When a business is failing, or is about to fail, you'll observe customers who do the following:
- They buy fewer items per order at a more expensive price per item purchased.
- They buy more items per order at a lower price per item purchased.
- They buy fewer items per order at a lower price per item purchased.
- Even with promotions (25% off, free shipping), they buy fewer items per order at a lower price per item purchased.
Take a look at this example:
|October 1, 2011||2.62||$42.30||$110.83|
|July 1, 2011||2.55||$43.49||$110.90|
|April 1, 2011||2.51||$43.88||$110.14|
|January 1, 2011||2.42||$45.77||$110.76|
|October 1, 2010||2.34||$47.50||$111.15|
This example is symbolic of a business mired in a death spiral ... average order value, something that most folks carefully analyze, is reasonably static. However, it is static because items per order are on the increase, while price per item is on the decrease. In other words, customers are making clear budgetary decisions, buying ever-cheaper items. This is not sustainable, folks. This puts tremendous pressure on the profit and loss statement ... pressure on gross margins that require more customers purchasing to cover the loss in gross margin.
So pay close attention to each metric, because the combination of each metric clearly communicate current/future business weakness.