. There needs to a feedback look to see if the enhancements performed well or not. As the saying goes, you are what you measure.

Valuation

There are two main points to all this work. First and most important, the customer has the best experience possible. You’ll receive glowing five star review of your business that they would recommend to their friends, family, and colleagues. It’s work that you are proud of. The second, is that your company’s revenue, profit, and valuation will increase. More customers will want to work with you, they will stay with you longer, and your profit margins will increase because you’ll be spending less on acquisition costs. The fly wheel effect is in motion. And, when it’s time to exit, the work you put in place will have paid off because your valuation will increase. If you are able measure your LTV:CAC ratio, you even further along the journey because you can demonstrate the gains to prospective buyers. Measurable data. In turn, your company’s valuation will increase exponentially.

Conclusion

The little things we do for our businesses have the greatest impact for valuation. You do not need to tackle a customer service improvement project as a massive turnaround all at once. Start small and pilot the changes. Utilize help from your team and make sure they are involved. Your team will likely have the best ideas on ways to make customer experience better. See what changes you’ve tried have the greatest impact. The most important thing is to act and make changes to drive positive outcomes.