What is the first warning sign that your target market might be about to run out of road? Is it revenue? Is it churn? Is it price sensitivity? Is it sales?
It is none of those – it is new business sales volume. The number of new clients signed up each period is down but this has been compensated by increasing the value of each sale thereby allowing the sales team to hit their number.
This is frequently disguised as a good news story that is easy for everyone to believe because no one wants to face up to the reality that there is likely to be a market problem.
Sales hit their number, so they are happy. The CEO suspects something but feels that they have to be positive and and a narrative is created that runs something like.
Great news. Our customers are willing to pay us more. This means we will be able to spend more per customer on marketing and we will quickly be able to make up for sales volume.
This ignores the fact that the natural instinct of sales is to close every deal. They will do this even if it requires discounting to the maximum allowed level. This means that they only way sales was able to hit their target was by going against their instincts and increasing pricing.
The hard truth is that customers are becoming more difficult to find and the inescapable logical conclusion is that your market is running out of road.
If ignored, customers will become progressively more difficult to find compounded by an uncontrolled push to increase prices to compensate. It normally takes a few periods but eventually it all comes crashing down with sales not just missing their number but missing it by a country mile.
At that point the market problem becomes a crisis. Sales are dramatically reforecast, budgets redone over and, if the company is undercapitalized, redundancies ensue.
The sad part of this is that there is typically enough time to adapt from the first signals before it becomes a crisis. New markets can be found, product can be developed, hiring delayed, but this can only be done if you recognize that there is a market problem in the first instance.
I can’t say this is true all of the time but I’ve seen this at least 6 times now. Twice in my own company (I spun the good news story and even managed to deceive myself), twice with companies that I’m on the board of and twice with client companies. I’ve gotten good at recognizing the pattern and ringing the alarm now – hopefully you will too.