As a small business, you’re looking for any opportunity to get a leg up on your competition, but most businesses fail to realize that your competitive advantage likely lies in your data insights. Every business has immeasurable amounts of data from sales, expenses, marketing, ecommerce, and even in-store statistics and POS sales data, but most of it is just collecting dust in a server somewhere or in your back office. Be honest, that sounds just like your business, doesn’t it?
Here we’re going to look at how we can bust out those data insights, dust them off, and put them to work crushing your competition. As forewarning, not all the data that you pull out is going to be comfortable for you. You’re likely going to have some data that doesn’t say great things about your business or data that you don’t really like, but it’s better to understand that data and correct it than to let it continue to be a problem for your business. We need to take a long hard look at the data that you have at your finger tips and how it is and can impact your business moving forward!
Here we go –
1. Cost to Acquire a Customer (CAC)How profitable are each of your customers to your business? You’re likely not really sure. To really understand this, you have to go beyond the – my widgets (whatever you sell – could be a product or service, or both.) cost me $5 each and I sell them for $15 each.
The $10 difference ($15 - $5) is your gross profit on each item sold, but it doesn’t really tell you what it cost to make that sale, does it? Here we have to dive deeper. We have to understand what it actually costs our business to get someone to make a purchase (no matter what they purchase). Items that we will want to factor in here include marketing costs, advertising spends, salaries, overhead, and even commissions or bonuses paid out based on performance. It’s essentially everything that you are investing in to generate more customers on the sales and marketing side of your business.
Why it matters
Your cost to acquire a customer is important because it gives you a full picture of your profitability by customer and goes into helping to figure out how long until you become profitable with each customer. Many businesses are not profitable with the very first purchase someone makes from your company. It will likely take multiple purchases to be in the green. If your cost to acquire a customer is too high, your payback time (time to profitability) will be high and will result in not being profitable with a particular customer quickly or ever.
It is also a good measure of how effective your marketing and advertising programs are. If your cost to acquire a customer is low, that means that you are reaching your potential clients at the right time, right place, and providing them good reason to buy. If it’s high, you likely need to reevaluate your campaigns to better target and identify your ideal customers. Have you done a thorough persona development?
How to calculate it
In order to calculate your customer acquisition cost, follow this equation:
Total sales and marketing spend / new customers
Again, the sales and marketing spend will differ from business to business, but it is anything that contributes to generating new customers for your business.
2. Buying HabitsAmazingly, this one seems to escape many small business owners, but it’s vitally important to the overall health and success of your business. There is nothing that you can do in your business as important as understanding your customers. Who are they? What do they look like? What do they frequently buy? How frequently? Are they buying in store or online or both?
There are so many questions that you can ask about your customer’s buying habits that will make you a better business. To get started, we recommend focusing on a few questions in particular:
Where do your customers shop?
It’s very important to understand if your customers prefer to shop in store or online, or maybe they frequent both. As we all know, brick and mortar shops are on the decline, but there are many industries that still thrive and will continue to thrive in their shops, but if you are beginning to realize that more and more of your customers are moving online, it may be time to invest more in your online store and that may mean pulling resources from your brick and mortar store, or even closing them all together.
How frequently do they return?
Frequency is very important to making projections about the future, business viability, and your bottom line. Your customers are likely following a pattern of purchasing. Are they buying every week? Every month? Once a year? Every 10 years? You need to know the buying patters of your customers in order to accurately project financials and inventory.
Plus, now that you know how frequently your customers are returning, your can start to think next level – how can you increase that frequency, even if it’s just one extra time per year?
What would one extra purchase per customer per year do for your business? How can you make that happen? The wheels are starting to spin, aren’t they?
What are they buying?
For any business, but retailers in particular, you need to understand what is selling, how frequently, and which customers are buying which items. This will help you plan your inventory as well as your sales and marketing initiatives.
Again, taking this to a next level – are the products that your customers are frequently buying your most profitable items or are they your loss leaders? If you’re only reselling your loss leader products or services over and over, you’re not going to be in business very long. Understanding this may help you adjust your mindset and start focusing on pushing your customers to your more profitable products and services.
3. Average Ticket PriceNow that we’ve covered how many times and how frequently someone is buying from you, we need to look at the average amount that they’re spending with you each purchase. This information is vital in understanding how many purchases (and how long) a single customer has to make in order to become a profitable customer.
Let’s look next level again – What would the impact on your company be if you increased the average ticket price by $10 per purchase by upselling or raising prices? What about $1,000 per purchase? Making a (relatively) small increase in your average ticket price for each customer can turn your average year into the best in company history. This can also be done by recommending and pushing your customers to higher priced, higher quality items that you think they’d love. Whatever you can do to increase your ticket price, even by a very small amount, can make this a year to remember!
4. Marketing Originated Customer PercentageNow let’s take a look at how many new customers your marketing efforts are actually providing for your business. Without understanding what percentage of your new customers are a direct result of your marketing initiatives, you don’t really have a good grasp on how well your campaigns are going. This percentage is looking specifically at the customers that directly resulted from your marketing, customers you wouldn’t have otherwise.
How to calculate it
In order to calculate your marketing originated customer percentage, follow this equation:
Total customers generated from marketing / Total customers
This isn’t always super easy to track, but there are steps that you can take to be as accurate as possible. The first and most important piece is to use a great CRM and track EVERYTHING. Doing so you should be able to see where a customer originated from and when. For some outbound marketing initiatives, relying on the old, “where did you hear about us?” question still may need to be your go-to. No matter what you do or the software you use, it’s vital that you understand where every single customer is coming from so you can double down on the successful initiatives and scale back the unsuccessful ones.
If you’re a marketing agency or a marketing manager you are likely reporting on your success to a C-Level person and while you may love your statistics and information about your Twitter reach, your viral impressions, email open rate, and keyword rankings, they likely don’t think it’s as interesting as you do. What they really care about are marketing metrics that directly impact their bottom line. How can you connect what you’re doing to the overall financial health of the company? We have developed a FREE eBook to help you do just that. Download our free 6 Bottom Line Marketing Metrics Your Clients (or boss) Care About now! We have broken down our six favorites, what they mean, how to calculate them, and why your boss or client cares about it.