May 13, 2015

The Compounding Interest on Business Relationships

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I listened to a podcast, The Growth Show, from Hubspot about a month ago featuring Tomasz Tunguz. And he said something that really struck a cord with me:


"Content is one of the few forms of marketing that has a compounding return."


I've never been the marketer that thinks content marketing is a shot in the arm nor have I ever written a piece of content that is a one and done disposable piece. I've always had the firm belief that majority of the content you create should have the ability to be repurposed and it should have the ability to continually show value into your own customers' journey.

Compounding Return on Evergreen Content



This idea of compounding interest or return isn't something that is just reflected in content marketing or financial institutions, it's actually reflected directly with your network.



Any good, impactful relationship doesn't form over night, instead it takes time, caring and feeding. Depositing money in and developing a solid savings account. Maybe there are some withdrawals that happen. You ask a contact to introduce you to another contact, you may make a deposit by introducing that contact to someone else. Relationships can be transactional, but they are a two way street and with each deposit you have the chance to accrue interest.

What do people say defines a great relationship?


We believe that great businesses are powered by great relationships, so what makes a relationship great?

The foundation of a great relationship starts with a two way street, involving a set of individuals, at least 2, exchanging communication with each other. It may just be a conversation at first, but there is a purpose to the form of communication.

In our research to determine the set qualities of a great relationship, here's what we've found:

    1. Listening

    1. Giving more than receiving

    1. Asking and answering questions

    1. Connecting individuals to each other

    1. Adding value to the relationship

    1. Going above and beyond

    1. Paying attention



The list of these guidelines isn't set in stone and your own relationships may require other tasks for you to form a solid relationships. However, having most of these components can make your relationships even more impactful than they already are today.

How long does it take for a great business relationship to form?




Sometimes I think certain parts of my job would be so much easier if I had a few different formulas where I could insert the right inputs to get the wanted output. For example, if I post 20 different blog posts all at 6pm, I'll get 1 million leads.

There are some steps you can take with optimization to achieve those formulas and marketing requires a more quantitative, formulaic approach; however, relationships aren't like that.

Just because I email someone 5 times, doesn't mean we are best friends or trusted business partners. It could mean that I've just excessively emailed them with useless information that they have no reason to respond.

There isn't an average time that you can measure to base a great relationship on. Instead the best advice to follow is to listen to your relationships when you are conversing and to offer more value than you take. Can you introduce these individuals to others in your network? Have you read a piece of content recently that would that would be useful to one of your contacts?

Figure out how you can deposit more value into your business relationships in order to constantly maintain a healthy bank of relationships with compounding interest. You never know when those contacts will come through for you.

How many interactions must you exchange?


Unfortunately there isn't a tried and true formula for this either. I can't say that if you reach out to someone 10 times you'll have a significantly better relationship. There isn't a one size fits all combination. Instead you have to look at your own network and relationships to identify the best form of communication and the frequency of interactions. You then can compare your relationships and the level of closeness you have to those individuals

What do you define as interest?


Ultimately how do you define this compounding interest? Zvi mentioned in a post about how he went above and beyond with a personalized gift and that this relationship has proven way more than it's initial worth. It's the interactions that compound on top of each other in these business relationships that increase its interest.

How do you calculate that interest?

Calculating the interest made from your relationship will vary from relationship to relationship, but if you want to see the effects of the compounding interest of your network you can assign some numbers to help give your relationships the quantitive boost they may need.

The equation for compounding interest is as follows:

A = P (1 + r/n) ^ nt


Where:

A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for

So how would you calculate that for your relationships? Here's what we've come up with:

A = the future value of the relationship
P = the principal investment amount (the initial deposit or cost for you to obtain this relationship)
r = the annual interaction rate (this can be broken out monthly, weekly, or daily)
n = the number of times that you will interact with the individual in the year
t = the number of years you plan on maintaining this relationship

Let's add some numbers to this for an example relationship:

For the principle investment it's the amount that you initially invested to obtain this business relationship. Did you go to a conference where you met this person? Or were you introduced via email at work, where you could calculate the hour you spent to respond to this intro? For this purpose, I'll go with the conference example where maybe I spent $800 on the conference.

So, P = $800.00.

Now for the annual interaction rate. This is the percentage (converted to a decimal) of time I'll spend on interacting with this relationships. So let's say total, I'll spend about 15% of my time really fostering this relationship. It was a really great conference.

r = 0.15

How many times will I interact with this individual in the year? Maybe once a week?

n = 15

How long do you plan on maintaining this relationship? A good estimation could be up to a year.


t = 1

The equation would be: $800(1 + .15/52) ^ 52 (1)

A = $929.26

So, your compound interest would be $126.26.

This formula is flexible and by no means finite, but it allows you to see the full value of your relationships especially with the time and resources you may put into them. And this formula doesn't mean your relationships are only worth the compounding interest, they could (and probably are) worth way more than this equation amounts to. However, this is a great exercise to try in order to wrap your head around more quantitative properties your relationships have.

It takes 6 to 7 times more money to acquire a new customer versus the amount it takes to keep a current customer with upsell opportunity. That's directly relates to relationship building as well. Think about the number of networking events or conferences you'd have to go to build your network up again or if you took time to develop your key relationships in your network. The latter has the potential to produce double of the first option.

We know the power of great relationships, and their compounding interest. Have you tried out Contactually to further those relationships yet?