Myth #5: The only indicator of profit is growth
20 March 2019
One thing almost everyone can agree on is that growth is one of the most important dynamics in a property management business.
Despite that, we have not really worked out what growth means and certainly not how to drive it.
The first thing is to define the different types of growth. Growth in new clients, net growth after accounting for losses, revenue, gross profit, net profit, business valuation. Each has a different dynamic and each measure is important in different contexts.
The most interesting question though is what causes each type of growth, and we have been doing a lot of research on this topic by using our massive set of property management data. We’ve looked at hundreds of businesses over a couple of years, trying to find the underlying drivers of growth.
We have looked at different team structures, different compensation methods, fee structures and so on. We have looked at each of those and looked to which one is the best predictor for the different types of growth.
It turns out that there is one metric that stands out above all others as the best predictor of net client growth, revenue growth, gross profit growth, or net profit growth.
The average churn rate in any single year is a little under 15%; that is for every 100 clients you have today, 13 will not be with you in a year. It is not about how many you add, it’s just about how many you keep.
If you can get that churn rate below 10% you will have double the profit than if you had a churn rate about 20%. Net growth in client numbers will be significantly higher even if you sign the same number of new clients.
Driving customer retention by reducing churn requires a lot of work. You need to understand your customers and create value for them on an ongoing basis; what we call creating customer intimacy. You need to do the hard work of aligning your culture to this goal. None of it is easy, but it what separates high growth businesses from the low growth ones, whatever definition of growth you prefer.
For any business focused on growth or seeking to build a business that is ready for the changes affecting our industry, focusing on client retention is the place to start.