January 10, 2018

Knowing The Business You Operate

If you want to know what quadrant your business belongs in, it's a good idea to know what type of business you operate.

More than a decade ago, I wrote a book called "Multichannel Forensics". In that book, I described three types of repurchase modes that define a typical e-commerce and/or retail and/or catalog business.

Here are the three repurchase modes described in that book (click here for a summary).
  • Acquisition Mode: When 40% or fewer of past twelve-month buyers repurchase again in the next year.
  • Hybrid Mode: When 40% - 60% of past twelve-month buyers repurchase again in the next year.
  • Retention Mode: When 60%+ of past twelve-month buyers repurchase again in the next year.
Most of us operate like all of our customers are in "Retention Mode". We think we can force a customer to be loyal. We offer points and we send 250 emails offering 40% off plus free shipping and we go out of our way to encourage a customer to keep buying. Most of it doesn't work.

What is the average annual repurchase rate across my client base?
  • 37%.
That being the case, what is the average "mode" that my average client belongs in?
  • Acquisition Mode.
If you are in Acquisition Mode, what is the most important thing that business can do to grow and thrive?
  • Acquire Customers.
What is the typical response I get when I share this information with you?
  • It's 8 times more costly to acquire customers than retain customers, so let's focus on retaining customers.
That's a strategy that never works. Look at the graph below ... this graph depicts how many times a year a "repurchaser" purchases based on annual repurchase rate.

As long as the annual repurchase rate is under sixty percent, the typical repurchaser is going to buy two or fewer times per year. Your mileage will vary ... but it's going to vary by +/- 25% of what I'm showing here. In other words, you simply aren't going to force a customer to become loyal. You might force 5% of your customers to become loyal (and you'll generate a ton of profit doing that) ... but by and large, you're done. The customer is pre-disposed to not buy more than two times per year. Get as much profit as you can ... but you're not going to have a loyal customer base.

Look at what happens when the annual repurchase rate goes beyond 70% ... orders per repurchaser begin to surge. The relationship looks like this:

As an industry, we think our customers have 90% annual repurchase rates and if the customer repurchases the customer buys 9 times a year. This is the customer we constantly hear about when we read "success stories" and "best practices".

By knowing the business we operate, we can do a better job of deciding what quadrant we belong to (Buy / Sell / Scale / Unique).
  • Buy: If we are in Acquisition Mode and are flush with cash, we can buy other brands or build additional brands and then cross-shop customers across brands, thereby increasing customer acquisition counts.
  • Sell: If we are in Acquisition Mode, then we know we have to fix customer acquisition practices in order to appeal to a buyer.
  • Scale: Unless our Annual Repurchase Rate is > 60%, we are probably not going to scale. Home businesses (i.e. Wayfair) have a chance to scale because future purchases "can" happen on two or three year intervals. But for most of us, we're not going to scale.
  • Unique:  Unique brands are ideally suited for Acquisition Mode. Word-of-mouth generates low-cost / no-cost new customers, allowing the brand to grow without giving all cash to Google or Facebook or Catalog Co-Ops (or even Amazon).
Study this stuff ... learn it inside-out, ok?

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