Over the coming days and weeks, we are going to be sharing a lot of bite-sized free content with you to help you make the most of the lockdown and to help you come out of the blocks with a plan, not just for recovery, but for growth.
If any areas of your sales and marketing processes need reviewing now is the perfect time to get it sorted, once and for all.
In this blog, we investigate how to grow a business strategically, by the numbers using the 3 ways to grow a business model, made famous by Jay Abraham.
According to Abraham, if you exclude business acquisitions, there are only 3 ways to grow a business.
- Increase the number of active customers by targeting the right kind of customers similar to your top 10 customers.
- Increase the average order value by targeting customers that spend more, and add/promote services that add value.
- Increase the average order frequency by targeting and converting the right kind of customers, becoming preferred suppliers across the customer base and by out promoting your competitors.
For the benefit of these examples we assume that your business is competitive and has comparable quality, delivery and service. The numbers are purely to demonstrate the business model concept.
Here’s an example of a fictitious manufacturing company that has 100 active customers spending on average £2000, 6 times a year.
100 active customers x spending £2000 x 6 times a year = £1.2m in annual revenues.
If we increase each by say 20% then a dramatic change happens:
120 active customers x spending £2400 x 7.2 times a year = £2.1m in annual revenues.
That’s the theory but what about the detail?
Increasing the number of customers
Firstly the number of new customers is a key driver that most companies focus on but they often fail to recognise that customer attrition cancels out much of the good work that went into finding, nurturing, meeting, quoting and closing a new customer. Customer retention is directly related to customer experience, service levels, relationships and perceived value delivered via regular marketing communications to existing customers. How often do you market to your existing customers? Is it in the marketing plan and communications schedule? If it is not on your schedule, this is easily remedied with monthly, fortnightly or weekly emails, posted letters and quarterly printed newsletters. Regular calls on Zoom are also a great idea to keep your brand at forefront of mind.
New customer acquisition, is a process that requires skill, resolve and consistency. Results are directly related to inputs, selecting the right tactics and the execution of inbound and outbound marketing activities. If you skimp on the inputs and execution, then you won’t get the desired results.
The effectiveness of your new customer acquisition process is directly related to:
The number of high-quality leads x your conversion rate = number of new customers.
Quality leads/month x conversion rate = the number of new customers/month
If your inbound activities from search engine marketing, content marketing, LinkedIn marketing and online advertising generates 10 leads and your outbound telemarketing, direct mail and email activities generate another 10 leads, then you have 20 leads and a repeatable system that can consistently generate new customers.
Let’s say that half the leads are not a good fit. That leaves 10 good leads and let’s say your conversion rate is 1 in 5. In this case you would generate 2 new customers every month.
In this scenario after a year our example business would in theory look like this:
124 customers x spending £2000 x 6 times a year = £1.48m, an increase of £280,000
However, if customer attrition rates are running at 10%, then the business will lose 12 customers and the numbers will look like this:
112 customers x spending £2000 x on average, 6 times a year = £1.34m
An increase of £140,000 but leaving £140,000 on the table. Typically, 15% of customers leave a supplier due to a bad experience, which means that 85% will leave for either pricing reasons, because they no longer have a need or because they have been wooed by a competitor. In this instance, customer attrition can be improved by small tweaks to the customer experience and by improving marketing communications to add value. Re-engagement marketing campaigns to lapsed customers can also result in quick wins.
Let’s go back to our example business and let’s say in year two, we implement the following improvements:
- Reduce attrition rates by 50%
- Improve the effectiveness of their digital marketing by 20%
- Improve their outbound marketing campaigns by 20%
- Improve their conversion rates from one in five to one in four
- Start prospecting with better data, based on the avatars of their top 10 customers, which improves the average order values by 10% and order frequency by 10%
These are modest numbers and all attainable. Now we have a business that looks like this:
Number of inbound leads from digital marketing – 12/month
Number of outbound leads from direct marketing – 12/month
= 24 leads/month.
Better qualification, testing, measuring and optimisation on the campaign can improve lead quality to 15 leads out of 24 being an excellent fit.
Consistent and automated nurturing and follow up processes will help improve conversion rates from one in five to one in four to increase the number of new customers to 3/month (36 year) which if we add to the 112 from year one, will equate to 148 repeat customers.
Attrition at 5% would bring this number down to 140 customers in total.
So with 140 customers, spending on average, 10% more (£2,200 a month) and with an average order frequency of 6.6 times a year our example business looks like this:
140 customers x spending £2200 x 6.6 times per year = £2.03m. A growth of £832,000.
The final piece in the jigsaw is a question. If the average customer spends £14,000 per annum, and they keep their top customers on average say 5 years, then the lifetime value of the average customer is £70,000. So, the killer question is what should this company be willing to spend to buy a new customer?
Once you know this figure, and you have a system that is proven, marketing budgets can become a thing of the past and growth can be a given.
Your homework:
- Calculate the number of active customers in your business over the past 12 months.
- Work out the average order value (annual revenues/number of orders).
- Assess the average frequency of purchase (number of orders/number of active customers).
- Now look at the effects of a 10%, 20% and 30% increase across all three.
- Finally, calculate the lifetime value of your top ten customers and work out what you would be willing to pay to acquire more, like these.
- Email your top-level numbers to us and we will be happy to give advice on the best strategies to achieve these.
Good luck, stay safe, keep smiling.