The S&P 500, a market index widely considered as the performance barometer of the American stock market, captures a trend that seems to be constant over the past few decades. The lifespan of the companies listed in the index are progressively getting shorter. In 1965, the average tenure of a company listed on the index was 33 years. Fast forward to 1990, that number reduced to 20 years. By 2026, expect this to shrink to 14 years.
This phenomenon has received much attention from both industry veterans and customers. The famed economist, Joseph Schumpeter, referred to it as "the gale of creative destruction" that is constantly creating new industries while decimating older ones. A key component in this iterative process of industrial mutation is customer success. If there's one reason why upcoming, agile startups dethrone incumbents, it's because they lose out on the customer's loyalty. The customer is always looking for a faster, cheaper, and better experience and will be quick to jump ship if their current providers are not keeping up with the competition.
Consistency trumps all
The most successful brands are built on authenticity. Elaborate PR campaigns and flashy adverts only draws attention to your business. It cannot be a substitute for the interaction with your customers. The sudden proliferation in startups and substitutes to market incumbents across sectors means that consumers now live in an era of unprecedented choice and empowerment. This abundance in choice has intensified the competition for modern-day businesses and redefined what it means to stay relevant.
A customer experience survey conducted by McKinsey, which involved 27,000 American consumers across 14 different industries, highlighted the importance of effective customer journeys. The benefits of improving customer journeys are tangible— it has the potential to increase customer satisfaction by 20%, lift revenue by up to 15%, while bringing down the overall servicing cost by as much as 20%. With so much riding on customer journeys, it’s not surprising why a consistent customer experience, both horizontally and vertically, is the key to sustaining market share.
For customer success leaders in their respective industries, consistency cannot occur at individual touch points alone. Rather, it needs to be integrated into the operational realities and reveal itself across all facets of the company. The best companies often ensure that consistency is maintained not only in the core customer journey, but also with respect to emotions and communications.
A survey of 70 customer success leaders at technoloy companies revealed that industry leaders made much better use of their time (36% to be precise) by building customer relationships, proactively checking in, and monitoring adoption rates. Concomitantly, they also spent 47% less time dealing with support issues and escalation activities that serve as a setback to any company, let alone tech companies.
The new growth engine
The early aughts witnessed many technology companies, especially SaaS vendors, trying to bolster growth by spending vast amounts of their budget on customer acquisition. While this did have the desired effect of initiating a spurt in customer accounts and revenue, product complexity and lackluster support resulted in high churn rates leading to lower revenue.This phenomenon replicated itself across many B2B sectors as customers were beginning to experience a superior service across all fronts.
The transition from a one-time purchasing model to a subscription/leasing model meant that the companies had to invest heavily in acquiring customers and retaining them. Many companies learnt the hard way that money spent on customer acquisition without a proper retention plan in place was a surefire way to depleting their coffers with nothing to show for it.
Analysis by McKinsey revealed that the reason behind the top-quartile performers’ success in the SaaS business was their relentless focus on customer success. These SaaS business companies approached customer success as a philosophy instead of a function, and it had the marked effect of lowering net-revenue churn, which in turn links to higher growth. The approach led to an interesting observation that companies can lower net-revenue churn by focusing on gross revenue rather than expansion revenue.
Retention over expansion
One thing that is increasingly clear from the observations surrounding company trajectories in the past three decades is this— businesses are better off focusing on retaining their existing customer base, rather than going after new accounts. Older incumbents in the S&P 500 operated on “blue-ocean principles” where growth strategies hinged on tapping in more unique markets and accessing different segments. The method has proven ineffective as the very same industries have become 'red oceans' saturated with many players.
The only way to counter this new reality is by doubling down on the existing customer base and forging strong customer relationships in the process. This approach will lower the churn rate to near-zero levels in the long run, and the second-order effects from a robust customer success function will make it a mini-growth engine in its own right.
COVID-19, while proving to be disastrous for many, affords companies a chance to rethink their operations. As digital self-service models are finally proving to be a key differentiator, companies will no longer have to worry about backing digital solutions to complement existing customer success functions. In the new normal, those that realign themselves to be more flexible, responsive, and resilient in the face of disruptions will emerge as industry leaders in the coming years. They can comfortably lengthen their lifespans as and when they reach the S&P 500.