Internet powerhouse PayPal started out with twenty-four customers, all of them employees. Founder Peter Thiel tells the story of how they converted customers at a rate that almost doubled every 10 days.
Thiel talked about the process in his book "Zero to One." Essentially, PayPal paid their existing customers to bring in more customers AND also paid the customer when they signed up. He commented "after four or five months, we had hundreds of thousands of users and a viable opportunity to build a great company…" For PayPal it ended up being a stroke of genius since fee revenue quickly outpaced the one-time cost of a customer conversion. The short payback within the business to consumer space worked out well.
When it comes to your business, what would it take for one of your existing customers to give your company a positive reference to someone else? The power of a personal referral should not be underestimated. As marketing giant Nielsen and Company has said "recommendations from people we know are the most trusted form of marketing."
The PayPal strategy for customer conversion inspired Dropbox founder Drew Houston to do something similar, yet different. Houston developed a word of mouth campaign for Dropbox. In lieu of a monetary reward to convert, Dropbox offered additional free storage for the existing customer and the new customer being referred. It resulted in a highly successful way of gaining customers by using their "storage" instead of money. Another solid B2C strategy.
The concept being used in these examples is called the customer conversion rate. In other words, getting your existing customer base to serve as one of the growth drivers for business expansion.
Author Sean Ammirati in his book "The Science of Growth" suggests a conversion metric, to be used regularly, as a means of identifying growth. According to Ammirati, if the result of the calculation is more than 1.0 there is growth. If the calculation yields less than 1.0 it represents decline. A value of 1.0 is stable.
If your company reached out to 5 potential new customers in one month and your average conversion percent was 20 percent (1 out of 5), your conversion rate would be 1.0 ( i.e. 5 * 20% = 1.0).
If the conversion rate is greater than 1.0 you might not have to employ other means of marketing your products or services. If the rate is less than 1.0 you might consider other, more traditional ways of sales and/or marketing. The importance of the exercise is to identify your customer base and continually measure its expansion or contraction.
What metrics do you employ that indicate how many total customers you have served in a month or a year? Of those customers, how many have been active as a result of a sale in a particular month? Do you have an expectation that each of your customers should buy something from you at least a few times every year? You should be getting the main point by now. Each business is different. The key metric for your business may not be the key for other businesses. What works in B2C may not work in B2B (Business to Business).
Is your business conducive to referral selling? Could you develop a customer incentive program that utilizes gifts or cash money as part of the program? Some companies have events where they invite existing customers and potential new customers. Not only do they ‘mingle’, they also have a chance to ‘win’ prizes and other rewards for attending. Typically, these events can be very beneficial to all concerned, but they do take a lot of time to prepare and execute.
Mark Zuckerberg of Facebook, is the undisputed world champion of promoting referrals and recommendations between Facebook "friends." Facebook’s harnessing of the internet in such a way, has caused many businesses to grow at an unbelievable rate while others, based on unflattering comments, have crashed and burned. Facebook has converted new customers at the lowest possible denominator, person to person. It is clearly a successful way to convert customers.
If your expectations for customer growth are small, then your metrics should most certainly focus on something other than converting to new customers. In order to achieve growth, you need to develop measurements that will monitor sales frequency, timing, volumes, and types of sales; as well as cross-selling.
Consider developing a way of winning additional customer referrals and measuring the effectiveness of that methodology to achieve growth in your business.
Dan Arens is an Indiana-based business growth advisor.