Ten warning signs of a failing business

Many businesses are like Bob Dylan’s Mr Jones: They know something’s happening, but they don’t know what it is. To help you get a better grasp of what is going on in your business, Debra Ellis of Wilson & Ellis Consulting has put together a white paper titled “Ten Hidden Signs Your Company Is Sinking and Some Life Preservers”. The signs:

1) Customer attrition exceeds acquisition. Bear in mind, though, that it’s not just enough to look at the attrition vs acquisition rates themselves; you also need to analyse the value of the customers who are leaving vs those you are gaining. “If your new customers are less valuable than the ones you are losing, then your costs have to be aligned accordingly,” Ellis writes.

2) Your best customers are buying less. “Your best customers are not always in your top segmentation cells,” Ellis explains. “Platinum buyers are the ones who consistently buy year after year. Some are seasonal shoppers who move down the segmentation scale until it is time to buy again. Immediately after they purchase, they show up in the top cell, but they won’t stay there. These customers and their buying patterns don’t show up in traditional reporting. You have to identify and monitor individual buying patterns before you can see a downwards trend.”

3) Buyers are not completing the life cycle. Generally speaking, customers ideally have a six-stage life cycle: prospect, newbie (upon placing the first order), active (three full-price purchases), rising star (at least four full-price purchases), platinum (consistent year-on-year purchases), and ultimately, falling star before coming to the end of the cycle. Some customers fail to proceed after the newbie stage, of course; others divert from the cycle to become discount-only buyers. But if an exceeding percentage of customers skip the active, rising star, and platinum stages to go straight to falling star, you have a problem. By giving customers reasons to proceed to the next stage (which is often a key goal of loyalty programmes) you can help avert the problem. Also, by developing a distinct marketing plan for your discount-only buyers—promoting liquidation items more heavily than full-price offers, for instance—you can reap greater value for them while reducing your marketing costs.

4) Your vital signs are erratic. The key vital signs for a multichannel business, according to Ellis, are turnover, lifetime value, average order value, average lines per order, method/channel of incoming customer contact, productivity rates, initial and final fill rates, employee accuracy, costs, returns, and margin. Radical, rapid fluctuations up and down among any of these metrics indicates that you need to take a closer look at the affected areas.  

5) Inventory is out of control. “If inventory value is rising and backorder rates are holding steady or increasing, it is a sign that your inventory is out of control,” Ellis warns. Examining your inventory management process, creating a drop-ship programme, and renegotiating terms with vendors are a few actions that can help.

6) Costs are not aligned with sales. Calculate your cost-to-sales ratio on a monthly basis, for the entire company and by department, so that you can spot any problems before they balloon.

7) Analytics are trending down. Don’t just analyse your marketing programmes, operational efficiency, or any other departments or actions in a vacuum. You need to analyse current trends against past ones, and act quickly once you notice the numbers trending in the wrong direction.

8) Innovation is evasive. When cutting costs, you may be tempted to slash your research and development budget. Think before you do. Without continuing to hone and develop products and services, you lose your unique selling propositions and eventually have no choice but to compete on price.

9) Employees are unhappy. And unhappy employees are less productive than happy ones. What’s more, their negativity can spread to other workers, your vendors and partners, and your customers. If your staff is unhappy, ferret out the causes; don’t assume that the employees are malcontents.

10) You have lost your passion.

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• The five phases of business failure—and three options for survival
• “Make do and mend” strategies for your business