October 16, 2007

Healthy Sales, Unhealthy Business

At times, the simplest of Multichannel Forensics work identifies future challenges that are not easy for your management team to identify.

Take this business, as an example:
  • In 2004, 100,000 prior customers had a 50% repurchase rate. If they purchased, they spent $200 per customer. 60,000 new/reactivated customers spent $100 each. Total Business = $16,000,000.
  • In 2005, 110,000 prior customers had a 45% repurchase rate. If they purchased, they spent $220 per customer. 55,000 new/reactivated customers spent $110 each. Total Business = $16,940,000.
  • In 2006, 104,500 prior customers had a 43% repurchase rate. If they purchased, they spent $240 per customer. 54,000 new/reactivated customers spent $120 each. Total Business = $17,264,400.
What do you think will happen in 2007? Let's assume a 43% repurchase rate. Let's assume 53,000 new/reactivated customers, given recent trends. Let's assume spend per customer remains constant at $240 for existing customers, $120 for new customers.

When you do the math on the 98,935 customers who start 2007, you learn that sales will top out at $16,570,000.

Sometimes the seeds of failure are sowed many years earlier.

For this business, 2004 was a stable year.

In 2005, something changed. Notice that repurchase rates significantly declined. Also notice that new customer counts significantly declined. Finally, notice that spend per customer significantly increased. Apparently, price points per item increased (this can be verified), driving some customers away, but increasing sales volume among existing customers, and the new customers who chose to purchase.

Customer behavior changed in this business. Sales results were great. But future problems were predictable, if the business had forecast future sales on the basis of repurchase rates, spend per purchaser, new customers, and spend per new customer.

Few businesses are able to significantly grow sales, year-after-year, by getting customers to "spend more". As some point, loyalty activities tap themselves out. When that happens, repurchase rates and new customer counts take over as the key drivers of business growth.

If you're getting a "free bump" in sales from spend per purchaser, it is a good time to focus on new customer acquisition activities. It is important to protect the future of your business.

4 comments:

  1. Anonymous8:29 PM

    It should also be noted that that "free bump" would also generally provide a higher gross margin per customer, which should then also enable you to invest more in new customer acquisition or customer reactivation. While the agricultural metaphor isn't perfect, it is inadvisable to harvest without doing at least some planting.

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  2. I agree with your comment, even the metaphor!

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  3. There are some great brands out there that are already planning for a slow, but steady decline into obscurity. How?

    They "cream the business" by getting more each year from existing customers ceasing all significant acquisition activity. They loose interest in their businesses forgetting that innovation and new business growth are required for survival.

    To some, this is a conscious decision. To others, it is all about greed at the expense of the brand.

    The thing is, watching that process for me causes some pain. It’s like watching your hero die of cancer.

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  4. Thanks for the comment, Ted. I suppose it is challenging to run a business when you're required to post excellent results every single quarter.

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