this ONE equation determines how big your business will become
Mike Andes explains why service businesses plateau: when you acquire 100 new clients yearly but lose 20% to attrition, you'll max out around 400 total clients. Growth stops when new customers equal lost ones. Push past the ceiling by acquiring more clients or cutting attrition through better service.
Questions this video answers
April 14, 2022
100 new clients per year
20% attrition per year
400 clients (with 100 new/year and 20% attrition)
20–40% attrition per year
It's not that. That was dumb. Where did I put my phone? It's 500, Michael. Oh, that's right. Oh.
Hey everyone. My name is Mike Andes and today I'm going to be talking about why your business seems like it's stalling or like it's plateaued in growth. And this is going to work for any industry that has maintenance, recurring visits. And once you get customers, you constantly are serving them again and again and again. So I'm going to use the example of mowing, but this is for pool service. This is for any sort of that you go back to the customer's house again and again. And when you consider them a client, you can keep them indefinitely for years servicing their house. So what we're going to look at here is how many clients. The goal that we're trying to objective, objectively look at here is where is this business going to plateau? How many clients will this business plateau at based upon a certain metrics and the metrics we really want to really pay attention to? Here is the number of new clients per year as well as the attrition rate. Now, attrition is basically what percentage of your existing customers do you lose every year? And it doesn't necessarily mean that you've done a bad job and they leave, although that does include is included in attrition. But it could also mean that they just move away, they pass away, and for whatever reason, they no longer do service with you. So it's very comfortable to say that 20 to 40% attrition is relatively common in home improvement service industry. Again because people do move, they are older, they're gonna pass away, they're going to move out of town, they're gonna sell the house, and so you're gonna lose a certain percentage of customers even if you do. Now, if you do a bad job, that attrition rate could be 60, 70, 80% at least. And if it's 100%, it basically means that every single year you have to get brand new set of customers. So what we're going to assume in this.
Scenario is that this specific business gets 100 new clients, or mowing clients, in this case per year. And they spend enough money on marketing to get 100 new clients per year. And the thought process is, well, that's great, in 10 years they should have 1000 customers. No of attrition. And actually we can predictably model exactly where they're going to plateau in terms of number of customers based upon this math. So let's just look at this though. More from a conceptual standpoint, at first, over here we have number of customers on the bottom here we have the number of years as time goes on. So the first year we get 100 customers. So we should have 100 mowing customers, right? No, we have a 20% attrition, which means we're going to lose 20% of those new customers just because they cancel service, et cetera, all those other. So really, after the first year, we're going to have actually 80 new customers at the end of year one. Now, year number two, you would say, well, we must have 180 customers, right? 80 plus 100 new customers. Well, in theory, yes. However, again, only 80% of our customers are going to stay because we have a 20% attrition, which means, well, shouldn't we have 160 customers? 80 from year one, 80 from year two? No. The first year's customers are also subject to attrition. So when you add up the 80 plus 100 new customers. 180. But then if you multiply 180 by 0.8, that assumes you have a 20% attrition rate. That means that you actually only gained a net or a delta of 64 new customers. Therefore, you're at 144. Now, you can continue this math for every single year. And if you keep going on, you can see the change of new customers is actually going down. We went from 80 the first year, 64, 51, 41, 32, 27. It's slowly going down. The number of new customers, the delta, the change from year to. And you can see that this is not a linear growth pattern. This is actually parabolic in the form of slowly the rate of growth is declining, and we can actually measure how many customers this business will stop growing at. And the reason for that is because the number of customers they lose every year will be equal to 100. In other words, they get 100 new customers and they lose 100 customers. So let's do the math. When is this going to happen and what number of customers is going to plateau at? So when we run the math, what's going to happen is we're actually going to plateau at 400 clients. The reason for that is if I have 400 clients and then I get 100 new customers, that's going to be a 500. But if I take 500 and I multiply that by 0.8, and the reason I'm doing that is because 8 is my retention. Retention is the inverse of attrition. So if I have a 20% attrition, it assumes that I have an 80% retention. But if I do 500 multiplied by 0.8, it equals 400. So although I got 100 new customers because of attrition equaling 100, I will plateau at 400 customers. Regardless of anything that happens this year. As long as I get 100 new customers and have a 20% attrition, this business will not grow beyond 400 clients. Now, you might say, I don't have 400 clients, I only have 100, I only have 150. But the math will work exactly the same in terms of deciding the cap, the largest your business can become. And this is the law of large numbers when it comes to small and medium sized lawn care businesses, home improvement services is because of this issue. Attrition eventually equals acquisition, which means the number of customers I lose eventually equates to the number of customers that I gain. So you might be saying, well, what do I do if I feel like I'm at the same size of business, I'm not growing, I'm not getting any more customers, and my attrition is equal to my acquisition. Here's what you gotta do. One of two things. There's only two variables in this entire equation, and that is you either a, have to increase your number of new customers per year, which means probably investing in new marketing and advertising to get more acquisition, get more customers. That's the first thing you can do. You could also do other things like raise prices or upsell customers. But these are the two things I want to focus on with all those other variables being held constant. So get more customers, invest into acquisition and getting more customers. That's the first thing you can do. That means maybe you have to get a new website. It means you have to mix up your marketing message, maybe to change your logo, update your branding. These are all things you can do to increase the number of new clients that you get in the year. The second thing you can do is just simply reduce attrition. How do I do that? I make sure I'm providing a lot of value to my customer so they don't leave to another service. That when I make a mistake, which is inevitable in the home improvement industry, that you fix it quickly, that you make it right with the customer, that you have a good response time, that you answer the phone, that you show up in a uniform, that you're insured, that your crew members are professional and trained, all of that is going to help reduce your attrition. And by doing that, you can do the math. If you would like, just take this 20% attrition and change like 10%, you immediately would be able to get hundreds of more customers before plateauing this business if you simply reduce attrition. So those are the two things you gotta focus on. How many customers am I getting every year? That's after acquisition. That is the front end of the business. The back end of the business, the attrition side is governed. You know, how many customers can I retain? Every single year is governed by your customer service, your value proposition and how professional you are. There's a myriad of other things that can affect profitability, but when it comes to growth and when it comes to the cap of size, you can actually grow your business to. This is extremely important when it comes to recurring based business. Now if you're smaller and you're just getting started, I wanted to share this one tip here in this video about how to get to $250,000 in annual revenue. You don't need a ton of employees. It's not super complicated. It's very simple things you must know to get your business from 0 to $250,000. Click this video here.
